The MIF regulation (full name - “Regulation (EU) 2015/751 on interchange fees for card-based payment transactions”) came into effect at the end of 2015 and is composed of four main areas:
- Caps on interchange fees
- Acquirer pricing transparency
- The separation of card schemes and processing
- Supporting rules
The MIF Regulation’s scope includes debit, credit, prepaid, and ‘universal’ cards (those behaving as both debit and credit cards).
The regulation excludes three-party schemes (but only if having less than 3% of market share), until 9 December 2018. After that, it is unclear; it is most likely that the regulation will get extended to those as well. However, the three-party schemes that either license their network to an issuer or acquirer (or have another brand mark on the card) would be considered a four-party scheme and therefore, equally subject to the same interchange caps immediately. Corporate cards used for business purposes and paid for by the company are also exempt from the MIF Regulation interchange caps.
Cap on Interchange Fees
In this article, the focus is only on the first component of the MIF Regulation, which sets the following caps, depending on the type of card and type of transaction:
- Cross-border: 0.2% of debit transaction value, 0.3% for credit.
- Domestic debit: 0.2% of transaction value or €0.05 per transaction (whichever is lower).
- Domestic credit: 0.3% of transaction value but member states may set a lower cap.
- ‘Universal’ cards: 0.2% of transaction value or €0.05 per transaction with a 0.2% cap. 0.3% of transaction value for those treated as credit.
Impact on Issuer Revenue
The 0.3% cap on credit cards and 0.2% cap (or €0.05 per transaction, whichever is lower) on debit card interchange fees will result in significantly reduced revenues for card issuers. Since card issuers in the UK, Ireland, Germany, Spain, Portugal, and several Central and Eastern European countries were traditionally accustomed to high credit and debit card interchange fees, they will clearly feel the most bottom-line pain.
The credit card issuers will clearly feel a bigger impact than debit card issuers because the post-MIF Regulation credit interchange fees are much closer to interchange levels for debit cards. For example, in the UK and Germany, pre-regulation credit card interchange fees were at least three times higher than the new levels.
However, in some countries, debit card issuers also enjoyed relatively high debit interchange fees in the past and will feel the bite as well. Overall, the agreed upon estimate is that EU issuers are expected to lose between €5–6 billion annually in revenues from interchange fees.
Due to the significant drops in revenues, issuers are already applying unpopular countermeasures like reducing rewards levels, increasing cardholder fees, etc. Card issuers are already re-evaluating their business models and are working frantically on building infrastructures for the new revenue streams by innovating and trying to commercialize the transaction data they have, like card-linked Offers/loyalty programs, etc.
However, this is very good news for merchants because it significantly lowers their cost of card acceptance at POS and online.
Impact on Apple Pay Adoption and Expansion
Where does it leave Apple Pay now? It looks like another potentially significant obstacle and a significant blow to Apple Pay’s future adoption. We all know that Apple is requesting a portion of the interchange fees from each of the issuers whose cards are loaded into the Apple mobile wallet.
With such a drastic drop in issuer’s interchange revenue, it will be almost impossible for Apple to continue insisting on charging participating card issuers per transaction revenue moving forward. The impact of MIF Regulation on card issuer’s bottom lines will likely force Apple to reconsider the current business model, or risk losing the mobile wallet game to Google and Samsung, especially because Google and Samsung aren’t charging issuers for participating in Android Pay and Samsung Pay wallets and as such, may become preferred mobile wallet options for issuers in the days ahead.
How will Apple respond to this formidable challenge? Only time will tell, but it doesn’t look to me that Apple will be able to enjoy the long-term benefits of their current approach with Apple Pay.