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Interchange fees: necessary condition to the payment market´s efficiency?

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On 24 July, the European Commission presented its proposal aiming at reforming the payment cards system in Europe. On 28 August, on the Huffington Post in France, the EU Commissioner in charge of this reform, Michel Barnier, defended the idea that his reform will not penalize consumers.

The general reduction of the interchange fees (which represent the transfer from the merchant’s bank to the consumer’s when the latter pays by card) is one of his reform’s key pillars. This reform was been presented as being in favor of merchants and consumers, thanks to a better competition among payment institutions. Nevertheless, a deeper analysis reveals a different reality.

Merchants claim that should interchange fees be removed, they would be enabled to reduce their prices to consumers. This argument is regularly used by the European Commission and other Competition Authorities in order to prove to consumers the interest of the reform. Nevertheless, a deeper analysis of the numbers prompts us to strongly nuance this statement. Indeed, in Europe, interchange fees represent €9,2 million based on a total card transaction volume of €1,8000 billion (for an average of 0.5%). In practical terms, for a pack of six bottles of milk costing €5, included in a total card payment of €80, this fee is about €0,026. For a stick of butter sold €1.20, included with the same € 80 card transaction, the fee is €0.006(less than one cent).

Can we imagine that merchants will reduce their price to the nearest thousandth? In opposition to the European Commission’s beliefs, merchants will very likely increase their margins more than diminishing their prices. Moreover, a price decrease would not be perceptible by consumers. The price variation per sold unit is so small that it is highly unlikely that prices will decline. It would be very naïve to believe that the price difference will be directly transferred into the final price. And also this would not take into consideration all the different elements which really make a product cost what it costs.

On the consumer side, a decrease of interchange fees would be followed by an increase of the cardholder fee. The latter is already very constrained by the law (no charge for cheques and for basic operations done by indebted clients; etc.) and any increase of bank fees to consumers will not be able to be based on any direct correlation. If interchange fees are completely removed, it would cost around €1,2 billion per year to French cardholders. A reduction of 50% will be followed by extra cost of €600 million a year (more than €25 per household per year, and VAT should be added on top).

Beyond this, the economic reasons driving the European Commission’s decisions are not very clear. The confusion of arguments stems from economic theories which wrongly define the payment market as a standard goods and services market, as if any transaction between two agents would only be a market transaction. But by its own nature, interchange cannot be considered as a basic service: it is based on the sharing of costs between providers which cooperate within the same system in order to jointly deliver a unique service to their own clients. Without this necessary cooperation between banks (which are also competing with each other), the service could not exist. Each bank does not sell some independent services (payment acceptance for merchants; payment for consumers; and other services – which cannot be legally defined by the other bank it cooperates with) but a unique general service to clear and settle commercial transactions.

As it was explained by Economy Professor Raymond Barre (former French Prime Minister), the money is not a banal economic good: it is a good made for economic transactions, and not for consumption. Money facilitates satisfaction of users.

Consequently, the payment system’s efficiency cannot be measured like a basic market offering goods and services would be. The use of cards is legitimate when it generates positive externalities for merchants and consumers. Interchange is not a market price, but the way to share the costs related to the infrastructure.

Ultimately, the European Commission is entangled in its doctrine, and is its own victim. By trying to reduce the prices for the well-being of consumers, via competition laws, it will achieve a result in real opposition to its objectives. This result is going to reinforce the margins of large retailers, and will not support European citizens’ purchasing power. In its war against interchange, retailers take retail banks as hostages, to the detriment of consumers.

François Schwerer, PhD in law and business economy is the former Chief Legal Officer of La Banque Postale. Previously, he was Chief Legal Officer for Crédit Mutuel and Caisse d’Epargne Languedoc-Roussillon.

Source: Huffington Post

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