State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

Section 5.3 – Payments Industry Regulation in Europe Section 5.3.1 – Interchange Caps in Europe THE EUROPEAN COMMISSION COMPETITION METHODOLOGY

Table 5.6 – “Net Effect of Fee Changes on Stakeholders, 2015-2017 (in EUR mn) 281

The European Commission (EC)’s Interchange Fee Regulation (IFR), enacted in December 2015, established caps on domestic and intra-European Economic Area (EEA) spending on consumer cards. The caps, set at 0.2% and 0.3% for debit and credit cards, respectively, employed the competition methodology (see Section 5.1.1). The EC aligned transaction processing costs with cash transaction processing costs by considering three studies — Bergman et al. (2007), the National Bank of Belgium (2005), and Brits and Winder (2005) — utilizing survey data from 2002 to 2003. 273 274 275 While the EC’s caps are ceiling caps, Member States within the EU can establish additional lower caps, and countries such as Ireland 276 and Spain 277 have chosen to do so. The EC commissioned two studies to assess the IFR’s impacts. The first study, conducted by Ernst & Young (EY) and Copenhagen Economics and published in 2020, looked at the period from the inception of the IFR in 2015 to the end of 2017. The study reported €2.68 billion in annual savings from the IFR 278 , significantly lower than the EC’s €6 billion estimate in its own 2013 Impact Assessment before the IFR. 279 The 2020 EY study attributed this difference in part to the chosen base year used between studies (in the EC study, “2013 was used as the benchmark year with higher interchange fee levels than in 2015”). 280 Additionally, the 2020 EY study looked at the net effects the IFR had on stakeholders in the card payment industry. Despite interchange fee reductions of €2.68 billion, the study found that merchants only saved a net €1.2 billion annually from the IFR, with €1.2 billion absorbed by acquirers not passing savings on to merchants, and €280 million gained by card networks via higher network fees to merchants. 273 Bergman, M., Guibourg, G. and Segendorf, B.L. (2007). The costs of paying-private and social costs of Cash and card payments. Riksbank Research paper series, (212). 274 Quaden, G. (2005). Coûts, avantages et inconvénients des différents moyens de paiement. 275 Brits, H. and Winder, C. (2005). Payments are no free lunch. De Nederlandsche Bank. 276 S.I. No. 525/2020 - European Union (Interchange Fees for Card-based Payment Transactions) (Amend- ment) Regulations 2020 (irishstatutebook.ie) 277 Interchange fees and merchant service charges - Public information sent by supervised entities - Super- vised entities - Entities and professionals - Banco de España (bde.es) 278 copenhagen-economics_march_ifr-report.pdf (copenhageneconomics.com) 279 Page 76: resource.html (europa.eu). “Operational savings for all card accepting merchants. Estimated at EUR 6 billion annually. Part of these could be passed through to consumers.” 280 Page 14: https://copenhageneconomics.com/wp-content/uploads/2021/12/copenhagen-economics_ march_ifr-report.pdf

The 2020 EY study is likely to underestimate the level of network fee increases, because it only covers the period to the end of 2017 and therefore excludes network fee changes that occurred in 2018 and 2019. Subsequent research suggests that in 2019 network fee increases eroded the IFR benefits for merchants by more than an estimated €1.46 billion annually. 282 The IFR’s second study was conducted by Valdani, Vicari and Associati (VVA) 283 and published in 2023. Unfortunately, the study’s takeaways are restricted because “Data on scheme fees from Visa and Mastercard were not shared due to confidentiality reasons.” 284

Section 5.3.2 – Co-Badging and Routing in Europe WHAT HAVE EUROPEAN REGULATORS SAID ABOUT CO-BADGING?

The EU does not have explicit co-badging or merchant choice routing mandates like in the U.S. The IFR’s Article 8 provides the only EU-wide guidance on co-badging. 285 It states that networks cannot prevent issuers from co-badging cards, but it stops short of mandating issuers to do so. 286 When it comes to the routing of co-branded card transactions, Article 8 makes it clear that merchants are able to steer customers towards their preferred network: “Payees shall retain the option of installing automatic mechanisms in the equipment used at the point of sale which make a priority selection of a particular payment brand or payment application.” However, the Article also makes it clear that consumers have the final decision over transaction routing: “Payees shall not prevent the payer from overriding such an automatic priority selection made by the payee in its equipment for the categories of cards or related payment instruments accepted by the payee.” Moreover, Visa has network rules requiring consumer choice in Europe. 287 281 https://copenhageneconomics.com/wp-content/uploads/2021/12/copenhagen-economics_march_ifr-report.pdf 282 CMSPI estimates and analysis 283 VVA - The Group 284 Page 90: publications_studies_reports_kd0224082enn_and_kd0224141enn_study_on_new_developments_in_card-based_pay- ment_markets_report&annexes.zip | Competition Policy (europa.eu) 285 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015R0751 286 “Any payment card scheme rules and rules in licensing agreements or measures of equivalent effect that hinder or prevent an issuer from co-badging two or more different payment brands or payment applications on a card-based payment instrument shall be prohibited.” 287 Page 386: In the Europe Region: All of the following: – Present options for mutually supported Payment Applications contained in the Chip to the Cardholder, if the Cardholder has the ability to select the Payment Applicat0ion - Visa Core Rules and Visa Prod-