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# 52013SC0288

**COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a directive of the European parliament and of the Council on payment services in the internal market and amending Directives 2002/65/EC, 2013/36/UE and 2009/110/EC and repealing Directive 2007/64/EC and Proposal for a Regulation of the European Parliament and of the Council on interchange fees for card-based payment transactions /\* SWD/2013/0288 final \*/**

  

Contents

1     Introduction. 4

2     Procedural issues and consultation of interested parties. 5

1.1       Procedural issues. 5

1.2       External expertise and consultation of
interested parties. 5

3     Policy context, Problem definition and Subsidiarity. 7

1.3       Background and context 7

3.1.1       The EU retail payments market 7

3.1.2       Payment cards – basic functioning, market
size and integration. 9

3.1.3       Overview of legislative framework. 14

1.4       Problem definition. 15

3.2.1       Drivers for integration gaps. 15

3.2.2       Specific Problems stemming from the problem
drivers. 17

3.2.3       Effects of the identified problems – a
baseline scenario. 28

3.2.4       The problem tree. 33

1.5       The EU's right to act and justification. 35

4     Objectives. 35

5     Policy options. 37

1.6       Market fragmentation. 37

5.1.1       Weak governance arrangements. 37

5.1.2       Standardisation and interoperability gaps
(for card and mobile payments) 37

1.7       Ineffective competition in certain areas
of card and internet payments. 38

5.2.1       Interchange Fees (IFs) for card payments. 38

5.2.2       Restrictive business rules. 39

1.8       Diverse charging practices between Member
States. 40

5.3.1       Steering practices - surcharging. 40

1.9       Legal vacuum for certain payment service
providers. 40

5.4.1       Access to information. 40

1.10     Scope gaps and inconsistent application
of the PSD.. 41

5.5.1       Negative Scope of the PSD.. 41

5.5.2       “One-leg” transactions and payments in
non-EU currencies. 42

1.11     Other measures. 42

5.6.1       Ancillary measures addressing competition
issues. 42

5.6.2       PSD ‘fine-tuning’ measures. 43

6     Analysis of Impacts. 43

1.12     Market fragmentation. 44

6.1.1       Weak governance arrangements (operational
objective 1) 44

6.1.2       Standardisation of card payments
(operational objective 2) 46

6.1.3       Standardisation of mobile payments
(operational objective 2) 48

1.13     Ineffective competition in certain areas
of card and internet payments. 50

6.2.1       Interchange Fees (IFs) for card payments
(Operational objective 3) 50

6.2.2       Restrictive business rules (Operational
objective 4) 58

1.14     Diverse charging practices between Member
States. 60

6.3.1       Steering practices (Operational objectives
4, 5 and 9) 60

1.15     Legal vacuum for certain payment service
providers. 63

6.4.1       Access to information. 63

1.16     Scope gaps and inconsistent application
of the PSD.. 65

6.5.1       Negative Scope of the PSD (Operational
objectives 7 and 9) 65

6.5.2       "One-leg" transactions and
payments in non-EU currencies. 69

7     Choice of the most appropriate policy instrument 71

8     Cumulative impacts, impacts on stakeholders and choice of
policy instruments. 72

1.17     Cumulative impact of the recommended
policy options. 72

1.18     Impact on different stakeholders. 78

1.19     Other impacts. 80

9     Evaluation and monitoring. 81

1            Introduction

Secure,
efficient, competitive and innovative electronic payments are crucial if
consumers, merchants and companies are to enjoy the full benefits of the Single
Market, and increasingly so as the world moves beyond bricks-and-mortar trade
towards e-commerce. Many European consumers and payment users have become used
to travelling outside of their country of origin and to buying goods and
services abroad. More importantly still, today the internet enables consumers
to make purchases abroad without even having to leave their home. In both
cases, electronic payments that work smoothly across borders are of utmost
importance.

Despite
the significant progress achieved in the development of a regulation framework
for the payments market, card payments and new means of payments, such as
internet and mobile payments, remain  fragmented along national borders, making
it often difficult for consumers to use these payment methods at pan-European
level (with the possible exception of credit cards). Recent developments in
these markets have also highlighted certain gaps and inconsistencies in the
current payments regulation framework.

An
initiative to drive market integration for card, internet and mobile payments
has benefits along several axes:

–
A more competitive market leading to downward
convergence of costs and prices for payment users;

–
More choice and transparency of payment services
for payment users;

–
More innovation based on improved scale effects
and easier market access for payment service providers; and

–
More security and trust regarding payment
services.

In view
of the importance of payments systems for the real economy and in line with the
Commission’s better regulation approach, policy orientations need to be
carefully considered and their impact thoroughly assessed. Accordingly, this
report identifies problems in EU payment markets, in particular those owing to
the identified market failures and regulatory and supervisory gaps, and
analyses the rationale and potential implications of intervention at EU level.

It is
important to note that robust data for the payment methods analysed in this
paper is not always available. For core payment instruments such as credit
transfers, direct debits and, to some extent, payment cards, transaction data
is regularly published by the European Central Bank (ECB). While business
related data for card schemes has been gathered by the Commission it cannot be
used and published in the present report due to on-going proceedings in
competition cases. Reliable data for internet and mobile payments is even more
difficult to collect and identify as the environment is fragmented and
transaction data cannot easily be separated from the overall data for core
payment instruments.

2            Procedural
issues and consultation of interested parties

1.1
Procedural issues

This
initiative was led by the Directorate-General Internal Market and Services. It
was foreseen in the Commission Work Programme for 2013[1] and subject to a dedicated Roadmap[2].

Work on
the Impact Assessment started in September 2012 with the first meeting of the
steering group taking place on 19 October 2012, followed by two further
meetings, the last one taking place on 30 January 2013. The following
Directorates General (DGs) and Commission Services participated in the steering
group: Communications Networks, Content and Technology; Competition; Enterprise
and Industry; Health and Consumers; Justice; Legal Services and the Secretariat
General.

The
report was sent to the Impact Assessment Board on 20 February 2013. The Board
discussed the report on its hearing on 20 March 2013. Following the hearing,
several changes were made to the document, in accordance with the Board
recommendations. The most important include:

–
substantiating the urgency for the revision of
the Payment Services Directive (PSD);

–
providing supplementary information on the card
market, its functioning and on the EU case law about interchange fees,

–
clarifying the difficulties relating to SEPA
governance,

–
streamlining the presentation of impacts by focussing
on the impacts of the most important options in the main text and moving less
significant issues to annexes,

–
substantiating the reasons for regulating MIF
through legislation,

–
better explaining the interdependencies between
different options and packages,

–
providing the stakeholders’ view on individual
issues and summarising their positions in annexes.

1.2
External expertise and consultation of
interested parties

The
Commission has reviewed the impact of the PSD and the Regulation on
cross-border payments on the
Internal Market. The review process was based on two dedicated external
studies, providing the Commission with a comprehensive picture of the economic
and legal consequences arising from the PSD. The first study provided a legal
conformity assessment regarding the transposition of the PSD in the 27 Member
States.[3] The
second study analysed the economic impact of the PSD in comparison to its
original objectives.[4] For the
same purpose, input by Member States and the relevant market actors was
gathered via the Commission's advisory committees for the retail payments
policy, i.e. the Payments Committee (representing Member States) and the
Payment Systems Market Expert Group (representing non-governmental stakeholders
from the demand and supply side of the payments market).

Additionally,
the Commission published a Green Paper “Towards an integrated European market
for card, internet and mobile payments”[5] in
January 2012 which was followed by a public consultation. The comprehensive
feedback by stakeholders[6]
provided relevant information on some recent new developments and on possible
requirements for changes to the existing payments framework. A public hearing
in the same context took place on 4 May 2012 and was attended by some 350
interested stakeholders.

The
extensive consultation process has allowed the identification of some key
messages. First, stakeholders from all categories consistently agreed that
there was a need to provide legal clarity on multi-lateral interchange fees
(MIFs)[7] between
banks. This was seen as particularly relevant due to the number of on-going
competition cases launched at European and national level. Second, especially
merchants but also stakeholders from other categories pointed to obstacles for
cross border acquiring[8],
compromising a genuine Single Market for payment services. Third, the
importance of a regulatory framework on payment initiation services[9] was highlighted by both
payment service providers (PSPs) and users. Fourth, many stakeholders across
all categories stressed the negative effects of surcharges[10]. Finally, there was
broad stakeholder consensus regarding the benefits of technical standards and
inter-operability and the fact that a sufficient level of standardisation and
inter-operability has not been reached yet. Annex 3 provides more details on
stakeholder feedback, in the context of both the public consultation on the
Green Paper and the Commission's advisory committees.

The
European Parliament adopted an own-initiative report on the Green Paper in
November 2012[11]. The
report acknowledges the objectives and integration hurdles identified in the
Green Paper and calls for legislative action in a number of areas concerning
card payments while it suggests a more cautious approach regarding internet and
mobile payments due to the lesser maturity of those markets.

Overall, the consultation results call for
important regulatory adjustments to the existing framework. This should
reinforce the effectiveness of the European payments market and contribute to a
payment environment which nurtures competition, innovation and security.

3            Policy
context, Problem definition and Subsidiarity

1.3
Background and context

3.1.1      The
EU retail payments market

The
European Union's retail payments market is one of the largest in the world and
involves millions of companies and hundreds of millions of citizens. According
to the latest European Central Bank (ECB) payments statistics, 8,829
institutions offered retail payments services in the EU27 in 2011 and €90.6
billion transactions were undertaken for a total value of €240.24 trillion.

The
economic benefits of integrating this market are substantial and were driving
the establishment of the Single Euro Payments Area (SEPA). A study conducted
for the European Commission[12]
suggests that full migration to SEPA for credit transfers, direct debits and
payment cards could yield direct and indirect benefits of more than
EUR 360 billion over a six-year period.[13]

Payment
cards, followed by credit transfers and direct debits, are the most popular
non-cash payment instruments in the EU (see Figure 1). Together, these three
methods of payment account for over 90% of all cashless transactions.

Figure 1 - Number of transactions by type of payment instrument (millions) – EU-27

Source:
European Central Bank, Payment Statistics, Data as of September 2012[14]

The
current degree of payment integration at European level varies markedly between
the various payment methods. While pan-European credit transfers and direct
debits schemes have already been established, an integrated market for payment
cards or for internet payments (e-payments) and mobile payments (m-payments)
yet has to be achieved. The graph below illustrates the different possibilities
for retail payment transactions (cash excluded).

Figure
2 – Illustrations of the different possibilities for retail payment
transactions

Annex 4
provides a general description of the payment market and payment methods.

3.1.2      Payment
cards – basic functioning, market size and integration

Basic functioning

A
distinction can be made between debit cards and credit cards as well as between
consumer cards and corporate cards. Debit cards, when used at a Point of Sale
(POS) withdraw money directly from a cardholder's current account provided
there are sufficient funds. Debit card payments imply an “immediate” or
"near-time" deduction of the funds for the individual transaction
from the cardholder's account. Transactions with credit cards and 'deferred debit'
cards are aggregated for some period of time and settled on the cardholder
account at regular intervals, for example monthly. Credit cards offer a credit
facility that the cardholder may use each time he receives the (monthly) bill,
instead of paying back the entire due sum at once. If the user does not take
advantage of the credit facility, the card is used the same way as a differed
debit card. Corporate or business cards are issued to corporations or small
businesses and are intended for 'business related transactions' whereas
consumer cards are intended for general use – although in practise the
difference might not always be so clear-cut.

Card
payments are made possible through the existence of card schemes at national
and international (cross-border) level. Purely domestic debit card schemes
exist in several Member States. However, domestic debit cards, when not
co-badged[15] with
an international scheme, are not accepted outside the Member State of origin,
which makes any cross-border use impossible. International card schemes, such
as Visa and MasterCard, are available across the EU and are usually accepted
outside the country where they were issued.

In most
cases, payment cards are provided to the consumer by the issuing bank. On the
acceptance side, merchants usually have one or several acquiring bank(s).

The
most common type of card scheme is the so-called 'four party' scheme (for
example MasterCard and Visa), under which usually a collectively agreed
Multilateral Interchange Fee (MIF) is in place between the acquiring leg (i.e.
the PSP of the merchant) and the issuing leg (i.e. the PSP of the cardholder)
of the payment.

The
bank of the cardholder (issuing PSP) pays to the bank of the merchant
(acquiring PSP) the amount of the transaction after the deduction of MIF. The
MIF along with other fees - a card scheme fee (network fee) and a fee paid by
merchant for the services of the acquiring PSP - is passed on by the acquiring
PSP (bank of the merchant) to the merchant through the Merchant Service Charge
(MSC). Hence, when a customer uses a payment card to buy from a merchant, the
acquiring PSP pays the merchant the sales price after deduction of the MSC.
MIFs thus act as a minimum price floor and determine to a large extent (in
general 50 % or more) the price charged by PSPs to merchants for card
acceptance.

Figure
3 -
Illustration of the operation of a four-party scheme, including the transfer of
the IF

A
second type of card scheme model is the so-called 'three party' scheme (e.g.
American Express, Diners Club). In the case of a three-party scheme, only one
PSP is involved, being at the same time the issuer and the acquirer.[16]
Three-party schemes do not have a MIF explicitly agreed between PSPs. There are
only the fees paid by the cardholder (annual fees, fees per transaction, etc.)
and Merchant Services Charges paid by the retailer. Nevertheless, the scheme
may use the collected fees to subsidise one ‘leg’ of the transaction or the
other (i.e. the merchant or the cardholder), resulting in an implicit MIF.

Three
party schemes are often more expensive to accept for merchants. Even though
three party schemes do not have explicit IFs, they do charge proportionately
higher fees to merchants than to cardholders. It can therefore be said that
these schemes have an implicit IF, as one side is 'overcharged' for the
service.

Figure
4 - Basic operation of a three-party scheme

Generally,
the justification for charging a MIF has been to stimulate the card issuing
business by increasing their revenues from card payments. Issuing banks often
use part of the revenues from these inter-bank fees to incentivise the use of
payment cards through bonuses (air miles, etc.). In principle, the higher the
interchange fees the more card use is stimulated by issuing banks. Cardholders
are therefore encouraged by bonuses and other rewards to use cards that
generate higher fees. Hence, on the cardholder side, typically the direct cost
of using the payment instrument is often not apparent unless merchants convey
the information about the costs to consumers or turn down costly payment
instruments, both of which they are reluctant to do for fear of losing
business.

Usually, MIFs are justified by card schemes and card issuers
either as a means to make a merchant cover the costs to the issuing banks or as
a means to encourage consumers to use a payment card. In accordance with this
theory, MIF enables low cardholder fees and allows card issuers to encourage
the frequent use of the card by offering bonuses to consumers (e.g. air miles).
More recently the ‘balancing mechanism’ argument has been
used. Under this argument the MIF allows issuers to promote greater card use,
which creates efficiencies for the society as card use is presumed to be more
efficient and less costly than the use of cash.

These justifications have been much discussed and contested
in economic literature, including as regards (imperfect) competition in the
issuing and acquiring markets, the issue of internalisation of costs, the
limits of steering and interchange fees acting as a means of transferring rent
from acquiring to issuing banks which cannot be competed away by merchants as
well as in competition enforcement cases. Regulatory intervention has gained
prominence as a possible tool to deal with the competition and welfare issues
raised by collectively set interchange fees. More details on this subject and
card market are provided in Annex 5 and in the problem description below.

Payment cards: Market size and integration

Payment
cards are the most common and frequently used electronic payment instrument for
retail payments.

