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This story appears in the December 2008 issue of Cards&Payments.
European regulators have conducted a number of high-profile investigations into interchange in recent years, most recently leading to the European Commission's requirement that MasterCard repeal its cross-border rates in Europe, a decision the payment card brand is appealing. However, regulatory actions in Central and Eastern Europe, although grabbing fewer headlines than other regions, offer significant examples for the broader payments industry.
Responding to a complaint by a merchant organization in Poland, in 2007 the Polish Office of Competition and Consumer Protection found domestic multilateral interchange rates to be illegal and levied 40 million euros in fines against 20 banks. The banks are appealing the decision and, as a result, interchange still exists in Poland today.
Meanwhile, the Polish payment card landscape has continued to evolve. Card volume grew 21% in 2007, and First Data Corp. acquired Polcard, the country's largest merchant acquirer, in 2007, giving multinational acquirers a majority share of the market.
In Hungary, the Hungarian Competition Authority concluded in 2006 that domestic interchange rates were too high and earlier this year launched an investigation that continues today.
But despite the specter of regulation in Hungary, both card volume and card-accepting merchant locations grew 10% in 2007. A new merchant acquirer, Erste Bank, also entered the market.
The Polish and Hungarian developments have several implications. In Central and Eastern Europe, comparatively high domestic interchange rates versus Western Europe's could invite further regulatory scrutiny.
Regulatory actions in other markets primarily have focused on limiting interchange, not eliminating it. So the Polish regulator declaring multilateral domestic interchange to be illegal following a similar finding by the United Kingdom Office of Fair Trading (which banks also appealed) is a significant development. Moreover, the large retroactive fine imposed against Polish issuers, although under appeal, is a new occurrence.
For issuers in the region and globally, the most obvious impact of regulatory intervention on interchange is the risk of lower revenues. As a result, credit card issuers may benefit from their efforts to optimize revenues, such as encouraging revolving behavior and examining pricing opportunities and portfolio management. And continued efforts to promote debit card use at the point of sale in place of cash withdrawals may assist debit card issuers.
For merchant acquirers, pressure on interchange offers opportunities. If acquirers pass along to merchants interchange reductions, lower merchant-service charges offer the opportunity to grow the overall acceptance base.
Lower interchange also offers opportunities to increase profit margins for acquirers. Although acquirers may be pressured to pass savings through to existing merchants, pricing for new merchants typically is more flexible.
These opportunities may make multinational acquirers more likely to enter developing markets such as Central and Eastern Europe to pursue growth and profit margin opportunities, which would negatively impact domestic acquirers.
While at first glance retailers would seem to benefit from lower interchange, their ability to negotiate lower fees from acquirers and to avoid pressure to pass these savings on to consumers affects their savings. Lower interchange also could make retail cobrand programs less attractive to issuers, and thus less lucrative to the retailers.
Finally, lower issuer-interchange revenue also may result in reduced credit card availability for some consumers, which could reduce consumers' purchasing power.
Increased government involvement in the financial-services sector because of the credit crunch could increase the political will for further regulation of the payments industry.
Therefore, European and U.S. issuers, acquirers and retailers should consider the effects of potential interchange regulation, and the Polish and Hungarian experiences offer cautionary examples of what those effects might be. CP
Erik Howell is based in Prague specializing in retailer and Central and Eastern European cards and payments at First Annapolis Consulting. He can be reached at Erik.Howell@FirstAnnapolis.com
