Is European Interchange Regulation Toothless?

European merchants set to lose out as Interchange Fee Regulation (IFR) savings are eroded: CMSpi look at the impact on the UK - Europe’s largest card market.

IFR legislation was passed on March 10th 2015 by an overwhelming majority of 621 votes to 26. This legislation will see domestic credit card interchange fees capped at 0.3% of the transaction value with domestic debit card transactions capped at 0.2% on a weighted average basis.

If implemented in its entirety, CMSpi estimates that merchants across Europe will save a total of €4.2B ($4.7B) annually, or 48%, on their existing interchange bills, although this will differ significantly by merchant depending on transaction profiles.

It may be easy for merchants to assume that the IFR represents a firm and final victory for the merchant community in achieving fair interchange fees. However, CMSpi research suggests that for UK merchants, the current proposals issued by Visa and MasterCard fall more than £800M ($1,247M) short (annually) of the European Commission’s original mandate.

CMSpi forecasts that the £2.41B ($2.7B) UK merchants paid in interchange fees in 2014 should reduce to £0.958B ($1.1B) under full IFR as it was originally understood. However, the current proposals would see annual interchange fees reach £1.763B ($1.9B) – much closer to the 2014 level than the full IFR level. So, why is there such a big gap? The following is a summary of the main issues.


It will be many months before interchange is capped. Before the regulation comes into force, it needs to be officially endorsed by the Council of Ministers, then the regulation needs to be published in the Official Journal of the European Union and finally, a 20 day waiting period must then be observed. It is then the responsibility of individual member states to ensure that the caps are implemented within six months of the legislation coming into force.

Overall, it is expected that it will be November/December 2015 before the caps will come in, which is far too late considering this debate has been rolling on for decades.

7 cents cap removed from the IFR cap

Amendment 30 to the IFR made by the European Parliament in April 2014 introduced an important stipulation - the debit card cap would be the lower of 0.2% of the transaction value or 7 eurocents per transaction. For a transaction of €100 ($111), the 7 eurocents cap would lead to a reduction of 13 eurocents, or 65%, of the interchange fee paid.

However, Article 16(k) of the final compromise text document published by the Council of the European Union in January 2015 states that the 7 eurocents per transaction debit card cap will in fact not be initially introduced and will only be implemented if approved when a review of the regulation takes place four years after it is introduced.

Instead, an amended structure will be introduced whereby for any given transaction, card schemes are allowed to charge up to 5 eurocents per transaction on a fixed basis and up to 0.2% of the transaction value on an ad-valorem basis, as long as the weighted average interchange fee paid across the entire card network does not exceed 0.2%.

Up until March 2015, UK merchants did not pay more than 8p for any EMV face-to-face Visa consumer domestic debit card transactions. With the IFR however, there will potentially be no limit at all. Across the UK, CMSpi estimates that the exemption of the 7 eurocents cap will cost merchants £363M ($566M).

For merchants with a high average transaction value, this will have a potentially devastating effect.

Commercial cards excluded

Although it was initially unclear whether commercial and three party cards would be included within the scope of the regulation, the final text confirmed that they have been excluded.

This exemption is an unfortunate defeat for the merchant community, and the £442M ($698M) that has been lost to these sources is, in the short-term at least, irretrievable (the latest documentation suggests that third-party issued three party card networks will come into scope in 5 years).


Article 5 of the final compromise text states that circumvention of the IFR via interchange replacement fees is prohibited, however, the actual wording of the clause only specifies this with regards to interchange. Merchants would rather see confirmation that network fees are prohibited from replacing interchange fees.


Finally, there are also concerns that card acquirers may see the regulation as an opportunity to increase their profit margins by only partially passing on the benefits to merchants. Indeed, in other jurisdictions where interchange has been regulated, such as the United States, there is strong evidence that the profitability of acquirers has seen a marked increase following regulation.