EU Passes Interchange Caps; Prepaid Businesses Must Look Elsewhere for Income (March 10, 2015)
The long road to interchange reform in the European Union has come to an end of sorts with passage of interchange caps today in the European Parliament. For the prepaid industry, the new law will require program managers—especially those that don’t enjoy large FX income—to find other sources of revenue.
The legislation, which passed 621 votes to 26 with 29 abstentions, will:
- Cap cross-border debit card transactions at 0.2 percent of the transaction value;
- Cap domestic debit transactions at 0.2 percent after a 5-year transition period in which EU member states may cap fees at 0.2 percent of the “annual weighted average transaction value of all domestic transactions within the card scheme;”
- Enable member states to set a maximum fixed fee of €0.05 per transaction for smaller domestic debit transactions after the five-year transition period; and
- Cap credit transactions at .03 percent but enable member states to set a lower fee cap for domestic credit card transactions.
“A lot of people in prepaid will start to find program profitability extremely challenging and will have to introduce more cardholder fees,” says David Parker, founder and CEO of U.K.-based Polymath Consulting. “Losing over half or more of your potential interchange income will have a major effect on consumer cards with low levels of international use or those that don’t currently charge consumer fees,” he explains.
One potential positive for the payments industry is the exemption of commercial cards used only for business expenses. Under the new rules, however, retailers that choose a card scheme will be permitted to refuse cards that aren’t subject to the caps. Parker says there’s a feeling in the industry that some retailers might exercise that option as all cards will be required to be labeled debit, credit, prepaid debit or commercial.
The new rules also will not apply to so-called “three-party” card schemes, such as Diners Club and American Express, provided cards are issued and processed within the same scheme, according to the EU Parliament announcement.
The rules must be officially endorsed by the Council of Ministers before they can take effect, six months after the legislation enters into force.
Today’s vote provides some certainty for the industry to move forward; however, more changes are to come with a vote ahead for the Second Payments Services Directive (PSD2).
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