Bank of Israel - Press Releases - The Bank of Israel accelerates the path of reducing the interchange fee
Central bank: boi | Type: statement | Date: 2018-02-25

After receiving comments from the public, the Bank of
Israel publishes the final path for reducing interchange fees.  The fee will be reduced each year, and the
path of reduction will be brought forward. 
The interchange fee on debit transactions will also be reduced.
On
January 16, 2018, the Bank of Israel published a notice of the Governor’s
intention to use her authority pursuant to Section 9k and 9l of the Banking
(Service to the Customer) Law, 5741–1981, and to declare the service provided
by a merchant acquirer to a merchant in connection with the settlement of
payment card transactions as a supervised service in regard to the rate of the
fee collected from the merchant by the acquirer and transferred to the issuer
(the issuer’s fee or the interchange fee).
In
that notice, the intention was stated to reduce the interchange fee for
deferred debit transactions in a gradual path, and to leave the fee for debit
transactions at the level set in 2015. 
In addition, the final decision regarding the level of the fee would be
published after examining comments from the public, should any be received.
In
the period allocated for receiving comments from the public, comments were
received from various entities: credit card companies and banks (hereinafter:
the companies) and various organizations (hereinafter: the organizations).  The comments were examined with due
consideration by the professional team at the Bank of Israel that is entrusted
with formulating recommendations on the matter of interchange fees.
Following
the examination of the comments, the Governor of the Bank of Israel decided to
adopt the recommendations of the professional team and to make two changes to
the path published on January 16, 2018. 
First,the pace of the reduction of the fee on deferred debit
transactions will be accelerated, and the date for completing the path, meaning
the date on which the interchange fee of 0.5 percent will be set, will be
brought forward.The change will
require the companies to implement streamlining procedures at a more rapid
pace, and will enable merchants to benefit from the lower settlement fees at an
earlier stage.
In
addition, the Governor has decided to adopta path for reducing the
interchange fee in respect of debit transactions, at the end of which the fee
will be 0.25 percent.This path of
reduction reflects the forecast of the Bank of Israel’s professional team
concerning the expected decline in the ratio between the relevant costs for
setting the fee in respect of the issuer’s activity in debit card transactions
and the volume of transactions carried out on such cards.  This ratio is expected to decline both in
view of the expected streamlining in the companies’ work methods, and as a
result of the increase expected in turnover of debit transactions in the coming
years.
The
path set out provides the required level of certainty to players in the market
in the coming years.It thereby
enables the advancement of the separation of the credit card companies from the
banks, which is a significant element in the implementation of the reform to
increase competition in the credit market. 
Moreover, the path encourages the companies to continue streamlining.
The
reduction of the interchange fee on deferred debit cards and on debit cards is
expected to be reflected in savings of hundreds of millions of shekels per year
for merchants in the economy in the coming years.
Figures
1 and 2 show the final path of reduction of the interchange fee in respect of
deferred debit and debit transactions, respectively.  Figures 3 and 4 show a comparison between the
reduction path of the interchange fee for deferred debit and debit transactions
(respectively) published in the draft for public comments on January 16, 2018
and the final paths after examining the comments from the public. –
2.Comments from the publicThe comments received mainly deal with four main issues:
the level of the fee for debit card transactions; the level of the fee for
deferred debit card transactions and the path for its reduction; the
streamlining coefficient; and arguments regarding the lack of transparency of
the data used in calculating the fee.a.The level of the
fee for debit card transactions:Comments received:On this topic, the
organizations made two main arguments. 
First, the fee set for debit transactions is too high, and second, a
path should be set for reducing the fee on transactions using debit cards that
will be calculated on the basis of the companies’ expected streamlining in the
coming years and the smaller ratio between the entitling costs in these
transactions and the business turnover, similar to the path of reduction
adopted for the fee charged in respect of deferred debit transactions.Discussion and decision:The fee for debit card
transactions was set based on the methodology that was used in determining the
fee for transactions with a deferred payment card, with necessary changes that
were mostly due to the low volume of transactions in debit cards and the
difficulty in estimating the future path of streamlining in respect of the
costs inherent in those transactions.After looking into it again, it was decided that it
would be correct to assume that the ratio between the entitling costs in debit
transactions and the volume of those transactions will decline in the coming
years for two reasons: a decline in the volume of the companies’ entitling
costs in view of streamlining their work methods, and the expected increase in
the transaction turnover on debit cards in the coming years.  As such, the Governor decided to adopt the
recommendations of the professional team developing the path of reduction of
the fee in debit card transactions, which will in the end by 0.25 percent.b.The level of the
fee for deferred debit card transactions and the path for its reduction:Comments received:The credit card companies
noted that in their opinion, the fee was set too low.  They also claimed that the path of reduction
is extreme and rapid.  In their opinion,
the adoption of the proposed path may lead to a negative impact on the
companies’ competitive abilities after their separation from the banks.In contrast, the organizations argued that the fee was
set too high; that the companies’ other sources of income, beyond the
interchange fee, that they can use to cover the costs of insuring the payment
and approving the transaction, should be taken into account; and that the
proposed path of reduction is too slow. 