In
terms of volume (number of transactions), card payments represented 41% of all
non-cash retail payments in 2011. There were some 727 million payment
cards in use in the EU, representing 1.44 cards per capita. 63% of all cards
issued in the EU were debit cards. On average, EU consumers spent on a yearly
basis EUR 2 596 per card in 50 point-of-sale card transactions (in
2011[17]).

However,
the potential economies of scale associated with this volume and its
significant growth over the last two decades, have either not been realised so
far or they have not been translated into substantially lower fee levels for
consumers or merchants. The reasons for such situation are explained in this
impact assessment.

The
usage of payment cards across the EU Member States varies strongly, as shown by
the table below.

Figure 5 - Card payments (other than e-money) in value as a percentage of GDP

Source:
European Central Bank, Payment Statistics, Data as of September 2012[18]

Internet payments: Market size and
integration

With
the emergence of e-commerce, i.e. the buying and selling of products and
services over the internet, payments over internet play an increasingly
important role. They can take on different forms. For example, they can be
based on card payments, credit transfers, direct debits, or through pre-funded
accounts with dedicated internet payment providers.

According
to Forrester Research the number of online shoppers in Europe is expected to
increase from 157 million in 2010 to 205 million by 2015[19].
Annual growth rates of the e-commerce market size over the next five years are
projected at around 10%. Average spending per capita at EU level is forecast to
rise from EUR 483 in 2009 to EUR 601 in 2014. Despite its significant
growth potential, e-commerce currently only represents 3.4% of all retail trade
in the 27 Member States[20]. The
internet economy has generated 21 % of the GDP growth of the last 5 years and
could represent as much as 20% of GDP growth in the period up to 2015 in the
Netherlands and the UK[21].

According
to a public consultation on the future of e-commerce[22],
payments have been identified as a significant barrier[23]
to the future growth of e-commerce. The related key issues that were identified
include the diversity of payment methods across Member States, the cost of
payments for consumers and merchants and payment security. Regarding online
banking based payments the lack of a coherent and comprehensive (self-)
regulatory framework for payment initiation services[24]
currently leads to a European internet payments environment that is largely
fragmented along national borders with a limited number of domestic internet
payment schemes[25] and a
few proprietary solutions[26] for
online-banking based payment initiation services. Furthermore, (potential)
market participants seem reluctant to invest as long as the legal situation
regarding scope for applying collective fee arrangements[27],
such as for payment cards, has not been settled and common standards have not
been identified.

Mobile payments: Market size and
integration

Like
internet payments, mobile payments can be based on card payments, credit
transfers and direct debits, in each case using the underlying infrastructure
of bank accounts, or performed through pre-paid cards or dedicated payment
accounts which are not linked to bank accounts (e-money). Finally, mobile
payments can also be settled through the Mobile Network Operator's (MNO)
billing to the consumer.

Several
studies indicate that the volume of payments made by using mobile phones is the
fastest growing of all payment methods at the global level. The rapid
proliferation of smart phones is fuelling this growth in developed markets.
Gartner estimates the world-wide value of m-payments in 2012 at USD 171.5
billion, growing to USD 617 billion in 2016.[28]
IE Market Research estimates the world-wide value of m-payments in 2012 at
slightly above USD 100 billion and in 2015 at USD 945 billion.[29]
This reflects annual growth rates of more than 37% and more than 100%,
respectively.

However,
market penetration of m-payments in the EU still lags behind, in comparison to
other regions. According to Gartner, there were 26.7 million mobile
payment users in Europe in 2012, compared to 85 million users in
Asia/Pacific, 57.8 million users in Africa and 32.8 million users in North
America.[30] A
recent study suggests that the 'latent’, i.e. untapped, demand for mobile
payments in the EU amounts to more than EUR 50 billion in 2012.[31]

Several
national initiatives started to emerge in Europe, for example the so-called
'Weve' joint-venture between three MNOs (Vodafone, O2, and Everything
Everywhere) in the UK which is foreseen for commercial launch in 2013. Overall
however, the market for mobile payments at European level is still fragmented.
The lack of a concrete European framework addressing main concerns, such as
technical standards, security and inter-operability, risks perpetuating market
fragmentation for the m-payments market in Europe.

3.1.3      Overview of legislative framework

Regulation
(EC) No 2560/2001 on cross-border payments in euro was the first building block
of the legislative framework on retail payments in the EU. The Regulation was
later repealed by Regulation (EC) No 924/2009 on cross-border payments,
primarily to include direct debits in the scope of the Regulation. The
Regulation eliminated the differences in payment charges for payment service
users (PSUs) between cross-border and national payments in euro within the
Union. The Regulation applies to all electronically processed payments,
including credit transfers, direct debits, cash withdrawals at ATMs, payments
by means of debit and credit cards and money remittance.

The
Payment Services Directive (PSD), adopted in 2007, aimed at establishing a
harmonised legal framework necessary for the creation of an integrated payments
market so that payments could be made more quickly and easily throughout the
whole EU. By removing the legal and technical obstacles blocking the creation
of a single payments market as well as by promoting market entry by a new class
of financial institutions, namely payment institutions, the Directive aimed at
introducing more competition in payment systems and facilitating economies of
scale. At the same time the PSD facilitated the operational implementation of
the Single Euro Payments Area (SEPA). The PSD also provides a set of rules with
regard to information requirements and reinforces the rights and obligations
linked to payment services.

More
background on the PSD, including its objectives and impact, is provided in
Annex 6.

While
the PSD did bring significant improvements in many areas a number of specific
regulatory failures and gaps remain. These will be described in more details in
the next section.

Other
relevant legislation for the retail payments sector includes inter alia:

–
The SEPA migration Regulation (EC) No 260/2012
which sets migration deadlines for pan-European credit transfers and
pan-European direct debits, replacing national schemes for national and cross
border euro payments within the European Union as of 1 February 2014.
Regulation 260/2012 also addressed interchange fees for direct debit
transactions;

–
The E-Money Directive 2009/110/EC
which provides for the legal
framework to issue and redeem e-money (pre-paid payment instruments) and which brings the prudential regime for electronic money institutions in
line with the requirements for payment institutions in the PSD; and

–
Regulation (EC) No 1781/2006 which lays down
rules for payment service providers to send information on the payer throughout
the payment chain for the purposes of prevention, investigation and detection
of money laundering and terrorist financing.

The
regulatory framework is complemented by a number of investigations and cases in
the context of EU competition law which were launched by the Commission over
the past years in the field of retail payments.

1.4
Problem definition

The
following section provides a short overview of the main problem drivers. The
specific problems created by these drivers are described in more detail under
section 3.2.2. The negative effects caused by the specific problems are
described under 3.2.3.

3.2.1      Drivers for integration gaps

The
Payment Services Directive has already allowed for significant progress
regarding the overall integration of the retail payments market. However, there
are a number of specific and well-defined problems in the field of card,
internet and mobile payments. The drivers behind these problems broadly fall
into two categories. First, in a number of areas, the market is not functioning
optimally. Second, there are a number of gaps and shortcomings that revolve
around the existing provisions in the legal framework.

3.2.1.1   Market failures

The
retail payments market is a two-sided market. This means that there are two
distinct groups of users to which providers need to align their services: The
consumers who are serviced by the issuer of payment instruments and the
merchants who are serviced by acquirers of payment instruments. In the field of
card, internet and mobile payments, transactions between these user groups are
based on the intermediaries - "schemes" or "platforms" that
connect the two user groups through a network.

Even if
the corporate form may vary, banks often exercise control over key elements of
schemes, especially in the case of card schemes, and have a commonality of
interests in deriving revenues from it. While such schemes create societal
value by enabling payment transactions, in certain cases schemes and/or scheme
participants can use their market position to impose restrictive rules and
business practices on other market actors. This is for example the case for
so-called multi-lateral interchange fees (MIFs) which are fees set
multilaterally and paid by the PSP of the merchant (acquirer) to the PSP of the
card holder (issuer). Furthermore, certain rules, such as the so-called Honour
All Cards Rule (see 3.2.2.2. below) limit the choice of payment instruments for
merchants and consumers.

Restricted
access to crucial components of the payments infrastructure is a possible
source of market distortion. In many cases, these restrictions are applied by
incumbent payment service providers (mostly banks) based on their market
position in comparison to new entrants, such as new card schemes or new service
providers of internet and mobile payments.

Finally,
the lack of standards and inter-operability between different market actors,
for example in the case of mobile payments, is possibly delaying the broad
scale adoption of innovative payment methods.

3.2.1.2   Regulatory and supervisory
gaps in the PSD

The PSD
has been adopted in December 2007 on the basis of a Commission proposal from
December 2005. It constitutes the first, comprehensive legislation on payments
in the EU and a good basis for the development of EU-wide payments. This legal
framework generally proved valid and robust. However, an unprecedented
development of the payments market, in particular the rapid emergence of e- and
m-payments, gave rise to important challenges from a regulatory perspective.
Many innovative payment products or services do not fall, entirely or in large
parts, under the current scope of the PSD. This leads to legal uncertainty (no
supervision, no regulation), potential security risks in the payment chain and
to a lack of consumer protection. This is for example the case for
online-banking based payment initiation services (PIS) provided by third party
providers (TPPs)[32].

Furthermore,
the current scope definition of the PSD and in particular the existing
‘negative scope’, which exempts certain payment-related activities from the
general rules, proved in a few cases too ambiguous and too general, in
particular taking into account market developments. As a result, the
justification for some exemptions (like in the context of mobile payments and
within so called limited networks) has changed. Some of the exempted and
therefore unregulated service providers are now competing with the regulated
players, enjoying unjustified competitive advantages (e.g. in terms of initial capital,
own funds required, safeguarding of funds or liabilities and responsibilities
vs. consumer)  which results in an un-level playing field and creates consumer
protection gaps.

Finally,
some few of the 23 options set out in the PSD have been implemented and are
enforced by Member States in very different ways. This has led to considerable
regulatory arbitrage (e.g. as regards so called waived Payment Institutions),
legal uncertainty, cases of poor consumer protection (e.g. in cases of consumer
liability) and competitive distortions in a number of areas. This is e.g. the
case of national options regarding so called small (waived) PIs, safeguarding
rules, consumer liability thresholds and surcharging.

3.2.2      Specific Problems stemming from the problem drivers

Five
specific problems were identified and descriptions of these problems are
presented in the following sections. Annex 7 provides more details and
illustrations of the specific problems.

3.2.2.1   Market fragmentation

Technical
standardisation and interoperability are crucial in the network-based payments
business to maximise the reach between users (consumers and merchants). Under a
payment scheme, payment relevant information is
transmitted on the basis of technical and commercial rules. In order to maximise
the reach between payers, payees and their payment services providers, either a
common set of technical requirements (such as those established for credit
transfers and direct debits under Regulation 260/2012) or inter-operability
between different schemes is required. In this context, card, internet
and mobile payments all suffer, in varying aspects and to different degrees,
from a lack of standardisation and inter-operability between different
solutions, especially at cross-border level.

In the
case of card payments, there is a lack of inter-operability between national
debit card systems, resulting in diverging standards and messaging protocols,
for example between the card terminal at the merchants’ Point-of-Sale (POS) and
the PSP acquiring the card payment. Similarly, card terminals are subject to
different national certification procedures in order to comply with obligatory
security criteria. While several European market initiatives are attempting to
overcome these problems by setting common standards, the
adoption and implementation of these standards across the market represents a
major challenge and national protocols and approaches therefore still prevail.

Regarding
internet payments, online-banking based payments are an attractive and often cheaper
alternative to card payments. They could also open the world of e-commerce to
many EU citizens, as less than half of the EU citizens own a credit card while
more than 80% of EU citizens have a bank account.[33]
However, inter-operability between online-banking based payment solutions is
very limited, meaning that individual solutions only cover small clusters of
banks and are limited to the national level.

Mobile
payments, due to the nascent state of the market, show by far the strongest
degree of fragmentation. The current landscape for proximity m-payments is
characterised by applications for niche users and by a myriad of pilot
projects, mostly at domestic or even local level. A lack of standards and
inter-operability is identified as one of the key obstacles for the broad-scale
adoption of mobile payments by numerous studies.

The
problems described above are overarched by insufficient governance arrangements
for the European retail payments market. Until very recently, the European
banking industry under the umbrella of the European Payments Council (EPC) has
been the main driving force of the SEPA project by defining and developing
business rules and standards for retail euro payments, in particular credit
transfers and direct debits, as well as high level principles and rules for
card payments.

The EPC
is nonetheless perceived by large parts of the market, notably by users of
payment services (consumers, retailers, corporates including SMEs),
non-licensed market players offering payment-related services (such as TPPs)
and new players in the field of e- and m payments as not balancing or
adequately representing the interest of all actors in the market in its
standardisation work.  Even more, lack of adequate involvement of users
(corporates, SMEs, retailers, consumers) and of the supply side players other
than banks in the consultation and decision making process raises serious
concerns about the capacity of this body to coordinate the development of the
SEPA project from the governance perspective. Furthermore, the EPC does not possess
the powers to ensure the implementation of the already defined standards.

In
order to improve stakeholder involvement in the governance and to balance the
interests of all market participants in the SEPA project, including in the
process of the development of standards, an informal body, the SEPA Council was
established in March 2010. It is composed of high-level representatives from
the demand side (corporates, SMEs, retailers, consumers and public
administrations) and the supply side (banks and payment institutions) of the
market as well as the representatives of National Central Banks. The European
Commission and the ECB, which strongly supported the creation of the Council,
are co-chairing the meetings and providing the secretariat support. The SEPA
Council started playing an important role in the SEPA project and providing
useful input and support to the work of the Commission in the field of retail
payments (notably in the run up to the migration to SEPA credit transfer and
SEPA direct debit).

However, due to uncertainties surrounding the informal
mandate of the SEPA Council (no clear responsibilities are defined, no
follow-up to the recommendations, guidance and statements is ensured by the
market) and its composition (specific groups on the supply side, e.g. some
categories of payment service providers, market players falling outside the
scope of current payments regulation, as well as some important participants on
the demand side, e.g. internet retailers are still not represented), there is a
need to reform the current arrangements. With the quick development of e- and
m-payments the balancing of interests of all stakeholders and the need to
meaningfully steer the SEPA process, including in the area of standardisation,
is more pronounced than ever. Otherwise, there is a high risk of fragmentation
of the market along national borders and proprietary standards for e- and
m-payments. This is already the case for cards and the lack of standardisation
in this area has deeply impacted the EU market.

The European Parliament and Council highlighted these
problems and, in the context of the adoption of the SEPA Regulation[34],
called for a review of SEPA governance and if necessary for a revised governance
model.

3.2.2.2   Ineffective competition in
certain areas of card and internet payments

In the
area of cards there are several restrictive business rules and practices that
lead to a situation of ineffective competition. This
results in sub-optimal market outcomes and relatively high prices for card
payments that are at the end of the day reflected in the prices of goods and
services.

In this
context, the ECB estimates the total social cost of payments at €156 billion
per year in the EU or 1,2%% of GDP[35].
According to the same ECB report, the social costs of debit cards are about
1.4% of the transaction value, of cash about 2.3% and of credit cards about
3.4%[36].

Interchange
fees

Multilateral
Interchange Fees (MIFs) and Bilateral Interchange Fees (BIFs) for card based
payments and the way they are defined and applied cause several problems.

First, IFs are subject to reverse competition
meaning that competition between card schemes to attract card issuers (banks)
leads to ever higher  interchange fees (and consequently, MSCs).
IFs are basically revenues offered to banks by card schemes in exchange for
issuing their cards rather than the cards of the competitors. Therefore, an
increase in MIFs offered by one card scheme leads banks to issue the cards of
this particular scheme.

