Joaquín Almunia, Vice-President of the European Commission in charge of Competition (on the right), and Michel Barnier, Member of the EC in charge of Internal Market and Services, gave a press conference on the new rules on Payment Services for the benefit of consumers and retailers. In order to adapt EU payments market to the opportunities of the single market and to support the growth of the EU economy, the European Commission adopted a package including: a new payment Services Directive (“PSD2”) and a proposal for regulation on interchange fees for card-based payment transaction. (EC Audiovisual Services, 24/07/2013).
It was high time that the European Commission tried to arrest the over-exploitation of European consumers by a handful of banks and credit card providers. This week Joaquín Almunia, Commission’s Vice President responsible for competition policy, and Michel Barnier, EU Commissioner in charge of internal market and services presented one draft regulation and one directive amendment, targeted to control the excesses on interchange fees for cards and breaches of competition in Internet and mobile payments. According to Almunia, “The regulation will impose caps for interchange fees applied with respect to the widespread cards which merchants in practice cannot refuse, that is to say, the consumer debit and credit cards. The cap levels – 0.2% of the value of the transaction for debit cards and 0.3% for credit cards – are those that were accepted in commitments to the Commission from Visa Europe and MasterCard, and also from the Cartes Bancaires in France. They give merchants a share of the benefits of accepting cards instead of cash”.
The European digital payment market if left unregulated will end up like in the US where a simple payment through a bank debit card may entail commissions of up to 3% for the card holder, not including what the retailer is charged for it. In the US super charges for both consumers and traders are standard for payments over the Internet. In this last case commissions and charges are usually impossible to clarify. Only the giant Internet traders like the e-book trust can negotiate charges with banks and credit cards.
Retail purchases and Internet payment clearing and handling, controlled by a handful of huge banking firms and card providers, has gradually become a true bondage for the entire society. The daily lives of 500 million European consumers depend on the banking and plastic card industries. For quite some time payment clearing is a tightly controlled business with providers acting as a trust. At last this week the Commission decided to react.
Commission reacts
Almunia and Barnier, while presenting the new legal texts on interchange fees for cards, Internet and mobile payments stressed that, “For more than 20 years, the Commission and national competition authorities have been dealing with the widespread existence of high interchange fees. How do such fees work? Whenever someone buys something with a card, the bank of the retailer pays a fee to the bank of the consumer. The retailer’s bank then passes the interchange fee on to the retailer, and the retailer passes on these costs to consumers through higher retail prices. This means these higher prices are borne by all consumers, including those paying with cash”.
In this way the entire society is held hostage by the few banking and card firms which control the retail payment system. This arrangement became even more unbearable after the 2008-2009 credit crisis, when the big banks were termed as ‘systemic’, meaning that without them our modern societies cannot function. Credit card firms are in many ways connected to the banking system and constitute an integral part of it.
In view of all that the Commission decided to act. The new regulations will impose caps and rules on interchange fees for cards, Internet and mobile payments. On top of that the Commission is now also proposing a revision of the Payment Service Directive (PSD2) to counter the barriers the banking industry has created in order to block new players from entering the market of Internet payments.
Internet payments
No need to note that Internet transactions are gaining every day more and more importance for consumers. The Commission says that “this is an area which we have been scrutinising – in particular we looked recently into the standardisation undertaken by the European Payment Council. We were worried that it would de facto have created barriers to non-bank players, so we welcomed the decision to stop this activity”.
Quick profits for banks
Let’s put all that in a frame. The European banking industry – after triggering the 2008-2009 credit crisis and been rescued by governments and the European Central Bank with subsidies amounting to €4.5 trillion – tries now to recapitalise itself fast, through cashing in extra incomes. Understandably one way of doing that is to exploit its dominant position in clearing consumer payments, including the Internet. Seemingly this tendency must have acquired lately uncontrolled dimensions. That’s why the Commission decided to act. Consumers are usually unaware of the charges they pay on their card and Internet payments. Not all commissions appear on the bank client’s statement. For one thing no consumer is aware of the charges the retailer pays to banks and card issuers.
Given that, the Commission felt obliged to act now, arousing strong reactions by card companies. This is an extra indication that the EU’s executive arm was quite right in proposing those regulations. Almunia concluded that “Breaking up this cosy system between banks and card schemes will allow new providers to enter the market”.
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