According to them, a more rapid adoption of the path may accelerate the
pace of the companies’ streamlining.Discussion and decision:In terms of the level
of the interchange fee, the calculation was made based on a methodology that
was approved by the anti-trust court, and which has previously been used in
regulating the interchange fee.  In terms
of the path of reduction, after a re-examination and weighting of the various
arguments, it was decided to adopt a more rapid path of reduction.  The new path will require the companies to
take more rapid streamlining steps, and will allow merchants to benefit from
reduced settlement fees at an earlier stage.c.The streamlining
coefficient:Comments received:The companies argued that
the methodology through which the interchange fees are calculated does not
allow for the inclusion of a streamlining coefficient.Discussion and decision:The inclusion of a
streamlining coefficient is accepted in price supervision methodologies based
on recognition of costs.  The
streamlining coefficient has a double function. 
It allows for a more reliable reflection of the companies’ future costs,
and it contains a normative component that encourages companies to streamline
even when they are entitled to compensation for the costs they incur.  In view of this, the principle of lowering
the level of the fee, which is based on the expected fulfillment of
streamlining, remains in place.d.Transparency of
the data used in calculating the fee:Comments received:The organizations argued that the
data used in calculating the fee were not revealed to the public, and that the
formulae of the methodology were not provided.Discussion and decision:The cost data that were
used in the calculation of the fee are trade secrets belonging to the
companies, and revealing them may have a negative impact on their
operations.  We note that neither the raw
nor the aggregate data were published when the previous interchange fee
regulations were set either.  In any
case, the reasonability of the data was examined in depth by the professional
team, inter alia through a comparison of the data over time and between the
various companies, and obtaining point by point clarifications and
documentation as required.
The comments received mainly deal with four main issues:
the level of the fee for debit card transactions; the level of the fee for
deferred debit card transactions and the path for its reduction; the
streamlining coefficient; and arguments regarding the lack of transparency of
the data used in calculating the fee.
a.The level of the
fee for debit card transactions:
Comments received:On this topic, the
organizations made two main arguments. 
First, the fee set for debit transactions is too high, and second, a
path should be set for reducing the fee on transactions using debit cards that
will be calculated on the basis of the companies’ expected streamlining in the
coming years and the smaller ratio between the entitling costs in these
transactions and the business turnover, similar to the path of reduction
adopted for the fee charged in respect of deferred debit transactions.
Discussion and decision:The fee for debit card
transactions was set based on the methodology that was used in determining the
fee for transactions with a deferred payment card, with necessary changes that
were mostly due to the low volume of transactions in debit cards and the
difficulty in estimating the future path of streamlining in respect of the
costs inherent in those transactions.
After looking into it again, it was decided that it
would be correct to assume that the ratio between the entitling costs in debit
transactions and the volume of those transactions will decline in the coming
years for two reasons: a decline in the volume of the companies’ entitling
costs in view of streamlining their work methods, and the expected increase in
the transaction turnover on debit cards in the coming years.  As such, the Governor decided to adopt the
recommendations of the professional team developing the path of reduction of
the fee in debit card transactions, which will in the end by 0.25 percent.
b.The level of the
fee for deferred debit card transactions and the path for its reduction:
Comments received:The credit card companies
noted that in their opinion, the fee was set too low.  They also claimed that the path of reduction
is extreme and rapid.  In their opinion,
the adoption of the proposed path may lead to a negative impact on the
companies’ competitive abilities after their separation from the banks.
In contrast, the organizations argued that the fee was
set too high; that the companies’ other sources of income, beyond the
interchange fee, that they can use to cover the costs of insuring the payment
and approving the transaction, should be taken into account; and that the
proposed path of reduction is too slow. 
According to them, a more rapid adoption of the path may accelerate the
pace of the companies’ streamlining.
Discussion and decision:In terms of the level
of the interchange fee, the calculation was made based on a methodology that
was approved by the anti-trust court, and which has previously been used in
regulating the interchange fee.  In terms
of the path of reduction, after a re-examination and weighting of the various
arguments, it was decided to adopt a more rapid path of reduction.  The new path will require the companies to
take more rapid streamlining steps, and will allow merchants to benefit from
reduced settlement fees at an earlier stage.
c.The streamlining
coefficient:
Comments received:The companies argued that
the methodology through which the interchange fees are calculated does not
allow for the inclusion of a streamlining coefficient.
Discussion and decision:The inclusion of a
streamlining coefficient is accepted in price supervision methodologies based
on recognition of costs.  The
streamlining coefficient has a double function. 
It allows for a more reliable reflection of the companies’ future costs,
and it contains a normative component that encourages companies to streamline
even when they are entitled to compensation for the costs they incur.  In view of this, the principle of lowering
the level of the fee, which is based on the expected fulfillment of
streamlining, remains in place.
d.Transparency of
the data used in calculating the fee:
Comments received:The organizations argued that the
data used in calculating the fee were not revealed to the public, and that the
formulae of the methodology were not provided.
Discussion and decision:The cost data that were
used in the calculation of the fee are trade secrets belonging to the
companies, and revealing them may have a negative impact on their
operations.  We note that neither the raw
nor the aggregate data were published when the previous interchange fee
regulations were set either.  In any
case, the reasonability of the data was examined in depth by the professional
team, inter alia through a comparison of the data over time and between the
various companies, and obtaining point by point clarifications and
documentation as required.