The
UK debit cards market is an excellent example of how competition
between Visa and MasterCard triggered an increase in interchanges fees. In
2005, MasterCard increased its MIFs to 6.93p per debit card transaction. In
reaction Visa increased its interchange fee to 8.00p in 2007. MasterCard did
not react at that time. The result was immediate: a number of banks decided to
move to Visa. For example in 2009, HSBC switched 10 million customers from
Maestro to Visa debit.  Maestro had 27 million cards in 2008 but only 2.8
million in 2011, losing 90% of its market share in the process.

A
similar situation was observed in Hungary, where in the result of the
competition proceedings Visa consumer debit card MIFs were lowered to a level
of 0.20%. This led to the massive migration of debit card issuers from
Visa to MasterCard, with Visa losing 45% of its market share (more than a
million cards) in the first semester of 2012 compared to 2009[37].

Table 1

UK debit cards market[38]

|| || 2005 || 2006 || 2007 || 2008 || 2009 || 2010 || 2011

Mastercard || MIF per transaction (pences) || 5.97 || 6.93 || 6.93 || 6.93 || 6.93 || 6.93 || 6.93

Number of cards (million) || 24.6 || 24.9 || 25.8 || 27 || 20.8 || 8 || 2.8

Visa || MIF per transaction (pences) || 6.50 || 6.50 || 8.00 || 8.00 || 8.00 || 8.00 || 8.00

Number of cards (million) || 42.4 || 43.7 || 45.8 || 49.3 || 58.5 || 76.6 || 83.5

As a
result, a large and still growing part of the merchant service charge, paid
by the retailers to acquirers for payment card acceptance, is
determined by the interchange fee. MSCs in the EU add up to
an amount of app. 14 billion EUR annually[39].
Close to 75 % of these charges, app. 10 billion EUR is transferred to issuers
as MIFs, although a large share of this corresponds to credit cards, and
expensive ones in particular (e.g. premium)[40].
MIFs made up 60% of MSCs
in Czech Republic in 2003, 60% in Italy in 2003 and 73% in
Belgium in 2002[41].

Another
aspect of the same problem is that banks issuing cards,
getting ever higher MIF revenues can encourage consumers to use these cards
through additional incentives (such as air miles, insurances, etc.), as the cost
for these benefits is not directly apparent to the cardholder as they are borne
in the first place by the merchant accepting the card. Merchants
are normally reluctant to turn down payment instruments which are costly to
them (and ultimately to their subsequent purchasers) for fear of losing
business. For the same reason, most merchants prefer not to use surcharging
(see also the section below, diverse charging practices – surcharging). As a
result, merchants pass on to all their customers the increasing costs of
accepting card payments through the general prices
of their goods and services.

Furthermore
reverse competition on MIFs also means that market entry for new pan-European
players remains difficult. Such new schemes would have to offer issuing banks
interchange fees that are at least comparable to those prevailing in the market
they want to enter. This also explains why in a number of Member States, national
('cheaper') card schemes continue to dissapear and beeing replaced by
MasterCard and Visa. This happened, for example, in the UK, Ireland, the
Netherlands, and Finland. On top of maintaining the
status quo in favour of incumbent card schemes, high MIFs also form barriers to
entry for cheaper and more efficient payment solutions, e.g. in online payments
area (offered e.g. by TPPs). This results in limited market entry and less
payment innovation.

Secondly,
the widely diverging levels of MIFs
between Member States constitute a real obstacle for market integration.

Figure 6 - Average domestic MIF levels in the
Member States, 2012[42]

The
above graph illustrates that MIF levels show significant variation between
Member States. When looking at consumer card transactions, their weighted
average level range between 0.1-0.2% to 1.4-1.5% among various Member States.
Country average MSC rates range between 0.3-0.4% to 1.9%. MSC rates also vary
between merchants within the same Member State, smaller merchants may end up
paying average MSCs of up to 3–3.5% of the transaction value.

This is
especially the case when the widely diverging levels of MIFs between Member
States are seen in combination with scheme rules which force
acquiring banks to apply the MIFs applicable in the country where the payment
transaction takes place even if the acquirer is based
in a different country with a potentially lower domestic MIF level. This
effectively eliminates the benefits of cross-border and centralised acquiring
for merchants and limits their ability to avoid paying high MSCs resulting from
high MIFs through using acquirers in other Member States.

Another
problem in the MIF area is the perceived limited legal certainty.

The
General Court's MasterCard ruling of 24 May 2012[43] 
has confirmed the Commission's analysis that Multilateral Interchange Fees
restrict competition, are forbidden under the competition rules and not
justified for efficiency reasons. However, MasterCard has appealed the
judgement, and the ruling still leaves the question of the appropriate level of
MIFs open - even if it the General Court endorsed the Commission’s assessment
that debit cards generate important commercial benefits for banks apart from
interchange fees, and therefore questioned the necessity of a MIF for debit
cards[44].

However,
the EU proceedings against MasterCard and Visa cover only cross-border
transactions in case of MasterCard and cross-border and domestic transactions
in 10 Member States in the case of Visa. In spite of the many past and current competition
proceedings against MIFs at national and European level, domestic IFs are still
there and vary widely in most Member States at a high level. The remaining domestic
MIFs remain to be addressed by National Competition Authorities (NCAs), in
close cooperation with the Commission, by the Commission itself or through
private damages action. While arguably these domestic fees are not different
from the MasterCard ones that were deemed unlawful and not justifiable under
competition rules, competition enforcement for each MIF would be a long and
fragmented process, which is unlikely result in a coherent, consistent and
timely outcome across the EU. Arguably, only an 'across the
board' lowering of fees by all market players for instance on the basis of regulation
could assure EU wide alignment of the market based on the Court judgment.

In
addition, since competition between payment card schemes is based on offering higher
IFs to convince issuing banks to issue their cards, it is difficult for
individual schemes to reduce their fees, as it will only result in giving the
market to the other banks/schemes– as happened in Hungary. There is a
'last-mover-advantage' in complying as late as possible with Court cases and
decisions from (European) competition authorities.

Competition
proceedings on MIF

The Commission’s Decision of 19 December 2007[45]
prohibits MasterCard’s multilateral intra-EEA interchange fee for cross-border
payment card transactions made with MasterCard and Maestro cards. It states
that the MasterCard's MIF restricts price competition between acquiring banks
by artificially inflating the basis on which these banks set their charges to
merchants and effectively determining a floor under the merchant service charge
below which merchants are unable to negotiate a price.

The main argument of MasterCard was based on the efficiencies
created by encouraging the issuing and use of cards to match greater demand
from merchants to receive card payments ('scheme optimisation'). The Commission
however challenged these efficiencies and the indispensability of MIFs to
achieve them. The Commission held that the MIFs must be set at a level that
allows merchants overall to receive some of the benefits of these alleged
efficiencies.

In 2009, MasterCard offered Undertakings to reduce its
cross-border consumer MIFs to 0.2% for debit cards and 0.3% for credit cards
(this latter category including deferred debit cards); it introduced a number
of changes to its scheme rules to facilitate competition in the card payments
markets; and it repealed the increases in its scheme fees to acquirers which
could have had a similar effect on the market to MIFs. The Commission stated
that, in light of the Undertakings, it did not intend to open proceedings
against MasterCard for non-compliance with the Decision[46].

Following the expiry of the Visa II exemption decision in December
2007, the Commission opened an antitrust investigation against Visa. In 2009
the Commission issued a Statement of Objections ("SO") to Visa for
all the MIFs it sets in the EEA (cross-border MIFs and the MIFs for domestic
transactions in eight Member States). In 2010 Visa Europe offered commitments,
based on the MasterCard Undertakings, but the MIF reduction only covered debit
transactions (reduced to 0.2%). These commitments were made binding in December
2010[47].

In May 2012, the General Court rejected
MasterCard's appeal against the Decision of 2007. The General Court confirmed
in particular that MIFs are not objectively necessary for the operation of a
four party payment scheme. According to the Court banks can operate within a
payment system without a MIF, save costs from card issuing (the use of debit
cards reduces the need for cash handling by banks) and receive additional
revenue from card issuing (interest on credit card balances). It was therefore
unlikely that banks would stop issuing cards if MIFs did not exist and the
argument that MIFs were indispensable for the functioning of a payment card
system was rejected. MasterCard appealed the judgment to the ECJ[48].

In July 2012 the Commission issued Visa a
supplementary SO covering its MIFs for credit card transactions. In the
supplementary SO sent to Visa in 2012, the Commission also expressed the
concern that Visa's rules on the conditions of cross border acquiring were an
infringement in their own right of the competition rules[49].

In April 2013 the Commission opened further
proceedings against MasterCard, this time addressing MasterCard's MIFs applied
to so-called inter-regional transactions (ie payments made to merchants
established in the EEA with cards issued outside the EEA, for instance by
American tourists in Europe) and MasterCard's cross border acquiring rules[50].

A number of competition proceedings have also
covered interchange fees at Member State level, following the approach under
the MasterCard case. The French Competition Authority for instance made binding
the commitments from the Groupement des Cartes Bancaires – the domestic
card scheme- on 7 July 2011 to reduce its interchange fees on payment cards by
20 to 50%, to level equivalent to the ones agreed by MasterCard and Visa for
their cross-border transactions. Proceedings are on-going in a number of other
Member States[51],
including in the UK, Germany and Italy.

Other
issues

The
ability of merchants to resist high IFs is also hindered by a number of business
rules that for instance limit their ability to differentiate their prices
according to the cost of a given means of payment (no surcharge,
non-discrimination rule), or force them to accept all cards of a given brand
(honour all cards/products).

The
Honour All Cards Rule (HACR) requires merchants to accept all products issued
under the same brand, even if the fees for these cards can vary by a factor of
3-4 within the same card category (i.e. credit / debit cards in Belgium) or by
a factor of up to 25 between card categories, such as premium credit card and
low-cost debit cards in the UK. These costs, initially borne by the merchant
are usually passed to the consumer through the price of the goods and services.
Some of the business rules of card schemes, in addition to MIFs, have been
addressed through the MasterCard Undertakings and the Visa Commitments, the
applicability of which is however by nature limited in time.

Another
problem caused by market restrictions is the lack of access to information on
the availability of funds on a payment account by third parties. For example,
for new card schemes, this implies that they depend on the willingness of the
account servicer (often a bank) to provide this information in order for a
payment to be initiated and guaranteed. This puts new players possibly at a
disadvantage versus incumbents.

Finally,
small Payment Institutions (PIs) often have difficulties to directly
participate in designated payment systems. This creates competitive
disadvantages versus banks. Indirect participation is possible for PIs in some
cases, but again this creates competitive advantages for the bank through which
indirect participation for the PI is enabled. In any case, there is an unlevel
playing field between these PIs and incumbent banks.

3.2.2.3   Diverse charging practices
between Member States

A
surcharge is a charge from merchants to consumers that is added on top of the
requested price for goods and services when a certain payment method (usually a
card) is used by the consumer. One of the reasons for surcharging is to direct
consumers to cheaper (from the merchant’s perspective) or more efficient
payment instruments. The PSD provides an option for Member States to allow or
prohibit surcharging in their territory. This has led to a situation where
around half of the Member States allow surcharging while it is forbidden in the
other half.

The
problem of surcharging lies both in its original design and implementation.
Because of the divergent national practices, it is often unclear for consumers
whether merchants can surcharge them and under which conditions. Especially in
the e-commerce sphere this can be confusing as merchants located in a country
where surcharging is allowed can offer products and services in countries where
it is not and in this case surcharge the consumer. Therefore the lack of
harmonisation in this regard is a rapidly growing problem in itself.

Furthermore,
surcharging was intended to allow merchants to steer consumers to the most
cost-efficient payment method. However this method has not led to the intended
results. Many merchants cannot or prefer not to surcharge. One of the
difficulties for merchants to efficiently steer consumers follows from the
Honour All Cards Rule. As merchants are obliged to accept all cards within a
brand and the fees for the use of these cards are usually not separated,
merchants do not know which cards are most expensive and how much a single
transaction costs them.

Moreover,
in those countries where surcharging is allowed, surcharges are sometimes
exploited by retailers who applied excessive surcharges to increase their
revenues. Even though the Consumer Rights Directive 2011/83/EU prohibits
excessive surcharges[52], consumer
representatives from several Member States, in the public consultation on the
Green Paper on payments, called for a ban on surcharging.

As the
cost of a card payment for merchants is to a large extent determined by the MIF,
any regulation of MIF should logically be accompanied by a revision of
surcharging rules.

3.2.2.4   Legal vacuum for third party
providers (TPPs) for payment initiation services, account information services
and other equivalent services

Since
the adoption of the PSD in 2007, new services have emerged especially in the
area of internet payments. In particular, third party providers, which do not
maintain payment accounts for payers, offer so-called payment initiation
services (PIS) to merchants. These services facilitate the use of the consumer’s
online banking platform to initiate immediate (typically guaranteed) internet
payments on the basis of credit transfers. For this purpose, most PIS require
that consumers introduce their online banking credentials (e.g. username,
password and transaction authorisation codes) on the PIS provider’s website for
the initiation of a payment transaction. Some other PIS (often based on a
scheme) are forwarding the consumer to the online banking website and are
receiving the confirmation of the successful payment initiation from the
account servicing PSP.

However,
access to consumer online banking credentials by third parties raises a series
of issues, ranging from consumer protection, security, liability to competition
and data protection. As PIS providers are
not licensed, they are not supervised by any competent authority and do not
follow the PSD requirements. There is clearly an issue with the scope of the
Payment Services Directive as it did not foresee such market developments.

TPP
providers are present in the majority in the EU Member States, with an
established position in the German, Dutch, French and Scandinavian market, as
well as an increasing presence in Spain and Poland, among other countries. As
the number of transactions initiated by the market leaders is counted in
millions each month and rapidly increasing, and as the established providers
enter new EU markets, there is an urgent need to address the concerns listed
above.

3.2.2.5   Scope gaps and inconsistent
application of the PSD

Certain
exemptions in the PSD lead to very divergent interpretation and application
across Member States. In some cases the exemption criteria appear too general
or outdated in respect of market developments, raising doubts about the
appropriateness of the current scope of the Directive.  In other cases the same
exemptions are being interpreted by Member States in very different ways, thus
indicating implementation difficulties.  Finally, in many cases “would-be PSPs”
often decide on their own that they should be subject to specific exemptions
and do not consult or even inform the authorities about their exempted payment
activities, indicating a serious enforcement problem. These identified problems
are particularly applicable for the PSD exemptions regarding commercial agents
(acting on behalf of the payer or payee), limited networks (in which payment
activities take place), payment transactions initiated by a telecom device and
independent ATM providers.

A
second issue related to the scope of the PSD are the so-called one-leg
transactions, i.e. when one of the PSPs involved in a payment transaction is
located outside the EEA (e.g. in Switzerland or USA). In those cases the rights
and obligations related to the transaction as well as transparency and
information requirements of the PSD do not necessarily apply, since it is left
to the discretion of the Member State or PSP. This creates confusion and
detriment for PSUs, for example regarding information on applicable charges or
liability rules for incorrectly executed transactions. Furthermore, payments in
non-EU currencies fall outside the current scope of the PSD which creates
similar problems as for one-leg transactions.

Finally,
there are some issues around licensed Payment Institutions (PIs), a category of
service providers which was introduced by the PSD. First and foremost, the
possibility offered in the PSD for Member States to waive some requirements for
small PIs seems to have led to an un-level playing field, giving competitive
advantages for “waived” PIs. Some larger PSPs seem to have circumvented the law
by setting up multiple legal entities which on an individual level stay below
the waiver threshold.

