No matter how the European payments landscape looks after the European Commission's new version of the Payment Services Directive takes effect, merchants can almost certainly expect lower rates for accepting card transactions.
Interchange caps are not officially part of the new payments directive, or PSD2, but they are joined at the hip as a concurrent initiative of the European Union.
PSD2 seeks to change the very definition of a payments company, as well as add regulations for security and procedures in e-commerce, gift and loyalty cards, bill payment services, mobile wallets and direct debit payments. The European Union wants new interchange rules in place before PSD2 takes hold.
The EU is proposing that cross-border interchange rates be the same as domestic rates in a single EU market. Currently, interchange rates are a complex mix of various domestic schemes in Western Europe.
In addition to Visa and MasterCard, domestic schemes are in place in France, Italy, Spain, Portugal, Belgium and Germany, said Andrew Copeman, a London-based analyst for Aite Group.
"All have differing interchange, although all have been steadily converging toward the long-proposed caps on debit and credit for some time," Copeman said.
Interchange regulation from the European Parliament and Council is likely to take hold this year, possibly as soon as the end of the first quarter. That regulation introduces maximum fees for consumer debit cards at 0.2% and credit cards at 0.3%.
Much of the attention in Europe is on debit transactions, which are far more common than credit card transactions. Most rates in Europe are close to those in the proposal, though Visa rates in Germany vary between 0.4% and 1.65% depending on the method of capture at the point of sale, Copeman said.
The interchange regulation would make it possible for retailers to accept only consumer cards and establishes "transparency rules for all transactions," said Zil Bareisis, a London-based analyst for Celent. An agreement between the European Parliament and Council took place last month, moving the interchange regulation closer to reality, Bareisis said.
Europe's debate on interchange won't end with the enactment of the PSD2 directives, Bareisis said. When the European Court of Justice stated in September 2014, in ruling in a case against MasterCard, that "interchange fees are a violation of EU antitrust rules," it effectively put the debate on a longer track, Bareisis added.
The European Commission is pushing the new interchange fees initially for cross-border transactions and, after a 22-month transitional period, to apply those caps to domestic card transactions as well. The fees would not apply to commercial cards or closed-loop, branded store cards, according to an Aite report on PSD2 and the accompanying interchange proposals.
New interchange rules would also allow merchants to steer consumers toward less expensive payment options, rather than abide by an "honor all cards" rule. Merchants will also be able to inform customers about the fees they have to pay to accept payment cards, the report said.
Issuers will be permitted to use two or more card network brands on a single payment instrument, and merchants or acquirers cannot discriminate between those brands. The payer would select the brand at the point of sale.
Card issuing and acquiring licenses will cover the entire European Union under the new rules. Payment schemes will not be able to discriminate between third parties should a client wish to use a specific processor.
A big change in the proposed regulations comes in the form of a five-year period in which payment networks will be allowed to calculate interchange on a weighted average basis, Copeman said, meaning transactions for certain products or through certain acceptance environments, such as e-commerce, would be above the cap. After five years, the cap will apply to these transactions.
Ultimately, the new fees will simplify the payment process in Europe and create greater efficiencies and possibly some consolidation among processors, Copeman said.
"The main downside is that it appears to be a win for retailers who will pay lower charges but are unlikely to pass these savings on to consumers," Copeman said. Already, acquirers in the U.K. are sending "re-pricing" letters to small-business clients in an effort to increase commissions, citing the costly changes they'll absorb to accommodate European legislation, Copeman said.
Retailers in the U.S. have engaged in lengthy legal battles against the card networks over swipe fees.
The Supreme Court ruled in favor of the Federal Reserve Board's interpretation of the Durbin Amendment's mandated debit-fee caps last week, in effect leaving retailers with few options to challenge again.
A separate case, relating to a multi-billion-dollar settlement over credit card swipe fees, is under appeal.
Separately, MasterCard and Visa lowered credit-card transaction fees to 1.5% in Canada late last year after pressure from the Canadian government to do so.