Europe's Interchange Crackdown Gives Fintech Rivals a Clear Shot

Europe's clash over interchange rates is being spun into marketing gold by alternative payment companies like Seamless.

Many startups aim to win over merchants with a less expensive alternative to traditional interchange fees. In some cases these savings are passed along to consumers, such as with decoupled debit cards offered by gas stations. But in many cases, the startup's marketing pitch falls flat, and merchants revert to the familiarity of per-transaction pricing even if they could save money with a flat monthly fee or offer-based pricing.

But when a card network's fees draw the attention of regulators, as MasterCard's has with the European Union, it highlights an issue that merchants care about enough to seek alternatives.

"A lot of the smaller businesses have chosen not to have card payments and use cash instead, and for the large businesses there is a huge cost" said Jonas Larsson, Seamless' chief marketing officer.

Card network interchange fees are referenced in Seamless' sales pitch, and merchants have migrated to Seamless because of card network costs," Larsson said. Seamless' SEQR mobile wallet uses account-to-account transfers, which are cheaper than credit and debit card payments.

"With the card networks, the fees and interchange are about blackmail frankly. There is no way you can use their structure without letting them have a piece of the cake," Larsson said.

Seamless of course takes its own piece when merchants use its wallet app, but it contends its prices are about 50% less than what merchants pay to accept card payments.

Merchants may feel validated in their concerns by a July statement of objections by the European Commission, which alleges that MasterCard is breaking the European Union's single market competition rules. The card network is allegedly not allowing banks to offer lower interchange fees to retailers based in other countries with higher interchange fees, a process known as "cross-border acquiring." Interchange fees can vary from one country to another, and the commission contends MasterCard's rules restrict cross-border competition between banks, a practice that would violate anti-trust rules in Europe.

The commission also contends MasterCard's inter-regional interchange fees are too high. Acquiring banks pay inter-regional interchange for transactions occurring within European Union that are executed by cards issued in other parts of the world. European Union regulators say MasterCard's fees are up to 500% higher than similar fees for locally issued cards.

MasterCard's public relations team emailed a written unattributed statement confirming the investigation and its cooperation. "Throughout this procedure we have kept the needs of both consumers and merchants in mind and aim to further encourage the uptake of electronic payments both inside and outside the European Union," the statement said.

If MasterCard is found to be in violation of these rules, it could be fined up to 10% of its annual sales in the region. Visa Europe reduced its fees in 2014 following an investigation of its cross-border interchange policies.  In the U.S., Amex has faced legal pressure from the government based on a practice called steering, or prohibiting merchants from offering consumers a discount for using cards with lower interchange.

The idea that traditional card networks are using their own rules to goose interchange fees would appear to meld with Seamless' anti-interchange message, particularly as the company expands across Europe.

The Swedish company is not marketing directly on the regulatory clash, but is approaching merchants with a range of reasons to adopt its SEQR mobile wallet, such as cash-back incentives and the ability to accept payments from anywhere in the store. It also plays nice with store loyalty programs, Larsson said.

"SEQR increases user experience and customer loyalty as existing loyalty programs can easily be integrated with the SEQR app," Larsson said. "There's no need for yet another plastic card in your wallet."

The SEQR app on a consumer's phone is used to scan a QR code displayed at the point of sale. The shopper then confirms the purchase by typing a PIN into the app. The use of QR codes is a carrot to draw merchants, since it works with most existing point of sale systems. Seamless also partners with third parties to offer revolving credit as an additional alternative to plastic credit cards.

Despite Seamless' testimonial, it may not be easy for most alternative payment companies to capitalize on the card networks' conflict with regulators, said Zil Bareisis, a senior analyst at Celent.

If the regulators succeed in getting MasterCard to reduce its fees, it could even harm the alternative payment companies. "As the card acceptance costs go down, merchants lose incentives to invest into alternatives," Bareisis said.