The
significance of these problems is often difficult to assess, given the lack of
any reliable market data “by design”. Clearly, as the exempted providers are
bound neither by a requirement to seek authorisation nor by any specific
conduct of business rules, current exclusions encourage “would-be PSPs” to
design or redesign their products so as to meet the exemptions criteria and,
thus, to fall outside the PSD scope. It is unofficially observed by some market
experts and representatives of the Member States that the size of the exempted
market in terms of volumes and values may be much larger than the size of the
regulated market. Certainly, in some Member States non-regulated providers have
developed into powerful competitors to authorised providers in their respective
niche markets (e.g. pre-paid cards, independent ATM deployers, bill payment
providers, currency exchange bureaus). Given even these anecdotal data, there
is an urgent need for revisiting the scope of the PSD.

The
scope of the regulatory divergences and possible effects of arbitrage may also
be roughly assessed by the distribution of PI licenses and national waivers for
small PIs, though of course many other factors influence these figures.  As
much as 40% of the authorised PIs (224 out of 568 in the EU) and 43% of e-money
institutions (30 out of 70) are registered in the UK. A similarly divergent
approach to the possibility of creating a category of small, waived
institutions (PIs with a limited, national only license) lead to the creation
of 2094 small PIs in only eight Member States, with the huge majority located
again in the UK and Poland. Many of the PIs using extensively passporting are
located just in two/three Member States.

3.2.2.6   Conclusions

PSD

The
case for a selective revision of the PSD some six years after its adoption and
only four years after it has been transposed is strong and supported by the
results of external studies[53],
opinions of Member State authorities[54]
and stakeholders[55]. The
need for urgent action has been also highlighted by the European Parliament
resolution of 20 November 2012[56]. Four
main issues requiring the regulatory intervention are:

–
Addressing the issue of legal vacuum for TPPs,

–
Limiting risks of circumvention of the PSD in
reviewing its negative scope,

–
Changing these Member State options that lead to
regulatory arbitrage (including surcharging) and

–
Ensuring appropriate governance arrangements for
SEPA.

These
main changes could be accompanied by some fine-tuning measures (see chapter
5.6).

Interchange
fees

IFs
lead to much higher costs to merchants and ultimately their customers. Any
efficiencies they generate do not appear to justify these costs, at least at
the current IF levels. IFs also constitute an obstacle to market integration.
These negative IF effects are reinforced by a number of business rules, which
reduce transparency, limit the ability of retailers to steer their customers
towards more efficient means of payment and the ability of retailers to choose
an acquirer in another Member State. The lack of a level playing field
persists, in spite of the many national and European competition proceedings.
Fragmented competition law enforcement may even lead to further legal uncertainties
and distortions. A reduction of IFs by all market players, would be the most
appropriate way to ensure a competitive market.

3.2.3      Effects of the identified problems – a baseline scenario

The
problems identified in the sections above result in significant consequences
for all stakeholders. The effects described below should be understood as a
description of the situation in the payments market both today and in the
foreseeable future, if no intervention is taken at the EU level.  They can
therefore be considered as a baseline scenario for the policy options described
in Chapter 5 of this impact assessment. A short presentation of the main
effects is provided in the following sections. Annex 8 provides a more detailed
overview.

3.2.3.1   Unlevel playing field
between service providers / payment institutions

Barriers
to market entry for new and innovative PSPs an:
Standardisation and interoperability gaps prevent competition among incumbents
and create a significant barrier to the market entry for new and innovative
payment service providers, in particular in the context of online and mobile
payments. Even already existing and successful payment solutions face serious
difficulties when they try to diversify their service offering into new areas
or expand geographically.

While
standardisation and interoperability work in the domain of card payments is
advanced in most areas and is likely to progress further, the rate of this
progress would continue to be slow. Market participants are unlikely to either universally
agree on the choice and use of already existing standards or implement them,
even in the medium term perspective (5-10 years), without a major regulatory
push[57].

Providers
operating with no authorisation and supervision by Member States:
The gaps in the scope of the PSD lead to a situation where some market players
are subject to authorisation and supervision by the Member States while others,
operating on the same market and providing similar payment services, are not.
This leads to very different costs and market access possibilities for
regulated versus non-regulated players.

Within
the category of regulated PIs the competitive playing field is far from being
equal or harmonised across the Member States. There are very different
authorisation and prudential requirements for PIs, including different national
rules for registration of small, waived PIs.

Yet
another example of the unlevel playing field for PIs can be found in
inconsistent application of the PSD passporting rules by the Member States and
ambiguities surrounding the role of PI agents. Thus, some Member States grant
numerous passports and allow for active provision of services by PI agents
abroad, while other Member States are much more reluctant in this respect.
Voluntary passporting guidelines, although existing, are not applied by those
Member States that are against the cross-border provision of services without an
establishment (either via an office or through an agent).

Market
dominance of (expensive) card schemes: Market
incumbents – in particular banks issuing cards and card schemes - are eager to
protect and if possible increase the revenues from card payments, above all
from MIFs. In some Member States national schemes – with lower fees – are being
abolished and replaced by international schemes that offer higher fees to
issuing banks than the domestic payment card scheme. Recent
examples of this include the UK, the Netherlands, Austria, Finland and Ireland.
The market share of two biggest international schemes in issuing cards in 2008
was 41.6% (Visa) and 48.9% (MasterCard) respectively[58].

Consequently,
service providers offering payment solutions that could challenge the payment
model based on MIFs (for example online-banking based payments) encounter
serious difficulties in entering the market and in introducing their product
onto the market. As explained above, this market dominance is unlikely to be
comprehensively and consistently addressed through the enforcement of
competition rules and precedents by the national competition authorities alone.

No
direct access to payment systems for PIs: As PIs
depend on banks for the settlement of their payments, this could in many cases
impact negatively on the services they offer, including prices and execution
times.

Table
2 - Effects of the identified problems (Unlevel playing field between service
providers / payment institutions)

Effect || PSPs || Consumers || Merchants || Other stakeholders

Barriers to the market entry for new and innovative payment service providers || X (main impact) || X || X || X (businesses)

Providers operating with no authorisation and supervision by MS || X || X || X || X (waived providers, other businesses))

Market dominance of (expensive) card schemes || X (main impact) || X || X || X (businesses)

No direct access to payment systems by PIs || X (main impact) || X || X || X (businesses)

3.2.3.2   High costs, limited choice
and protection for Payment Service Users (consumers, merchants)

High
merchant service charges for the acceptance of card payments:
High MIFs lead to high Merchant Service Charges (MSCs) from acquiring PSPs to
merchants. This is a challenge especially for small merchants as to whether
they can afford to accept card payments due to their high cost.

On-going
competition cases at the EU and national level as well as the General Court
MasterCard case may address some of the MIF-related issues on a national and
cross-border basis. This would however be a very long and fragmented process,
with no guarantees to ensure any consistency across the EU[59].
Any competition and national procedure would also leave the question of the
appropriate level of MIFs open. MIF could be also lowered in some Member States
on the basis of regulation. However, in such case, the change would apply in a
single Member State, lead to a similar fragmentation as the competition
enforcement and be potentially easily circumvented by banks and card schemes
due to a national-only scope reach of the law.

Socialisation
of costs for expensive payments instruments: As
card-issuing PSPs wish to obtain high revenues through the MIF income, they
provide consumers with incentives to use high MIF cards, such as premium cards.
Due to restrictive business rules of the card schemes merchants may not refuse
to accept or charge the consumer for the use of such expensive cards. As a
result, all consumer prices are inflated as the costs of even most expensive
payment instrument are included in the prices for goods and services offered by
the merchant

Limited
choice of payment instruments: In those cases where
merchants decide not to accept certain payment instruments based on their high
cost, consumers are often limited in their choice of payment instrument and in
many cases restricted to cash payments.

Excessive
surcharges in some cases: Even if surcharging is often
not allowed due to a prohibition at Member State level or restrictions based on
the business rules of card schemes, in those cases where surcharges can be
lawfully applied, they are sometimes used to generate incremental revenues for
merchants.

The
Consumer Rights Directive aims at addressing this problem. Its provisions
should be enforced in the Member States as of 13 June 2014. However, actual
enforcement might be complex in practice, taking into account the existing
blending practices and HACR. At the same time, limitation to costs may also
result, in different treatment of cardholders from different Member States[60].

Overly
strict liability rules: Due to Member States’
inconsistent application of the PSD rules on liability, payment service users
are often exposed to overly strict liability regimes. This concerns in
particular the liability for an unauthorised transaction and responsibility for
the use of lost, stolen or misappropriated payment instrument or credentials.

Limited
or non-existent protection for some categories of payment transactions:
As a result of the scope of the PSD, payment service users suffer from a lack
of consumer protection, for example in the case of one-leg transactions,
payments in limited networks or payments initiated by mobile devices.

Table
3 - Effects of the identified problems (High costs, limited choice and
protection for Payment Service Users)

Effect || PSPs || Consumers || Merchants || Other stakeholders

High merchant service charges for card payments || - || X || X || -

Socialisation of costs of expensive payment instruments through prices for goods and services || - || X || - || -

Limited choice of payment instruments || - || X || X || X (businesses, administration)

Excessive surcharges || - || X || - || -

Inconsistent and often overly strict liability rules || - || X (main impact) || X || -

Limited or no protection for some categories of payment transactions (one leg, limited networks, IT devices, payment initiation services) || - || X (main impact) || X || X

3.2.3.3   Low cross-border activity
(market integration)

No
genuine cross-border acquiring: A genuine Single Market
for acquiring services has not yet materialised. There is no incentive for even
large European retail companies to use the services of acquirers located in
another Member State since domestic rules apply. This leads to missed
opportunities for economies of scale and the streamlining of operations.

Limited
choice of payment service providers:
Similar barriers make it difficult for providers to expand their operations
beyond their country of origin. For merchants, this usually limits the choice
of payment or acquiring service providers to the domestic incumbents.

Limited
choice of payment instruments for cross-border online purchases:
Due to a lack of inter-operability, in particular for debit cards or
online-banking based payments, consumers are mostly restricted to credit cards
and wallet solutions (such as Paypal) when buying online in a different
country. These payment methods are expensive for merchants and discourage many
of them from taking-up cross-border trade.

Slower
take-up of cross-border e-commerce: As a
consequence, there is a growing gap between the popularity of domestic and
cross-border e-commerce. In 2011, 34% of consumers in the EU ordered goods or
services over the internet domestically, but only 10% of them ordered products
on a cross-border basis.

Table
4 - Effects of the identified problems (Low cross-border activity)

Effect || PSPs || Consumers || Merchants || Other stakeholders

No genuine cross-border acquiring for retailers || X || - || X (main impact) || -

Limited choice of payment service providers || X || - || X (main impact) || -

Limited possibilities for payments on cross-border basis, in particular in online context, frustrated cross-border payment attempts || - || X || X || -

Slower uptake of cross-border e-commerce || - || X || X || X (businesses)

3.2.3.4   Dispersed and hampered
innovation

Limited
economies of scale for providers: Due to technical
differences between national payment formats and infrastructures, new market
entrants or existing payment providers who would like to start offering
innovative services see their business case restricted to the national market.
This limits the potential for scale economies, both in terms of cost reductions
and potential revenues and therefore discourages start-up investments.

Competitive
disadvantage of EU versus other regions: A
fragmented environment along national borders might lead to lagging innovation
in Europe in comparison to other regions. Whereas leading players in internet
payments mostly originate in the US (PayPal, Amazon), the most promising
developments in mobile payment can currently be observed in Asia Pacific.

Table
5 - Effects of the identified problems (Dispersed and hampered innovation)

Effect || PSPs || Consumers || Merchants || Other stakeholders

Limited economies of scale for providers || X || - || - || -

Competitive disadvantage of EU vs. other regions || X || - || - || X (businesses)

3.2.4      The problem tree

The
figure below provides an overview of the various problems, their drivers and
their consequences.

Figure
7 - Problem tree:

1.5
The EU's right to act and justification

An
integrated EU market for electronic retail payments market contributes to the
aim of Article 3 of the Treaty on the European Union stipulating an internal
market. Market integration is necessary to fully unlock a number of benefits for
European citizens.  These benefits include more competition between payment
service providers and more choice, innovation and security for payment service
users, especially consumers. An integrated payments market ultimately
facilitates the cross-border provision of goods and services and thereby
contributes to a genuine Single Market. The depth of revision of the Payment
Services directive is proportionate to the issues arisen to date. PSD remains
globally fit for purpose; at the same time, this EU legal framework needs to
evolve to take due account of the latest technological and business
developments in the area of retail payments.

According
to the subsidiarity principle, EU action should only be taken if the envisaged
aims cannot be achieved by Member States alone.

By its
nature an integrated payments market, based on networks that reach beyond
national borders, requires a Union-wide approach as the applicable principles,
rules, processes and standards have to be consistent across all Member States in
order to achieve legal certainty and a level playing field for all market
participants. The alternative to a Union-wide approach would be a system of
multilateral or bilateral agreements the complexity and costs of which would be
prohibitive as compared to legislation at European level.

Member
States, in many cases, have refrained from acting at national level, pending
the adoption of possible measures at the level of the Union.

A
possible intervention at EU level therefore complies with the subsidiarity
principle.

The
approach supports the Single Euro Payments Area (SEPA) and is consistent with
the Digital Agenda, in particular the creation of a Digital Single Market. It
promotes technological innovation and contributes to growth and jobs, in
particular in the areas of e- and m-commerce.

4            Objectives

According
to Article 26 of the Treaty on the Functioning of the EU, the internal
market shall comprise an area without internal frontiers in which the free
movement of goods, persons, services and capital is ensured in accordance with
the provisions of the Treaties. In the context of the Union policy and in
accordance with the problems identified in Chapter 3, the following policy
objectives are identified:

General:

–
To ensure a level playing field between incumbent
and new providers of card, internet and mobile payments

–
To increase the efficiency, transparency and
choice of payment instruments for payment service users (consumers and
merchants)

–
To facilitate the provision of card, internet
and mobile payment services across borders within the EU by ensuring a Single
Market for payments

–
To create an environment which helps innovative
payment services to reach a broader market

–
To ensure a high level protection for PSUs
across all Member States of the EU

Specific:

–
To address standardisation and interoperability
gaps for card, internet and mobile payments

–
To eliminate hurdles for competition, in
particular for card and internet payments

–
To better align charging and steering practices
for payment services across the EU

–
To ensure that emerging payment service
providers are covered by the regulatory framework governing retail payments in
the EU

–
To improve the consistent application of the
legislative framework (PSD) across Member States and to better align licensing
and supervisory rules for payment services across Member States

–
To protect the consumer interest in view of
regulatory changes in the card business and to extend the regulatory protection
to new channels and innovative payment services

Operational:

–
To reinforce the governance of the SEPA project
and to empower all stakeholders to take a more active role in the conception
and realisation of the retail payments policy (governance)

–
To facilitate standardisation through adequate
governance framework and through the better involvement of the European
Standardisation Organisations (standardisation)

–
To ensure legal certainty in the field of
interchange fees for card-based payments and provide clarity on an acceptable
business model for current and future payment initiatives based on cards
(interchange fees)

–
To abolish restrictive business rules for card
payments which lead to market distortions (interchange fees flanking measures)

–
To harmonise the Member States policies on
surcharging in line with the regulatory decisions on interchange fees
(interchange fees flanking measures)

–
To define conditions of access to the
information on the availability of funds for third party providers, including
payment initiation services (scope of the PSD)

–
To adjust the scope and  improve the consistency
of the legislative framework (scope of the PSD),

–
To improve the implementation of the existing
PSD rules (PSD fine-tuning measures)

–
To reinforce the rights of PSUs in the PSD and
safeguard the consumer rights in view of the regulatory changes (scope of the
PSD, interchange fee flanking measures)

5            Policy
options

1.6
Market fragmentation

5.1.1      Weak governance arrangements

5.1.1.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged. The
SEPA Council would remain an informal body based on its current mandate.

