A look at the impact of payments regulation

January 17, 2020 | By Javier Perez

By Javier Perez, President Europe

2020 is upon us and as we find ourselves at the dawn of a whole new decade, I can’t help but notice that over the past years, people have not only embraced a plethora of new payment methods – such as contactless or the possibility to pay via their phones, watches, wristbands, household appliances and even cars. The competition across the region has also skyrocketed with the arrival of new payment providers (Apple, Samsung, facebook are only the best-known brands who joined the payments business) that meet the people’s evolving expectations in the digital and physical world.

Equally, recent regulatory and legislative initiatives have also transformed the legal framework in which the industry operates. The EU’s revised Payment Services Directive (PSD2) has opened the sector to entirely new players who can now access financial data (only with your consent of course) and offer new and better payment and banking services. At the same time, all payment players have to adjust to new regulatory requirements. For instance, new payment security requirements will have to be complied with by the end of this year.

Whether new legislation is needed at this point is an open question. The above shows that the European market is doing well and competition is thriving. Further regulation and price regulation in particular risk stifling competition and depriving consumers from accessing the best solutions for them. The Interchange Fee Regulation regulated Interchange fees – that were previously set by the market - for retailers with the objective of reducing payment costs for them and with an expectation that this reduction of input cost would be passed on to consumers through reduced prices. This Regulation hasn’t been in force for very long and its full effects are yet to be seen. A study recently conducted by Edgar, Dunn & Company highlights that some advances have been made, but that a number of challenges remain.

While the Regulation has led to lower interchange fees (card issuers received €5.14Bn less in interchange in 2018 than in 2014 despite an increase in transaction value of €749Bn) and card acquirers (retailers banks) had to pay less to card-issuing institutions, consumers have actually had to pay more for their cards. That is not surprising as issuers have had no choice than to partially offset the shortfall of interchange revenue by increasing cardholder fees. The average annual fee, for example, for the entire sample of regulated consumer credit cards increased by 13%. There has also been a significant increase in interest revenue. Similarly, loyalty programmes have been scaled back. This is demonstrated through reduced points earning per unit of spend or through a restricted range of merchants included in cashback programmes.

For retailers, the results are more mixed. Large retailers have benefited from the reduction of Interchange fees, given their negotiating powers and contract with their financial institutions which had to pass through those savings to them. Smaller businesses, however, did not benefit from those reductions. They usually pay a blended fee to their financial institutions and the latter have been more reactive than proactive in updating those pricing arrangements. These small businesses represent 99.8% of all enterprises in Europe[1]. Finally, where retailers and other businesses benefited from lower interchange rates, there is no available evidence that those reductions were passed through to the end consumer in the form of lower prices for the goods and services that they purchase.

As we have now entered the next decade, there has never been a better time to admit that ‘the future is now’. The pace of innovation is likely to increase. New and better payment solutions will continue to enter the European market and address businesses’ and people’s real pain points. Only by looking at all the consequences of regulation, can we - together with political decision-makers across the region - build the right framework for these innovations to thrive to the benefits of consumers and businesses and avoid rules that risk stifling this development.

[1] According to SMEUnited : https://smeunited.eu - formally known as UEAPME

Javier Perez