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Regulating Multilateral Interchange Fees

Authors: dr. Anže Burger and mag. Tanja Porčnik
Date: November 3, 2014

In a policy analysis "Regulacija medbančnih provizij za kartične plačilne transakcije" we evaluated how the European Commission's Proposal for a Regulation on Multilateral Interchange Fees (MIFs) would impact the Slovenian card payments market. A review of empirical studies on the effects of MIFs capping in the US, Spain and Australia reveals that such an administrative ceiling on fees generates a transfer of costs from merchants to cardholders. Namely, merchants did not pass on enough of their cost savings from lower merchant fees by way of lower consumer prices; whereas cardholders experienced a sharp increase in card costs, a rise in interest rates for credit transactions and a decrease in cardholder benefits. These changes on the consumer side were implemented by card issuing entities in order to neutralize their loss of MIF revenues. 

We estimate that the proposed capping of MIFs to 0,2% on debit card and 0,3% on credit card transactions would bring the following changes in Slovenia:
  • Net effect on the consumers between 0 and -50 million euros, corresponding to an increase in cardholder cost from 0 to 3 euros per card in the first year or from 0 to 12 euros per card by 2020.
  • Decrease in interchange fee revenues from acquirers to issuers by 16 million euros for debit cards, 19 million euros for credit cards and 35 million euros altogether in the first year of the regulation implementation.
  • Decrease in merchant service charges of 26 to 30 million euros in the first year following the cap on MIFs.
  • Scenario analysis of merchants translating around 17 million euros of their cost reduction to consumers in the form of lower prices in the first year following the cap on MIFs.
Based on the experiences in other countries, second-order effects of the proposed MIFs regulation could also include: 
  • Slowing of the pace of Slovenian banking sector restructuring due to a reduction of interchange fee revenues on the issuing side of business.
  • Inhibition of the spread of card use for retail payments and an increase in the prevalence of costly cash.
  • Reduction of investment in R&D and innovation activities in cashless payments.
  • Hinderance to further development of e-commerce in Slovenia.
  • Decrease in the number of officially recorded transactions, which could boost the underground economy and reduce government tax revenues.
The policy recommendation that emerges from literature review and empirical analysis is that any potential abuse of market power materialized in excessive MIFs should be acted against within antitrust regulation on a case-by-case basis rather than through systemic regulation. More theoretical and, above all, empirical research is necessary, and caution should be applied before producing sweeping claims about the social benefits that the regulation of MIFs will create.