5.1.1.2   A self-regulatory body set
up by market participants

A new
self-regulatory body could be set in place at the initiative of market
participants. The existing EPC which currently only consists of banks and one
payment institution could be invited by the Commission to open its membership
to all stakeholders in the field of retail payments. The current EPC could
become a balanced forum of the supply and the demand side. The existing SEPA
Council would remain as it is today in its composition and functioning.

5.1.1.3   Formal body based on legal
act of the co-legislators

An
alternative option would be to transform the informal SEPA Council into a
European Retail Payments Council and set it up as a formal body based on a
legal act of the co-legislators with a clarified mandate. This could be
achieved through the revision of the PSD or in an autonomous new Regulation.
The draft legislation would be accompanied by a Commission Communication on the
review of retail payments governance arrangements.

5.1.2      Standardisation and interoperability gaps (for card and mobile payments)

5.1.2.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged.

5.1.2.2   Drive
standardisation through the governance framework
for retail payments

In
order to ensure the involvement of all relevant stakeholders, standardisation
for card or mobile payments could be addressed through a formally set up
governance body (see previous section) in the future. Possible technical
working groups in this context would be entirely open to all interested
stakeholders.

5.1.2.3   Mandate to European
Standardisation Organisation

Three
independent European Standardisation Organisations (ESOs) are officially
recognized by the European Institutions as competent in the area of technical
standardisation[61]. The
two relevant ESOs in the context of card and mobile payments are the Committee
for European Standardisation (CEN) and the European Telecommunications
Standards Institute (ETSI). These organisations provide a framework to prepare
voluntary standards with the participation of all relevant stakeholders. The
Commission may issue standardisation mandates to the ESOs to develop standards
that are needed in support of policy or legislation, or that meet a set of
pre-determined requirements. Applying standards would nevertheless remain
voluntary.

5.1.2.4   Establish mandatory
technical requirements through legislation

In the
context of credit transfers and direct debits, Regulation (EU) No 260/2012
established a number of technical and business requirements for credit
transfers and direct debits. The requirements become mandatory upon the entry
into force of the Regulation after a transition period. A similar approach
could be envisaged for card and/or mobile payments.

1.7
Ineffective competition in certain areas of card
and internet payments

To
address the restrictive business rules and practices that lead to a situation
of ineffective competition, several options can be envisaged.

5.2.1      Interchange Fees (IFs) for card payments

It is
proposed that the options following below cover debit and credit card
transactions, as well as the e- and m-payments that are based on card
transactions.

5.2.1.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged. This
would imply that those practices would only be addressed by possible
competition proceedings.

5.2.1.2   Regulate cross-border
acquiring and the level of interchange fees for cross-border transactions only

Caps
for the IF for cross-border transactions could be set – e.g. at 0.2% of the
transaction value for debit cards and 0.3% of the transaction value for credit
cards. Allowing cross border acquiring would mean the IF paid would be either
the IF for cross-border transactions (capped), or the IF applicable in the
acquirer’s Member State.

5.2.1.3   Mandate Member States to set
domestic IFs on the basis of a common methodology

Legislation
would define the methodology for setting domestic interchange fees, and it would
be up to each Member State to implement it. The disparity between national
measures could in theory be reduced by supplementary use of caps or cap ranges,
on top of the national solutions.

5.2.1.4   Regulate a common, EU-wide
maximum level for interchange fees.

A
maximum, EU-wide interchange fee level for consumer debit cards and consumer
credit cards would be set. There are four sub-options possible, depending on
(1) whether the maximum IF cap covers both debit and credit cards or just debit
cards and (2) whether the IFs for debit card transactions are to be forbidden
altogether or just reduced to a low level.

Table
6 – Sub-options (Regulate a common, EU-wide maximum level for interchange fees)

Suboption || Debit cards IFs (domestic) || Credit cards IFs (domestic)

1 || maximum 0.2% of the transaction value || Not covered by the legal act

2 || Prohibition || Not covered by the legal act

3 || maximum 0.2% of the transaction value || maximum 0.3% of the transaction value

4 || Prohibition || maximum 0.3% of the transaction value

This
option could be considered in combination with the option of regulating cross
border acquiring above. The caps identified above (0.2%; 0,3%) are set on the
basis of existing proceedings, cases at European level and recently negotiated
agreements between French competition authorities and Groupement des Cartes
Bancaires.

5.2.1.5   Exemption of commercial
cards and cards issued by three party schemes

Commercial
cards and three party schemes – to the extent that they do not make use of
licensed banks – would be exempted from the options previously discussed as
these schemes have limited market shares in the EU and different fee
structures.

5.2.1.6   Regulate Merchant Service
Charges.

This
would imply regulating the fees paid by the retailer to its acquiring bank
(Merchant Service Charges (MSCs)). These fees cover not only interchange fees
but also the other fees merchants have to face i.e. scheme fees and fees for
the acquiring Payment Service Provider.

5.2.2      Restrictive business rules

5.2.2.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged.

5.2.2.2   Voluntary removal of Honour
All Cards Rule by card schemes

Under
this option, the Honour All Cards Rule would be voluntarily removed by card
schemes by self-regulation, thereby allowing merchants to differentiate between
the payments cards they wish to accept.

5.2.2.3   Regulating a Prohibition of
(part of) the Honour All Cards Rule

This
option would give merchants the freedom to choose the payment cards that they
wish to accept within each card brand. Nevertheless, merchants would have to
accept these cards regardless of where they were issued. (Honour All Issuer
Rule).

1.8
Diverse charging practices between Member States

5.3.1      Steering practices -
surcharging

5.3.1.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged.

5.3.1.2   Prohibit surcharging for all
payment transactions in all Member States

In
order to harmonise current practices regarding surcharging, an option would be
to prohibit it in all Member States.

5.3.1.3   Allow surcharging in all
Member States

In
order to harmonise current practices regarding surcharging, an option would be
to allow merchants to use surcharging in all Member States.

5.3.1.4   Oblige merchants to always
offer at least one "widely used payment means" (non-cash) without any
surcharge

This
option would ensure that merchants always offer the consumer the possibility to
pay with one payment means available on a pan-European basis without being
surcharged.

5.3.1.5   Ban surcharging for
IF-regulated payment instruments and allow for non-regulated

Under this option merchants would not be able to
surcharge for those payment instruments that were subject to IF regulation, but
would be allowed to surcharge those that are based on these and entail
additional costs and those instruments that are expensive for them.

1.9
Legal vacuum for certain payment service
providers

5.4.1      Access to information

Access
to information on the availability of funds for new card schemes and other third
party providers (TPPs), including payment initiation services, account
information services and other equivalent services

5.4.1.1   No policy change

No
legislative or non-legislative action from the Commission is envisaged.

5.4.1.2   Define the conditions of
access to the information on the availability of funds, define rights and
obligations of the TPPs, clarify the liability repartition

Under
this option, the conditions of access to the information on funds would be set
in the PSD. Whereas card issuers, new or existing, are considered and licensed
as payment institutions (or credit institutions), TPPs would be required to
become licensed under the scope of the PSD before they offer their services
within the EU. The issues of rights, obligations and liabilities between TPPs,
banks servicing the accounts and consumers would be also set. TPPs would be
obliged to explicitly inform consumers about the information they access.
Security and data protection requirements applying to TPPs and banks would be
specified in order to foster trust in these services and to ensure an
equivalent level of protection for the users as the ones already provided in
the PSD.

5.4.1.3   Allow TPPs access to the
information on the availability of funds under a contractual agreement with the
account servicing bank

The
possibility for a TPP to access payment accounts on behalf of consumers would
be subject to a mandatory collective or individual contract between the TPP and
the account issuing PSP.

1.10 Scope
gaps and inconsistent application of the PSD

In
order to address the specific problems related to inconsistent application of
the PSD, several possible options for each of the identified problems are
proposed:

5.5.1      Negative Scope of the PSD

Each of
the options discussed below could be chosen separately for each of the
discussed exemptions

5.5.1.1   No policy change

Under
this baseline option the scope of exemptions in the PSD would remain unchanged.

5.5.1.2   Update and clarify the scope
of exclusions

Following
this option the scope of the commercial agent, limited network, telecom and ATM
exemptions would become more clearly defined through an update of the
definitions in the PSD.

5.5.1.3   Delete the exclusions

Under
this option, payment transactions through commercial agents, telecom and IT
devices, payment activities in the context of a limited network as well as cash
withdrawals through stand-alone ATMs would become subject to the PSD rules.

5.5.1.4   Require payment service
providers that make use of the exclusions under the PSD to inform the competent
authorities and ask for their clearance.

Any
payment service provider that intends to benefit from the exemptions under the
PSD would be obliged to inform the competent authorities on the scope of these
exemptions or to receive their approval before starting any payment activities,
if appropriate.

5.5.2      “One-leg” transactions and payments in non-EU currencies

5.5.2.1   No policy change

The
application of the PSD to one-leg transactions and to transactions in non-EU
currencies would not be harmonised across the Member States.

5.5.2.2   Full extension to all
one-leg transactions and all currencies

The PSD
would become fully applicable to one-leg payment transactions and payments in
non-EU currencies.

5.5.2.3   Selective extension of
certain PSD rules to one-leg transactions and to all currencies

Only
certain specific provisions of the PSD, for example on the information
requirements or liability, would become applicable to one-leg payment
transactions and payments in non-EU currencies.

1.11 Other
measures

The previous sections
described the main policy options addressing the identified problems. Beyond
this, there are a number of other possible measures which either address
problems of a lower priority or ensure that the main policy options are fully
effective without having a significant impact per se (ancillary measures).

5.6.1      Ancillary measures addressing competition issues

The
first set of measures includes additional requirements to make the policy
options addressing interchange fees and interchange fees flanking measures more
effective. This includes:

-
The requirement for card schemes and issuing
banks to enable merchants to technically distinguish between different card
types, in particular consumer versus commercial cards.

-
The requirement for card schemes and acquiring
banks not to blend fees for different types of payment cards unless it is
requested by the merchant, so that merchants are enabled to make a choice of
the charging method and distinguish the fees of individual payment instruments,
if required.

-
The requirement for card schemes and acquiring
banks to issue invoices when charging merchants.

-
The requirement for card schemes and acquiring
banks to allow merchants to provide information on the cost of different
payment instruments to consumers.

-
The requirement for terminals at the
Point-of-Sale to enable the consumer to make a choice of the preferred payment
instrument in case several payment instruments are available on the same
device.

-
The requirement for card schemes to allow
acquirers to operate on a cross-border basis once they are licensed under the
scheme and not to limit the acquiring services to one country.

-
The requirement for certain card schemes not to
prevent merchants from applying surcharges for the use of a specific means of
payment, implying the abolishment of the so-called Non-Discrimination Rule
imposed by some card schemes.

-
Addressing the possible circumvention of MIF
regulation, in particular possible fee increases to compensate the revenue
losses of card schemes and banks.

The
cumulative impact of these measures is low in comparison to the main measures
proposed in the previous sections. Nevertheless, a more detailed description of
these measures is provided in Annex 10.

5.6.2      PSD
‘fine-tuning’ measures

The
second set of measures represents a ‘fine-tuning’ of provisions which already
exist in the current PSD. This includes:

-
Strengthening the implementation of information
requirements from PSPs to payment service users, in particular regarding the
timeliness and transparency of the provided information.

-
Streamlining and harmonising the safeguarding
requirements for Payment Institutions (PIs) licensed under the PSD, in
particular reducing current possibilities for Member States to limit or extent
safeguarding requirements and reducing the number of possible safeguarding
methods.

-
Clarifying the rules for the passporting regime
of PIs operating in several Member States by providing notification guidelines
(for example issued by a European Supervisory Authority) and criteria to distinguish
between the free provision of services and the right of establishment.

-
Clarifying the rules on passporting for PIs
operating in several Member States, via guidelines or regulatory technical
standards, specifying cooperation between competent authorities in home and
host Member States in the context of notification and supervision of the PI,
their agent and branches (for example through a mandate to the a European
Supervisory Authorities).

-
Fine-tuning the provisions on access to payment
systems by PIs, by providing the PIs with a possibility to access the
designated payment systems indirectly, in a way comparable to the access
enjoyed by smaller banks.

-
Clarifying the refund right for direct debit
transactions,

-
Lowering and harmonising across the Member
States the consumer liability threshold in case of theft or loss of a payment
instrument and adding precision to the gross negligence concept,

-
Decreasing the waiver threshold for small
payment institutions.

-
A more detailed impact analysis of these measures
is provided in Annex 11.

6            Analysis
of Impacts

This
section summarises the policy options and their impacts on stakeholders. The
policy options are not necessarily mutually exclusive and should not therefore
automatically be viewed as alternatives. They may be combined to achieve a more
effective and efficient outcome. The preferred policy options are indicated in
bold. When comparing the options, the tables illustrate how each of the policy
options contributes to meeting the objectives and their efficiency
(cost-effectiveness) in doing so when compared to the 'Do nothing' hypothesis.
The following schema is used: +++ (strong positive contribution), ++ (moderate
positive contribution), + (weak positive contribution), --- (strong negative
contribution), -- (moderate negative contribution), - (weak negative
contribution) and 0 (neutral contribution). The impact on stakeholders follows
a similar approach.

The
following sections combine key conclusions on the impact of each option and on
the comparison between available options. A more detailed impact analysis,
mirroring the structure of this chapter, is provided in Annex 9.

1.12 Market
fragmentation

6.1.1      Weak governance arrangements (operational objective 1)

6.1.1.1   Option 1 (No policy change)

The
demands of both suppliers and end-users of retail payment for the Commission to
address the weaknesses of the current SEPA Council would remain unanswered.
Therefore, the governance of retail payments in Europe, particularly for
payments in euro would remain sub-optimal. The EPC is currently re-examining
its role and it might decide to decrease its level of involvement in
standard-setting activities.

The
status quo would translate in a much slower integration of the European retail
payments market to the detriment particularly of end-users of payments.

6.1.1.2   Option 2 (A self-regulatory
body set up by market participants)

This
market-driven approach would not satisfy all stakeholders, especially consumer
representatives, who clearly call for a strong driving role of the Commission
and the European Central Bank in the whole SEPA project. Moreover, all market
participants are clearly in favour of a ‘co-operative approach’ between the
respective stakeholders, national SEPA committees and the European
Institutions.

This
self-regulatory approach, where the SEPA Council would remain as it is, could
give rise to risks of foreclosure vis-à-vis new market participants that would
not be “founding” members. Lack of compliance with the new self-defined
governance arrangements could not be excluded. All this might in the end call
for increased corrective measures by the Commission.

6.1.1.3   Option 3 (Formal body based
on legal act of the co-legislators)

The
SEPA Council, renamed as “the European Retail Payments Council”, would see its
composition, accountability and mandate clearly defined. The body would gain
the legitimacy and credibility that stakeholders are calling for. In the public
consultation on the Green Paper on payments market participants consistently
asked for a more active involvement of public authorities. Option 3 would allow
both addressing the call from most market participants for a co-operative model
and contributing to clarifying the role of the Commission and the European
Central Bank as co-chairmen. The European Retail Payments Council would have a
better clarified role vis-à-vis the Commission and the ECB who would keep their
freedom to act at any time, in accordance with their competences as laid down
in the Treaty.

