State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

Consumers are unlikely to have a strong preference for different card networks in the absence of surcharging (see Section 5.3.3) but building the POS over-ride functionality may provide a logistical challenge. Furthermore, evidence from the U.S. shows that customer selection requirements may inhibit merchant routing choice, which as previously described can create more competition and efficiency for card payments. 288 Co-Badging in Europe Despite the lack of mandated co-badging, there are several domestic debit card networks in Europe, including Girocard in Germany, Dankort in Denmark and Pago Bancomat in Italy. France’s local card network, Cartes Bancaires (CB), operates as both a credit and debit card network. Many of these domestic networks are owned by national banking associations and operate as not- for-profit entities with low costs. 289 As a result, the debit networks in Europe typically have very low network fees, as evidenced by the European Commission’s 2023 IFR study which showed average network fees for France’s Cartes Bancaires, Italy’s Pago Bancomat and Portugal’s Multibanco networks as less than 1bp on average. 290 PAYMENT TOKENIZATION EUROPE Since its launch in 2014, the Visa Token Service (VTS) has significantly grown its geographic coverage in the continent and is reported to outnumber physical Visa cards in circulation. 291 Following a similar approach taken in the U.S., Visa announced effective on October 1, 2023, that a 0.025% fee applies for all non-tokenized transactions in select geographies across Europe. 292 While Visa reports that VTS can “increase authorizations” 293 and, for individual card types, can be associated with lower pricing than a non-tokenized transaction 294 , there are also reports that state network token solutions can inhibit merchant access to domestic debit networks. 295 This potential impact is important for European retailers given the significant role domestic debit networks play across the region. uct and Service Rules 288 https://www.ftc.gov/system/files/documents/closing_letters/nid/closing_letter_from_james_frost_to_visa_-_11-22- 16.pdf 289 “The Eurosystem takes note of this reasoning and acknowledges that most existing national card schemes actually operate on a relatively low cost basis, which has benefited users in the past”: Card payments in Europe – current land- scape and future prospects: a Eurosystem perspective (europa.eu) 290 Figure 24: https://competition-policy.ec.europa.eu/document/65d4f65a-6b23-49c7-91cb-e5cd166a19ed_en 291 https://www.finextra.com/pressarticle/78472/visa-token-service-expands-in-europe https://usa.visa.com/about-vi - sa/newsroom/press-releases.releaseId.19116.html 292 https://www.spreedly.com/blog/visas-european-interchange 293 https://usa.visa.com/products/visa-token-service.html 294 https://www08.wellsfargomedia.com/assets/pdf/small-business/merchant/interchange-plus.pdf 295 https://www.federalreserve.gov/regreform/rr-commpublic/dna-meeting-20201014.pdf

Domestic debit cards are typically co-badged with global card networks such as Visa and Mastercard so they can be used internationally. CMSPI has observed a movement towards mono- badged global-network-only cards in some parts of Europe. 296 However, the existence of IFR caps may have reduced the direct incentive for European card issuers to move away from domestic card networks, as in many cases they receive the same capped interchange fees regardless of the network. 297 Case Study: Co-Badging in Germany One of the main goals of co-badging regulations – in addition to facilitating redundancy – is to ensure merchants are able to generate competitive tension between payment providers in order to put downward pressure on pricing. As we have seen in Germany, there are other ways of achieving this goal. In 2014, the Bundeskartellamt, Germany’s national competition regulatory agency, announced commitments had been reached with the operators of Girocard (or “electronic cash” as it was commonly referred) to cease setting default merchant pricing, which at the time was 0.3% (with a minimum of 8 eurocents). 298 The aim was to force Girocard to negotiate acceptance directly with merchants, particularly smaller merchants. This opened the door for merchants. There is now a market of merchant concentrators that negotiate Girocard acceptance on behalf of smaller merchants, and larger merchants are typically able to negotiate fees directly. In both cases, CMSPI has observed that fees now often sit lower than the prior default levels. The leverage merchants have comes from two sources. The first source of competition is that Girocard cards are typically co-badged with either Visa or Mastercard, as with most European domestic debit card networks. Additionally, Girocard transactions can be sent down the SEPA rails, which can be achieved because “data stored on the Girocard, an integral part of the electronic cash system, are used to create a direct debit.” 299 This is de-facto routing, with the merchant deciding which payment method is cost optimal and using authentication method to send transactions via either Girocard/Visa/Mastercard (PIN authentication) or SEPA (Signature authentication). Like other European countries, there has been a trend towards mono-badging in Germany and merchant fees could increase significantly if a reduction in network availability impacts merchant routing choice.

296 Are local map systems in Europe under threat? - Paymentandbanking 297 Card networks may be able to use issuer network fees as an indirect incentive to change network preference, although this practice appears to be prohibited by the IFR’s Article 5 anti-circumvention clause 298 Bundeskartellamt - Homepage - Standard charges for retailers in electronic cash card payment system aban- doned 299 B4-94-14.pdf (bundeskartellamt.de)