State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

Section 5.1.1 – Interchange Caps Interchange caps are a price ceiling set by the government or voluntarily agreed to by the card network for the per transaction interchange revenues issuing banks receive.

Cost vs. Competition Methodology

Date of Passage

Effective Date(s) of Current Cap

Jurisdiction

Credit

Debit

Exceptions

Commercial Cards, Non-EEA International Cards Credit Cards, Debit Cards Issued by Banks with Less Than $10 Billion in Assets, International Cards

2015

0.30%

0.20%

Competition

EU 199

WHAT METHODOLOGIES DO REGULATORS USE TO SET INTERCHANGE CAPS? Designing and implementing interchange caps is a complex balance for regulators. There are two main methodologies for capping interchange that have been used globally: the cost methodology and the competition methodology. The competition methodology (also known as the “Merchant Indifference Test” or the “Tourist Test”) used by the European Commission considers the level of interchange that makes a merchant indifferent between accepting payments by card and a competing method, typically cash. On the other hand, the cost methodology, employed in the U.S. and Australia, focuses on aligning interchange fees with the underlying cost incurred by issuers for processing a given transaction. Our case studies in Section 5 show that while both the cost and competition methods are able to achieve significant savings for merchants (and therefore consumers), each has their own limitations and risks, and neither is a superior or inferior approach. Central banks implementing a cost-based interchange cap may rely on self-reported issuer data on card processing costs. In these cases, issuers may have an incentive to report or maintain higher costs of processing. In addition, a cost-based methodology will not ensure merchant costs of acceptance for prevailing payment methods are equal, which could lead merchants to engage in surcharging or cash-discounting, ultimately pushing higher costs to consumers. With a competition-based approach, merchant costs of acceptance across payment methods may hold equal, but the predictability of future costs may change depending on the payment method against which the interchange cap is benchmarked. For example, the cost of cash, typically charged on a fixed cost basis, may rise as the volume of cash spending declines (see Section 1.2 for more information on the cost of cash).

2011

0.05% + $0.21 201

Cost

U.S.

2010 200

1.4% weighted average; 203 for SMBs - 0.95% (in-store) and reduction of 10 basis pts (online)

2020, 2024 (small business)

Debit Cards, International Cards

Canada

2018 202 , 2023

N/A

1.15% max MXN 13.50 (~$0.73) 206

2006

Before 2018 205

1.91%

Competition 207

Mexico 204

Credit Cards, Commercial Cards, Online Transactions. Cap Included Prepaid Cards.

2023

0.50%

Cost

Brazil

2022 208

199 All details can be found in: REGULATION (EU) 2015/ 751 OF THE EUROPEAN PARLIAMENT AND OF THE COUN- CIL - of 29 April 2015 - on interchange fees for card-based payment transactions (europa.eu) 200 https://www.congress.gov/bill/111th-congress/house-bill/4173/text 201 https://www.federalreserve.gov/newsevents/pressreleases/bcreg20110629a.htm 202 https://www.retailcouncil.org/province/national/credit-card-interchange-reduction-falls-well-short-of-where-it- should-be-2/ 203 This cap is a voluntary commitment between Visa, Mastercard, and the Department of Finance that is expected to apply until May 2025. Additional interchange cap restrictions apply for eligible small businesses as of fall 2024. https:// www.canada.ca/en/department-finance/news/2018/08/new-agreements-to-deliver-lower-credit-card-costs-for-small-and- medium-sized-businesses.html 204 https://www.banxico.org.mx/sistemas-de-pago/cuotas-intercambio-comisiones.html 205 https://www.eleconomista.com.mx/finanzaspersonales/Conozca-cuanto-cobran-las-tiendas-de-convenien - cia-de-comision-por-servicios-20181119-0077.html 206 Exchange rate as of 7/26/2024 207 https://www.kansascityfed.org/Root/documents/4269/Ortiz.pdf 208 https://www.bcb.gov.br/detalhenoticia/17733/nota

One of the earliest adopters of interchange fee limits was Australia. In 2003, the Reserve Bank of Australia recognized the negative impact growing card acceptance fees were having on the economy. 198 Shortly thereafter they instituted a weighted average interchange cap on covered four-party card transactions. After Australia trailblazed the way, several other governments followed suit over the next twenty years. One of the other most notable interventions was the European Commission capping interchange fees for credit at 0.3% and 0.2% for debit in 2015.

198 Competition and Efficiency | Payments System Board Annual Report – 2003 | RBA