Option
3 would contribute to defining the steering that all stakeholders are looking
for on the direction that the European retail payments market should follow to
ensure that tomorrow the EU has effective, efficient, innovative and cheap
means of payments available across all Member States. Failing this, the
emergence of such a market could take many more years to the detriment of
payment’s end-users and society at large.

Conclusion

A
European Retail Payments Council, set up as a formal body and based on a legal
act adopted by the co-legislators (e.g. through the revised PSD) will provide
the necessary legal clarity as to the role and responsibilities of the
different actors (industry, end-users and European institutions).  By
strengthening the retail payments governance as requested by all market participants,
Option 3 would allow the delivery of the necessary steer, notably but not only
with regard to standardisation of new means of payments, to ensure that
tomorrow’s integrated EU retail payments market becomes a reality for card, e-
and m-payments. The preferred option 3 enjoys the support of most stakeholders,
except banks, who have a preference for self-regulation.

Table
7 -Summary of the impact for governance (options 1 to 3)

Policy option || Description || Effectiveness || Efficiency

Option 1 || Baseline scenario || 0 || 0

Option 2 || Self-regulatory body || (0) || (+)

Option 3 || Formal body || (+) || (+)

Table
8 - Summary of the impact for main stakeholder categories (options 1 to 3)

Policy option || Description || Consumers || Merchants || PSPs

Option 1 || Baseline scenario || 0 || 0 || 0

Option 2 || Self-regulatory body || (0) || (+) || (+)

Option 3 || Formal body || (+) || (+) || (+)

6.1.2      Standardisation of card payments (operational objective
2)

6.1.2.1   Option 4 (No policy change)

Based
on a study on the benefits of SEPA and assumptions on the share of payment
cards in these potential benefits, savings of up to EUR 25 billion over six
years could be generated from full integration of the cards market. These
benefits would mostly apply to merchants and consumers. However, this assumes a
standardised card market.

European
market initiatives for card standardisation exist and a 'do nothing' approach
on card standardisation could eventually lead to market uptake for these
initiatives but only over a relatively long time span (20 years or more based
on a comparison with the EMV standardisation initiative) and possibly only by a
limited group of market actors. This would delay or even partially eliminate
the possible economic benefits mentioned above.

6.1.2.2   Option 5 (Standardisation
through governance framework for retail payments)

This
option could create benefits versus the baseline option, in particular an
accelerated and more comprehensive adoption and implementation of existing
standards for card payments by market actors. The option could therefore
facilitate the realisation of the possible economic benefits mentioned under
the baseline option. This option would also take a proper account of the need
to involve online and mobile payment service providers given their possible
link to card payment.

Technical
frameworks for card payments are already in place and do not have to be
developed from scratch. Since the focus is therefore more on the implementation
of the existing frameworks into practice, the European Retail Payments Council
would be a more appropriate forum than European Standardisation Organisations
for that purpose. The composition of the European Retail Payments Council with
participants of the supply and demand side of the market would ensure that
there is a proper balance of interests.

On the
functioning, the European Retail Payments Council would be mandated to set up a
new multi-stakeholder group being responsible for the implementation of the
general strategy into practice. This new group would be set-up for a limited
period of time to perform technical work, such as developing common standard
implementation guidelines and technical standards, if need be. Stakeholder
representatives at expert level would be present due to the executive nature of
this work. The European Retail Payments Council would strive for a proper,
efficient, timely and transparent function for the multi-stakeholder group and
closely monitor its work. The multi-stakeholder group could set up as hoc
technical working group(s) or exceptionally entrust the technical work to the
market. At the very end, the European Retail Payments Council would assess the
work delivered by the complementary level and in case of a positive assessment
adopt it. The assessment would be accompanied by possible recommendations to
the ECB and Commission, to ensure the proper implementation of the standards.

6.1.2.3   Option 6 (Mandate to
European Standardisation Organisation)

The
main benefit of this option versus option 5 is the possibility for stronger
steering role of the Commission from the very beginning, ensuring truly
balanced participation of all stakeholders in the conception of open standards,
fulfilling all criteria of various market participants, in particular users. 
However, this advantage is more than offset by the fact that stakeholder
participation in ESO work is always voluntary and at this stage, with many
market-driven initiatives already on-going and well advanced, participation by
the supply side of the market could be very limited. Moreover, starting card
standardisation from the beginning would risk undermining the momentum achieved
on card standards over last years. Implementation of the standards might be put
at risk. This assessment is further reinforced by stakeholder comments provided
in the context of the public consultation on the Green Paper on payments.

This
option would therefore be far less effective –under the current market
situation – in accelerating the materialisation of benefits from
standardisation in comparison with option 5. The possible involvement of ESOs
could be revisited in the medium term if sufficient progress through option 5
is not achieved.

6.1.2.4   Option 7 (Establish
mandatory technical requirements through legislation)

While
this option creates certainty regarding the timeframe and the comprehensiveness
of take-up by all market actors, the main drawback of this option is that it
removes the flexibility for market participants to jointly develop specific
technical requirements that best serve the market as a whole. It could
therefore entail significantly higher adaptation costs for stakeholders than
the previous options. In conclusion, this option is therefore less favourable
than option 5.

Conclusion

Card
standardisation is a pre-requisite for a fully integrated cards market and for
the resulting benefits which could be as high as EUR 25 billion. Option 5 is
the recommended option to achieve best progress on standardisation at this
stage. It enjoys the support of most stakeholders, in particular consumers,
merchants and public authorities. However, many banks and card schemes have
preference for industry – driven standardisation as it is today (option 4). The
tables illustrate the efficiency and effectiveness of each option to reach
these benefits and how they would impact stakeholders.

Table
9 - Summary of the impact for the standardisation of card payments (options
4 to 7)

Policy option || Description || Effectiveness || Efficiency

Option 4 || Baseline scenario || 0 || 0

Option 5 || Payments governance framework || (+) || (++)

Option 6 || European Standardisation Organisation || (+) || (+)

Option 7 || Mandatory technical requirements || (++) || (-)

Table
10 - Summary of the impact for main stakeholder categories (options 4 to 7)

Policy option || Description || Consumers || Merchants || PSPs

Option 4 || Baseline scenario || 0 || 0 || 0

Option 5 || Payments governance framework || (+) || (++) || 0

Option 6 || European Standardisation Organisation || (+) || (+) || (-)

Option 7 || Mandatory technical requirements || (+) || (+) || (--)

6.1.3      Standardisation of mobile payments (operational objective
2)

6.1.3.1   Option 8 (No policy change)

As an
example for the impact of standardisation on proximity m-payments, one recent
study estimates that the annual volume of NFC-based m-payments in 2016 will be
19.1 billion in a standardised European environment versus 11.8 billion
transactions if the environment remains fragmented.[62]
Consumers, merchants and PSPs would all benefit from the benefits of market
growth.

While
it is not excluded that pan-European initiatives emerge solely through market
forces in the future, so far this has not happened and hence fragmentation is
likely to persist over the short and mid-term in the absence of any additional
impetus. On the basis of the assumptions above, this means that almost 40% of
the market potential could remain untapped in a 'do nothing' or baseline
scenario. Conversely, a standardised market could be almost 70% larger than a
non-standardised one.

6.1.3.2   Option 9 (Standardisation
through governance framework for retail payments)

This
option could create possible benefits in comparison to the baseline scenario in
terms of addressing proximity m-payments standardisation at European level
under the participation of all relevant stakeholders. At the same time,
different than for card payments the required changes in the composition and
tasks of the SEPA Council are substantial due to a number of stakeholder
categories that are only relevant for mobile payments but not necessarily for
other forms of payments (e.g. MNOs, handset manufacturers, operating system
providers). Other costs related to this option are marginal.

6.1.3.3   Option 10 (Mandate to
European Standardisation Organisation)

This
option could create benefits versus the baseline option. The main benefit of
this option versus option 9 (SEPA governance framework) lies in the
considerable specific expertise of European Standardisation Organisations
(ESOs) in the field of telecommunications and in running standardisation
initiatives for mobile commerce. These organisations could be mandated by the
Commission to work on specific standardisation issues. The Commission would
acknowledge the standardisation work in the area of mobile payments which has
been conducted in various private standardisation fora so far. The costs for
this option are marginal and comparable to the ones of option 9. Overall, this
option is therefore more favourable than option 9.

6.1.3.4   Option 11 (Establish
mandatory technical requirements through legislation)

The
market for proximity m-payments is just emerging and pan-European
standardisation initiatives comprising all relevant market actors do not exist.
Most current pilot projects are based on proprietary solutions. Hence, there is
even less of a market-proven basis for the setting of technical requirements
available than it would be the case for payment cards. Under these
circumstances, this option would create the significant risk to stifle
innovation and is therefore discarded.

Conclusion

A
standardised European proximity m-payments market could be almost 70% larger in
terms of transaction volume by 2016 than a non-standardised market. Option 10
is the recommended option to achieve progress on standardisation for
m-payments. It is supported by merchants and non-bank PSPs, including mobile
payment providers and technical providers. Most banks and card schemes
expressed a preference for no changes (option 8). The tables illustrate the
efficiency and effectiveness of each option to reach these benefits and how
they would impact stakeholders.

Table
11 - Summary of the impact for the standardisation of mobile payments (options
8 to 11)

Policy option || Description || Effectiveness || Efficiency

Option 8 || Baseline scenario || 0 || 0

Option 9 || Payments governance framework || (+) || (+)

Option 10 || European Standardisation Organisation || (+) || (++)

Option 11 || Mandatory technical requirements || (+) || (--)

Table
12 - Summary of the impact for main stakeholder categories (options 8 to 11)

Policy option || Description || Consumers || Merchants || PSPs incl. MNOs

Option 8 || Baseline scenario || 0 || 0 || 0

Option 9 || Payments governance framework || (+) || (+) || (0)

Option 10 || European Standardisation Organisation || (++) || (++) || (+)

Option 11 || Mandatory technical requirements || (0) || (-) || (-)

1.13 Ineffective
competition in certain areas of card and internet payments

6.2.1      Interchange Fees (IFs) for
card payments (Operational objective 3)

6.2.1.1   Option 12 (No policy change)

Currently,
the card market in the EU is characterised by significant variation of MIF
levels among Member States. After a gradual replacement of a number of national
payment card schemes by the two major, international four-party payment card
schemes - Visa and MasterCard - the European payment card landscape is
dominated by these two market players. At the same time, the current diversity
of interchange fees paid to issuing banks on a national basis under the two
international card schemes prevents market entry by new payment card schemes.
As explained in the problem definition, new schemes would have to offer to the
issuing banks at least a comparable level of interchange fee to that applied in
the market they want to enter. This not only has a negative impact on the
viability of their business model but also prevents the economies of scale and
scope that would be possible on a European payments market with low MIFs/MSCs.
European retail merchants foot a bill of approximately €14 billion annually for
card acceptance, which is eventually passed on to consumers including those
paying with low of no fee payment means.

A 'no
policy change' option would continue to leave these issues to competition
enforcement actions, in particular on the basis of the MasterCard judgement.
This is however unlikely to be efficient and effective. Legal uncertainty
persists as the judgement has been appealed. Long-term, comprehensive
commitments from both Visa and MasterCard, in particular on fees charged for
domestic transactions, are unlikely as neither of the schemes has the incentive
to be a 'first mover' introducing lower fees. Competition proceedings by
National Competition Authorities, in close cooperation with the Commission, are
likely to lead to a long and fragmented process with uncertain results. This
will not ensure a level-playing field, and may lead to further legal
uncertainties and distortions on the card payments market.

6.2.1.2   Option 13 (Allow
cross-border acquiring and regulate the level of cross-border interchange fees)

This
option foresees the removal of legal and scheme-imposed obstacles to cross
border acquiring and the introduction of maximum caps on the IF of 0.2% and
0.3% of the transaction value for debit and credit cards, respectively (in line
with the undertakings of MasterCard). It could create benefits versus the
baseline option as it would allow cross border acquiring i.e. the ability of
merchants to benefit from lower interchange fees when choosing an acquirer
outside their own Member State, in line with the principles of a true Internal
Market. It will therefore address partly the issue of retailers fees mentioned
under the baseline option, and could put a downward pressure on national IFs,
through the threat of merchants' changing acquirer to one located abroad.
Similarly to the approach followed under the SEPA end-dates Regulation,
allowing cross border acquiring and regulating the level of cross border
interchange fees would provide legal clarity and be conducive to market
integration.

Nevertheless,
addressing only cross border interchange fees would have a limited impact, as
it would mean covering 5% to 10% of the EU market in terms of current
transaction values. Only MasterCard and Visa are present in more than one
country and have different fees in different countries. Since national schemes
have only fees for domestic transactions, measures on cross-border MIFs have no
effect on those fees. In addition, regulating only cross border fees would take
away the incentive for banks to invest in EU wide standards; by maintaining
different standards they could try to benefit as long as possible from a
segmented market with limited competition and possibly higher domestic fees.

Benefits
are likely to be limited because of the existing technical obstacles to
cross-border acquiring (currently, due to technical differences, cross-border
acquiring would be possible in only 10 Member States). Besides, only big
retailers would have the necessary negotiating power with acquirers and the
financial resources to pursue this solution. Small merchants would not benefit.
Therefore, this limited policy intervention is unlikely to bring a significant,
immediate or medium term change in many domestic markets and to the level and
variability of domestic MIFs. It could however be pursued as a transitory
solution, before more wide ranging options are fully implemented, as a means of
promoting market integration.

6.2.1.3   Option 14 (Mandate Member
States to set domestic IFs on the basis of a common methodology)

This
option would mean adopting legislation on the methodology for setting
interchange fees. It would be up to each Member State to implement it. This
would allow for national differences in card usage, acceptance and in cash
usage to be reflected in the domestic Interchange Fees levels. National
solutions could then be maintained or developed.

The
effects of this option as compared to the baseline scenario are however likely
to be more limited than option 13, in particular in terms of reducing
interchange fees variability and facilitating market integration.

Whilst
it would appear to make sense to align MIF levels to the different maturity of
card and payment markets, in practice this is not simple and straightforward.
The relative use and costs of cards and cash vary significantly also within
Member States, between their regions (e.g. across Germany), but also between
urban and rural areas. More importantly, countries with high MIFs have very low
card acquiring and acceptance rates and countries with low MIFs have high
issuing and acquiring rates. In the current market situation in Europe, no
obvious identifiable link can be established between the level of MIFs and a
possible need to subsidize the issuing of cards (main argument for MIF
existence). For instance, Poland is the country with the highest level of
average MIFs in Europe, but only about 20% of all establishments accept payment
cards. Even some big retail chains (including the biggest discount supermarket
chain in Poland with over 2000 stores) do not accept cards. In such a situation
the logic of a MIF as a 'balancing fee' would arguably lead to a fee going into
the opposite direction, stimulating card acquiring (thus increasing card
acceptance) instead of issuing. The reality shows the opposite, however.

As a
result 'new' pan European players are unlikely to emerge, and the national IF
levels are likely to be higher than under option 15 below. Consequently,
retailers' savings and consumers’ welfare gains are likely to be limited. In
addition, heavy administrative resources would have to be invested in defining
a concrete methodology for national regulators, implementation and monitoring. This
raises serious concerns in terms of the efficiency of
this option.

