28th Oct 2016


Credit card companies are pocketing dazzling profits

  • Retailers in Europe pay a yearly bill estimated by the European Commission to be over €10 billion to banks for accepting debit and credit cards. (Photo: Lotus Head)

Payment card companies such as Visa and Mastercard and the banks that issue their debit and credit cards have been pocketing dazzling profits as a result of unfair competition.

After years the European Union is finally about to end this situation with regulation. This could spur fair competition in the payment markets. However, the regulation risks being undermined in the European Parliament.

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Ironically the politicians who claim to trust the internal market and competition are harming the attempt to ensure fair and efficient markets.

Retailers in Europe pay a yearly bill estimated by the European Commission to be over €10 billion to banks for accepting debit and credit cards.

Part of this can be justified to cover for the costs of installing and operating card payment infrastructure. However the prices of payment services inflate to absurd proportions due to a lack of transparency about the real costs and a lack of effective competition.

Currently, market mechanisms are put on hold in this segment. The costs are based on the fact that for every transaction, retailers pay a fee to their bank known as "interchange", to compensate for transaction costs.

These fees are set by card schemes.

Given the situation of an effective duopoly on the European payment market, it has become almost impossible for retailers to refuse the acceptance of the big two card schemes, VISA and Mastercard, almost regardless of the price they ask.

Since the banks of consumers and retailers share the fee revenues, they are satisfied with high fee levels. This leaves Visa and Mastercard with an incentive to raise the fees, instead of lowering them - a clear abuse of market power.

New and innovative payment service providers are unable to offer the same fees to banks. As a result, they fail to penetrate the payment market and to offer a better deal for retailers and consumers.

The Commission tries to counter this complete lack of competition by at least three important measures.

Firstly, it proposes a cap on the levels of interchange fees for the most widely used payment cards which could reduce the yearly fees by 8 billion euros. Secondly, it provides for the opportunity for merchants to make use of cheaper payment services provided in other EU member states. Finally, it tries to guarantee the right of merchants to refuse payment cards that charge excessively high fees.


Unfortunately, Pablo Zalba, a Spanish member of the conservative EPP-group who leads the work on the regulation in the European Parliament, is torpedoeing all three measures.

He is proposing to replace a simple fixed percentage cap of the fees with a complex weighted average which would make it impossible to get the required transparency on the fee levels, and can only be implemented with a lot of bureaucracy.

Secondly, he is proposing to narrow the definition of cross border transactions by excluding from the scope the situation where a merchant uses a foreign payment service provider.

This thereby effectively limits the possibility of, for instance, a Spanish merchant to choose a better or cheaper payment service provider from Portugal.

Finally, the Parliament's rapporteur wants to oblige merchants to accept all cards of the same scheme, regardless of their fee level. It is incomprehensible and against the logic of competition to refuse giving merchants the necessary bargaining power to negotiate the lowest price or ultimately refuse cards with unreasonable fee levels.

Fair competition

The Green group in the European Parliament has come up with counter proposals to ensure that merchants and consumers will be able to benefit from real competition in the European payment market.

There should be an effective cap on the interchange fee level for credit cards and a full ban for fees on debit cards. Merchants should be able to refuse cards when they charge excessive fees.

A European market for payments should offer the best service to retailers and consumers instead of the highest profits for banks and the dominant card schemes.

If the conservatives in the European Parliament are as faithful to fair competition as they claim to be, they should revise their position and take such proposals seriously.

Bas Eickhout, Sven Giegold and Jean Paul Besset are Green MEPs


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