Legislative action on MIF is
currently considered in several Member States. In Poland, the lower chamber of
Parliament (Sejm) presently considers five drafts of legislation
regulating interchange fees[63]. In
Hungary, a legislative proposal is under discussion that would cap domestic
credit and debit interchange fees at their respective cross border level, with
the Hungarian Central Bank in charge of calculating and publishing these fees. In
Italy[64], a
draft Decree by the Ministry of Economy and Finance has been published for
consultation in December 2012. It focuses on transparency measures in the field
of payment cards (limits to blending, comparability of interchange fees and
merchant service charges, merchant service charges should take into account the
volume of transactions and should be lower for low value payments). These
provisions are related to the obligation for retailers to accept payments by
debit cards from 01.01.2014 onwards (decreto legge 18 ottobre 2012).

6.2.1.4   Option 15 (Set a common,
EU-wide maximum level for interchange fees)

Under
this option, a single common cap on the MIF on all card transactions (domestic
and cross-border) would be defined. This would result in the highest level of
legal certainty on business models for existing card schemes and new entrants,
promote market integration for consumers and merchants and favour pan-European
market entry. It would also address the threat of 'exporting'
the IF model to new, innovative payment services. Within
this option there are four sub-options possible, depending on
(1) whether the maximum IF cap covers both debit and credit cards or just debit
cards and (2) whether the IFs for debit card transactions are to be forbidden
altogether or just reduced to a low level.

Suboption || Debit cards IFs (domestic) || Credit cards IFs (domestic)

1 || maximum 0.2% of the transaction value || Not covered by the legal act

2 || Prohibition || Not covered by the legal act

3 || maximum 0.2% of the transaction value || maximum 0.3% of the transaction value

4 || Prohibition || maximum 0.3% of the transaction value

The
text below discusses, due to length and complexity considerations, main
arguments of the suboptions 15.3 and 15.4. All suboptions are extensively discussed
in the Annex 9 of this impact assessment (as indicated at the beginning of this
chapter).

Banning
or setting low interchange fees for debit cards would contribute significantly to
the development of the single market in card payments in the EU. Examples
show that low or no interchange fees are linked with higher card issuing and
usage.  This fact contradicts the traditional arguments of the international
card schemes that sufficiently high MIFs are needed to stimulate card issuing
and therefore card usage. For instance in Norway, the absence of IFs for debit
cards is accompanied by very high level of card acceptance by merchants and
usage. Denmark also has one of the highest card usage rates in the EU at 216
transactions per capita with a zero-MIF debit scheme. This is also true of
international schemes: in Switzerland Maestro has no MIF and is the main debit
card system. It is also worth noting that all European card schemes were originally
created without MIFs. MIFs have been introduced by banks and card schemes only
later.

A prohibition
or a low MIF for debit cards would therefore go a long way to ensure a high
card acceptance, in particular by small retailers and SMEs. Besides, if markets
are mature and cards are used everywhere there is no need to incentivise their
issuing. Currently, every adult in the EU has at least one debit card on
average[65] and it
is very rare to find a payment account which does not include a card. Moreover,
there is also an important aspect of wider EU policies. An EU initiative
adopted earlier this year –basic bank account proposal -
sees a debit card as an integral part of the basic account package, accessible
for every EU citizen, including socially vulnerable groups with no access to
bank accounts today. A further increase in issuance and usage of debit cards
may be therefore expected, while no MIF for debit cards would result in much
higher acceptance of these cards by small, local shops.

Banning
entirely debit card MIF would allay fears that card market integration would
result in higher IFs and costs structures for domestic debit schemes without a
MIF or with a MIF lower than 0.2% (Belgium, the Netherlands, Denmark, Finland,
Ireland, Luxembourg, Sweden and the UK). Conversely, fixing a cap instead of
banning IF for debit cards could result in a situation where current domestic
schemes that expand cross border or new entrants increase their fees to the
level of the cap, as it happened with the Australian domestic scheme EFTPOS.

However,
the maturity of EU markets as regards debit cards issuance and usage would need
to be carefully investigated if the proposal to entirely abolish interchange
fees for debit cards is to be made. The Commission intends to address this
issue in the future, assessing in particular the appropriateness of the level
of interchange fee, taking into account the use and cost of the various means
of payments and the level of entry of new players and new technology on the
market.

If
credit cards interchange fees are also covered by a cap, in addition to the
debit cards cap, the impact on the current variability and level of interchange
fees would be profound and direct, leading to a true Single Market for
card-based payments. It should be noted that the Commission's sector inquiry of
2007 assessed that in 20 out of the 25 Member States at
that time, positive profits in credit card issuing could be obtained even
without interchange fees[66].

The
reference caps of 0.2% and 0.3% for debit and credit cards respectively are
figures accepted by card schemes (MasterCard, Visa, Groupement Cartes
Bancaires). These levels were also proposed by card schemes in competition
enforcement proceedings and accepted by the competition authorities as not
raising competition concerns. They would therefore appear to be reasonable
benchmarks for the card schemes and banks and would provide legal certainty,
demanded by the sector.

Sub-option
15.3 – a cap of 0.2% for consumer debit cards and of 0.3% on interchange fees
for consumer credit cards (see Annex 9.2.1.4 for details) is the preferred
option. Transparency and steering measures would remain key to prevent
promotion of (expensive) credit cards by PSPs once this option is followed.
Anti-circumvention measures would also have to be considered. In
addition, the possible impact of this option on pricing of
payment services to consumers – especially if credit cards are covered - would
need to be carefully monitored.

Possible
impact of capping interchange fees on cardholder fees, overall consumers'
welfare and bank revenues

There appears to be no
convincing evidence of a direct link between capped interchange fees and
increased cardholder fees in the countries where IFs have been the subject of
regulatory intervention or other measures from public authorities.

In the US banks tried to
increase cardholder fees after IF regulation but had to back down due to
consumers' revolt. In Switzerland there was a decrease in cardholder fees in
parallel with the decrease in IFs. In Australia, cardholder fees were
increasing fast before caps on interchange fees were introduced. After IFs
become regulated, the cardholder fees were interestingly growing at a slower
pace than before. In Spain, the lack of competition in the banking sector seems
to have played a major role in the increase in cardholder fees as banks turned
to extract extra profit from cardholders, more than compensating for decreased
IF revenues. From 2005 to 2010, revenue for card issuers and card acquirers in
Spain increased by 0.6 Bio EUR and 1 Bio EUR respectively, with an average increase
of 5 EUR per year per card issued.

Isolating visible retail price
decreases resulting from a cap on interchange fees is however likely to be
difficult, as many other factors might play a role in the evolution of prices
(e.g. inflation, personnel costs, including any minimum salary regulation,
costs of basic, raw materials, general economic situation, changes in taxation
etc). Besides, the level of competition in the specific retail market segment
considered will impact the degree of pass through of retail cost savings to
consumers. However, the direct benefits to consumers through pricing are much
more likely to materialise than the potential increase of card fees  for
consumers, as competition in the retail sector is fiercer than between banks, retailers
are less concentrated, pricing to consumers is more transparent, and there is
no bundling. There is anecdotal evidence of price decreases happening in the
USA, one year after the MIF regulation was introduced. In addition, from
evidence in Australia, it seems that retailers would benefit integrally (100%)
from lower IFs – as acquiring markets tend to be more competitive than issuing
markets, whilst the potential increase in cardholder fees is limited to 30-40%
of the amount of the IF decrease.

Even if cardholder fees
increase – which is not a given as the impact of capping interchange fees on
banking revenues is likely to be mixed - consumers are still likely to benefit
from lower interchange fees through lower retail prices, even if retailers do not
pass through 100% of the savings, and from new entry in the payment market. It
has also to be considered that consumers are very likely to benefit from the
services offered by new market entrants. A real-life example of this is the
Netherlands, where the cheap online payment solution (Ideal) was developed
largely because the low interchange fees (below 0.2% of the transaction value)
prevailing there encouraged bank to innovate. In consequence, Dutch consumers
do not have to pay high credit card subscription fees in order to shop online.

At the same time, the impact of
capping interchange fees on bank revenues seems to be mixed. Decreases in IFs
lead to increases in the volume of card transactions (higher acceptance and
usage of cards allows acquiring banks and card schemes to collect higher
revenues at the point of sale, even as income per transaction is lower). In a
related effect, there is a decrease in the use of cash and a decrease in the
ATM withdrawals (thus issuing banks save on the IF amounts normally paid to ATM
acquiring banks). Therefore, the volume effect and the savings on cash could at
least partly compensate the losses due to the cap on interchange fees. In
Norway for instance, the absence of IFs for debit cards is accompanied by very
high level of usage and acceptance, with the domestic debit scheme BankAxept
more than doubling its number of transactions between 2001 and 2011. In
Switzerland there was also an increase in acceptance on the retailer side: the
reduction in MIFs encouraged the two biggest retailers to start accepting
credit cards.

In terms of viability, a debit
card scheme without any IF seems to be perfectly viable from a commercial
perspective without raising the costs of current accounts for consumers.
Denmark for example has a zero-IF on its domestic debit scheme while an average
account holder pays current account fees well below the EU average. Similarly,
in Switzerland the main debit card network is Maestro (part of MasterCard)
which has no MIF.

6.2.1.5   Option 16 (Exemption of
commercial cards and cards issued by three party schemes)

Under
this option, it is considered to exempt commercial cards (from all schemes) and
(all cards from) three party schemes from the IF regulation as described in
previous options. It could be argued that to create a level playing field for
all (card) payment providers, all types of cards and of card schemes should be
covered. However, commercial cards and three party schemes have very limited
market shares in the EU and are not expected to expand significantly as a
result of possible IF regulation. They could not substitute consumer credit or
debit cards as they cater for a specific market segments and their needs, not
for the average consumer. Nevertheless, to avoid circumvention of the law, it is
proposed to cover three party schemes by the IF regulation when they use banks
to issue their cards to customers (thus using de-facto a four-party scheme
model). In addition, transparency measures, including card identification
(consumer/commercial or third party) need to apply in full for options 15 and
16 to be effective.

6.2.1.6   Option 17 (Regulate Merchant
Service Charges)

Regulating
just interchange fees does not directly address the issue of Merchant Service
Charges (MSCs), although interchange fees make up the largest share of these
fees. Regulating MSC would bring an even bigger impact on the market than
option 15 and allow for three party schemes,  based on MSC fees, to be fully
regulated, thus creating a level playing field 'across the board'.

However,
as discussed above, there does not seem to be a compelling reason to fully
regulate three party schemes. Equally importantly, regulating MSCs raises
serious subsidiarity, proportionality and efficiency issues.  Capping IFs, as
proposed above in option 15, cannot be equated with retail price regulation.
Interchange fees make the most of the Merchant Service Charges bearing on
merchants, whilst IFs are not final prices to retailers and even less to
consumers. Capping MSCs, as proposed in this option, would however mean
controlling de facto prices for merchants.  It would make it impossible for
(big) merchants to negotiate with their acquirers, 'freezing' the MSC market
instead and regulating also this part of the card market that functions relatively
well. Finding the appropriate MSC level, implementing and monitoring this
solution would also require heavy public administration resources.

Nonetheless,
possible circumvention of the law through MSCs increases needs to be addressed.

Conclusions

The level
and variability of interchange fees for debit cards and credit cards have to be
tackled to promote market integration for retailers and consumers, foster
efficient electronic payments in Europe and to facilitate pan European market
entry for new players. A combination of option 13 (allowing cross-border
acquiring and regulating the level of cross-border interchange fees),
sub-option 15.3 (capping interchange fees for debit and credit cards) and
option 16 (exempting commercial cards and three party schemes) are the
recommended options to achieve a true Single Market for card-based payments.
Whilst option 13 would be of application as of the entry into force of the new
law (Phase 1), sub-option 15.3 and option 16 would become operational after a
transition period (Phase 2), set in the law. Option 15.4 i.e. banning
interchange fees for debit cards, which would generate potentially higher
benefits to merchants and consumers, would deserves further examination in the
future. A transitory approach (cross-border MIF first, domestic MIF second) is
recommended in order to give to the card schemes, banks and other participants
in the payment chain time necessary to adapt their business model and
commercial strategy to the radically new situation and avoid a potentially
de-stabilising effect for the EU financial system[67].

Transparency
measures are key for all these measures to become effective.

Regulation
of IFs is generally opposed by banks and card schemes. However many non-banks
PSPs, including mobile and internet providers, support the harmonisation of
IFs. The regulation is supported by merchants and most consumers, with both
groups calling for basic card payments without any IF. Competition authorities,
are supportive of the IF regulation, in particular as regards four-party
schemes.  Other public authorities are divided regarding an IF regulation, with
some favouring a ban or a decrease of IFs to increase competition, and others favouring
competition enforcement only.

Table
13 - Summary of the impact for regulating interchange fees (options 12 to 17)

Policy option || Description || Effectiveness || Efficiency

Option 12 || Baseline scenario || (0) || (0)

Option 13 || Allow cross-border acquiring and regulate the level of cross-border interchange fees || (0/+) || (+)

Option 14 || Mandate Member States to set domestic IFs on the basis of a common methodology || (-/0) || (--)

Option 15 || Set a common, EU-wide IF level, based on a maximum cap || From (+) to (++) || From (0) to (+)

Sub-option 15.3 || Capping IFs for debit and credit cards at maximum 0.2% and 0.3% of the transaction value respectively || (+) || (+)

Option 16 || Exemption of commercial cards and cards issued by three party schemes || (0/+) || (+)

Option 17 || Regulate Merchant Service Charges || (-) || (--)

Table
14 - Summary of the impact for main stakeholder categories (options 12 to 17)

Policy option || Description || Consumers || Merchants || PSPs || New entrants

Option 12 || Baseline scenario || 0 || 0 || 0 || 0

Option 13 || Allow cross-border acquiring and regulate the level of cross-border interchange fees || (0) || (+) big retail (-/0) small retail || 0 || 0

Option 14 || Mandate Member States to set domestic IFs on the basis of a common methodology || (0/-) || (0/-) || (+) || (-)

Option 15 || Set a common, EU-wide IF level, based on a maximum cap || (0/+) || (+) || (-/0) || (+)

Sub-option 15.3 || Capping IFs for debit and credit cards at maximum 0.2% and 0.3% of the transaction value respectively || (0/++) || (++) || (-/0) || (++)

Option 16 || Exemption of commercial cards and cards issued by three party schemes || (0/+) || (0/+) || (0) || (0/+)

Option 17 || Regulate Merchant Service Charges || (-/0) || (-) || (-) || (-)

6.2.2      Restrictive business rules (Operational objective 4)

6.2.2.1   Option 18 (No policy change)

The
existence of restrictive business rules currently leads to costs for merchants
that are higher than in a situation without these rules. Under option 18, no
policy change is envisaged and this will most likely result in a continuation
of the status quo. Therefore both the Honour All Cards Rule and the
Non-Discrimination Rule will probably stay in place and prevent merchants from
refusing certain payment cards or steering consumers towards the more cost
efficient payment cards.

6.2.2.2   Option 19 (Voluntary removal
of Honour All Cards Rule by card schemes)

Under
this option, merchants would be able to differentiate between the payments
cards they wish to accept. This will create a more competitive environment as
merchants will have more negotiating power. Issuers, acquirers and card schemes
will incur costs as they stand to lose some of their revenue. The lower costs
will however benefit the merchants as well as consumers, at least in price
sensitive markets. The total potential gain for merchants (and partly
consumers) can be between €370 million and €1.5 billion, depending on the
actual shift of credit card use to debit cards.

6.2.2.3   Option 20 (Prohibit (part
of) the Honour All Cards Rule)

This
option would have the same final effect as option 19, but the main advantage is
that it ensures the certainty and comprehensiveness of the measure as well as
its timely execution. The costs related to this option are similar to those
described under option 19. Both the benefits and costs would materialise
quicker and more comprehensively than under option 19.

Conclusion

Restrictive
business rules are an obstacle for effective competition in the cards market.
To address this, option 20 is the recommended option. It is supported by public
authorities, merchants and most non-bank PSPs. Consumers support it too, but
are afraid that the choice of payment methods may diminish if no other flanking
measures are taken. Most banks and card schemes are opposed to any changes.

Table
15 - Summary of the impact for operational objective 1 for card payments (options
18 to 20)

Policy option || Description || Effectiveness || Efficiency

Option 18 || Baseline scenario || 0 || 0

Option 19 || Voluntary removal HACR || (+) || (+)

Option 20 || Prohibition HACR || (+) || (++)

Table
16 - Summary of the impact for main stakeholder categories (options 18 to 20)

Policy option || Description || Consumers || Merchants || PSPs || Card Schemes

Option 18 || Baseline scenario || 0 || 0 || 0 || 0

Option 19 || Voluntary removal HACR || (+/-) || (+) || (-) || (-)

Option 20 || Prohibition HACR || (+/0) || (++) || (-) || (-)

1.14 Diverse
charging practices between Member States

6.3.1      Steering practices (Operational objectives 4, 5 and 9)

6.3.1.1   Option 28 (No policy change)

The
current PSD allows for divergent charging practices in the Member States,
explicitly allowing surcharging, rebating and other steering practices (e.g.
acceptance of cards above certain level only) in place. Surcharging, which is
most controversial, is allowed in roughly half of the Member States and
prohibited in the other half. However, the effects of surcharging can be easily
felt by consumers in any Member State, in the e-commerce and cross-border
context.

Current
national practices lead to many controversies and negative effects on
consumers, in particular in some sectors (travel, hospitality industry).
Moreover, surcharging has been sometimes used as a source of extra revenue for
merchants rather than as a steering mechanism to recover true costs. This
concern has in principle been addressed with the adoption of the Consumer
Rights Directive, which forbids retailers to surcharge above their costs. There
may however be issues about the definition of costs and the possibility for
merchants to identify, roughly, the true cost of a single payment transaction,
as long as blending practices persist and HACR is applied.

If no
policy change is envisaged, the current, complicated situation of national
solutions will persist. The results from the study undertaken by London
Economics and iff in 9 Member States[68]
suggest a total cost of surcharging – borne by consumers - of at least € 731
million annually and growing.

6.3.1.2   Option 29 (Prohibit
surcharging in all Member States)

Prohibition
of surcharging in all Member States and for all payment instruments would
harmonise the current diverging practices. It would eliminate the possibilities
for excessive surcharging by definition. It could however have the effect of
incentivising merchants to promote the use of cash, not to accept certain
(expensive) payment methods they could otherwise accept or to increase prices.
Besides, it would negatively affect merchants' – including those not
surcharging- bargaining power vis-à-vis acquirers.

6.3.1.3   Option 30 (Allow surcharging
in all Member States)

Allowing
surcharging in all Member States would resolve the current divergence, but
might not lead to efficient steering, as merchants are subject to the HACR and
often do not know the costs of individual payment transactions (as a result of blending
practices). This prevents them from efficiently steering consumers. In
addition, surcharging can be an incentive for consumers to use cash and some
merchants might continue to use surcharging as a way to obtain extra revenue (in
spite of the Consumer Rights Directive provisions).

Under
this option, merchants will be able to recover their costs related to fees for
card use by passing them along to consumers. If they were not surcharging
before it is likely that their payment costs were integrated in their retail
prices.  Steering consumers to more efficient payment means and using the
increased negotiating power implied in the threat of surcharging vis-à-vis
acquirers costs could drive down costs for these merchants but the extent to
which consumers would benefit from these cost reductions would depend from
competitive pressure in retail markets.

6.3.1.4   Option 31 (Oblige merchants
to always offer at least one "widely used payment means" without any
surcharge)

In case
option 28 is followed or 30 is implemented, not allowing surcharging for a
widely used payment means will decrease the incentive for consumers to use
cash. If there are limited fees related to this payment instrument, both
merchants and consumers will gain. Allowing surcharging for all other (more
expensive) means of payment would make it possible for merchants to accept
other methods of payment without incurring high costs and passing these on to
all consumers including those using cheaper payment instruments in the form of
higher overall retail prices. This would result in overall gains as compared to
the baseline scenario. The key difficulty of this option is that a widely
available pan-European payment means is currently not available, which would
lead to situations where consumers purchasing goods and services on a
cross-border basis have no option but to pay a surcharge (pay for the right to
pay).

6.3.1.5   Option 32 (Ban surcharging
for IF-regulated payment instruments and allow for non-regulated)

This
option would ensure that the payment instruments for which interchange fees
have been regulated (i.e. consumer debit and credit cards of four party
schemes, including Visa and MasterCard, see options 13 and 15.4) are not
surcharged, as they can be accepted by merchants without the latter incurring
high fees. Therefore, a logical link between the fees paid by merchant for
accepting card payments and the corresponding fees paid by consumers at the
cash desk for using the card (real or virtual) would be maintained (no IF or
low IF for merchant – no surcharge for consumer).

For
payment instruments that continue to generate high costs for merchants,
including commercial cards and cards issued by three party schemes (e.g.
American Express, Diners), exempted from interchange regulation under option 16,
merchants would be able to surcharge.

A
prohibition to surcharge would apply when the relevant provisions regulating
the interchange fees are implemented in full.
Rebates or other steering would still be possible for all payment instruments,
independently of interchange regulation. This would enable merchants to steer
consumers to efficient and cheap payment instruments, such as e.g. credit
transfers or debit cards for internet purchases.

Conclusion

Addressing
the divergence in charging practices between Member States and the costs
consumers incur because of surcharging could lead to substantial gains for both
consumers and merchants. It is estimated that a large part of the currently
estimated amount of EUR 731 million of annual surcharges could be gained
indirectly by consumers following measures to ban surcharging on payment
instruments with regulated interchange fees. Additionally, consumer and
merchant gains could be expected when rebating and other steering is encouraged.
Option 32 is recommended to achieve the desired results, if combined with options
addressing the interchange fees (13 and 15.4).

The
prohibition of surcharging is supported by consumers, banks, and most other
payment service providers. Merchants and public authorities are divided on the
issue, some supporting the prohibition, others favouring surcharging or taking
a neutral position.

Table
17 - Summary of the impact for operational objectives 1
and 5 (options 28 to 32)

Policy option || Description || Effectiveness || Efficiency

Option 28 || Baseline scenario || 0 || 0

Option 29 || Prohibit surcharging || (+) || (+)

Option 30 || Allow surcharging || (+) || (+)

Option 31 || Widely used payment means without surcharge || (-) || (-)

Option 32 || Ban surcharging for IF regulated payment instruments, allow for non-regulated || (++) || (++)

Table
18 - Summary of the impact for main stakeholder categories (options 28 to 32)

Policy option || Description || Consumers || Merchants || PSPs, card schemes

Option 28 || Baseline scenario || 0 || 0 || 0

Option 29 || Prohibit surcharging || (+) || (-) || (+)

Option 30 || Allow surcharging || (-) || (+) || (-)

Option 31 || Widely used payment means without surcharge || (0/+) || (+) || (-)

Option 32 || Ban surcharging for IF regulated payment instruments, allow for non-regulated || (+) || (-) || 0

1.15
Legal vacuum for certain payment service
providers

6.4.1      Access to information

Access
to information on the availability of funds for new card schemes and other third
party providers (TPPs), including payment initiation services, account
information services and other equivalent services
(operational objectives 3, 4, 6 and 7)

6.4.1.1   Option 33 (No policy change)

The
legal status of third parties who wish to provide payment-related services,
such as new card schemes, payment initiation services (PIS), account
information services and equivalent services is currently not defined.
Consequently, these providers face serious difficulties in accessing the
information on the availability of funds on payment accounts. This information
is however needed for card authorisation, payment initiation purposes and for
payment guarantees (if applicable). Access to this information by third parties
would create a downward pressure on current interchange fees because of
increased competition from new players, leading to benefits for merchants and
consumers and contributing to the reduction of overall payment costs to
society.

Under
option 33, account servicing PSPs would continue to be able to restrict access
to the necessary information, hampering the emergence of new schemes for card
and internet payments and the provision of PIS. Therefore, this option does not
address the current barriers for market access for card and internet payments
in any way. Moreover, no other uncertainties surrounding the provision of
payment services by TPPs would be addressed. This includes security
requirements, rights and obligations of the TPPs and of the PSUs/consumers as
well as liability allocation.

6.4.1.2   Option 34 (Define the
conditions of access to the information on the availability of funds, define
rights and obligations of the TPPs, clarify the liability allocation)

This
option would ensure that third parties are allowed to obtain the necessary information
on the availability of funds in order to provide their services and that TPPs
are incorporated into the legal framework of the PSD. It would at the same time
guarantee that all necessary data protection and security requirements are
fulfilled by both TPPs and the PSPs servicing the account. This option would
insure that a consumer is properly informed before giving a TPP an explicit
consent to access his or her accounts and that rights and obligations are
appropriately shared in a balanced way between TPPs, banks and consumers.  In
addition, defining a balanced liability repartition between PSPs servicing the
account and the TPPs would oblige both parties to take responsibility for the
respective parts of the transaction that are under their control and clearly
point to the responsible party in case of incidents.

This
option creates clear benefits in comparison to the baseline scenario, in
particular by eliminating the main barrier for market access and the
development on the market of new card schemes and by addressing the concerns
surrounding TPP operations. It also has the great potential to increase the
competition in the market, by providing an additional payment solution to the
consumers and merchants. The merchants, even the SMEs, which have far less
negotiation power than big corporations versus the card schemes, would benefit
from a less expensive and more tailor-made online payment facility. Costs for
account servicing PSPs are minimal and necessary investments by third parties
will be recovered by the increase in their revenues. Merchants however stand to
gain the most as their transaction costs would decrease in comparison with the
fees they face for card payments (depending on the current level of these
costs). Some of this cost reduction will be passed on to the consumers.

6.4.1.3   Option 35 (Allow TPPs access
to the information on the availability of funds under a contractual agreement
with the account servicing bank)

This
option should be seen as a possible complement to option 34. In this context,
information on the availability of funds on a payment account would become
available for TPPs under an additional condition of concluding a mandatory
contract (either a framework contract or an individual contract with a specific
bank) with the account servicing PSP and with the account holder's consent.

The
additional benefit of this solution, in comparison with option 34, could
possibly be a better technical and operational integration of services provided
by TPP with the account, which could provide a better consumer experience and
better resolution of any potential payment difficulties, if such arise.

However,
this option leaves the ultimate decision on the access to the information on
the availability of funds to the account servicing PSPs, rather than to the
account owner. It would therefore still constitute a potential barrier to the
market access, as it would give account servicing PSPs the possibility to
refuse cooperation with a TPP or to  impose specific requirements in the
contracts. For example, a significant charge for the access, e.g. of the value
comparable to MIF for card transactions, could be demanded, thus partially
recreating the market entry barriers for PIS services and new card schemes.

This
option could therefore undermine some potential benefits of option 34, such as
the equitable conditions of entry on the market of new service providers,
additional choice of payment solutions for consumers and significantly limit or
even negate the potential price benefits for the merchants of accepting TPP
services. In this way, account servicing PSPs could therefore protect their
card businesses from competition and prevent new payment services from
developing on the market.

Conclusion

Lack of
access to the information on funds and lack of legal status within the PSD
hinder the market entry of third parties such as new card schemes, PIS services
and others. Defining secure access conditions, granting legal status and
consequent rights and obligations for TPPs will provide legal certainty to TPPs
and banks and benefit the consumers. Possibly 20 new service providers
operating in 8 Member States will be licensed and the savings for merchants
could range at a rough estimation from minimum 863 million EUR to maximum 3 520
million EUR (detailed estimation of the savings in Annex 9). Option 34 is the
recommended option to eliminate barriers for market access and adjust the scope
of the PSD to encompass new relevant categories of market actors.

The
recommended option is supported by merchants, consumers, public authorities and
non-bank PSPs. Most banks and card schemes are opposed to granting access to
TPPs and new card schemes under the recommended option, though many of them
would change their view if a financial compensation for the access was
provided.

Table
19 - Summary of the impacts - Access to information on the availability of
funds for new card schemes and third party providers (options 33 to 35)

Policy option || Description || Effectiveness || Efficiency

Option 33 || Baseline scenario || 0 || 0

Option 34 || Define conditions of access to payment accounts, rights and obligations of the TPPs and the liabilities || (++) || (++)

Option 35 || Contractual agreements || (-/--) || (0/+)

Table
20 - Summary of the impact for main stakeholder categories (options 33 to 35)

Policy option || Description || Consumers || Merchants || TPP's || Banks

Option 33 || Baseline scenario || 0 || 0 || 0 || 0

Option 34 || Define conditions of access to payment accounts, rights and obligations of the TPPs and the liabilities || (++) || (++) || (++) || (0)

Option 35 || Contractual agreements || (0) || (--) || (-/--) || (++)

1.16 Scope
gaps and inconsistent application of the PSD

6.5.1      Negative Scope of the PSD (Operational objectives 7 and
9)

6.5.1.1   Option 36 (No policy change)

Under
this baseline option, the four discussed exemptions in the PSD (commercial
agents, limited network, telecom and independent ATMs) would remain unchanged.
In consequence, there will be limited PSU protection in numerous cases (i.e.
for consumer funds under commercial agent exception, consumer rights under
other exceptions) and a distinctly unlevel playing field among PSPs. Possibly
even much greater part of PSP services will be offered outside the scope of the
directive. Technical and business innovations would be undermining any efforts
of homogenous application of negative scope exemptions, leading to further
regulatory arbitrage.

6.5.1.2   Option 37 (Update/clarify
scope of exclusions)

Under
this scenario, the four exemptions would be subject (separately from each
other) to a comprehensive update, including clarification or introduction of
necessary definitions and explanations in recitals.

Thus,
for commercial agents, the law would clarify that this exemption is
intended only for legal persons who use an agent as their representative. It
should not be used by agents working on behalf of consumers. The foreseen
change would impact those commercial agent activities that clearly concentrate
on management of financial flows between buyers (consumers) and sellers on a
professional basis and should not have been exempted from the PSD. The main
benefit would be to limit the risks and increase the rights and protection of
consumers.

As
regards the limited network exemption, an improved definition would
comprise a limitation to the specific volume of transactions or a maximum
transaction value and specify that a network should be strictly focused on a
very limited range of goods and services. The benefit of this scenario consists
in extending PSD protection to a range of payment instruments and methods that
go clearly beyond strictly defined payment service in a limited network and
suffer from reduced consumer protection. The main impact of a new, more focused
definition would be on these service providers who built extensive payment
operations based on very broad interpretation of the exemption or purposefully
use it to avoid regulation.

The
telecom exception would be reformulated to focus
the exemption on the services related purely to telecommunication services
(calls, SMS, internet access) or being in a very close relation to telecommunication
business (such as e-mailing, virus-protection, purchase of a phone through a
package subscription). The main impact of such definition would be on mobile
network operators who do not strictly offer mobile-related payment services.
This would be in favour of PSUs[69],
protecting their rights and would be also beneficial for the position of third
party providers of content.

Finally,
for independent ATM providers, the law would become much more specific
and indicate that the exemption only applies to stand-alone ATMs, not connected
in a network and not acting on behalf of other PSPs or providing them any other
payment services as a third party. This would limit the non-regulated part of
the market and protect the consumer, in particular as regards the fees for
withdrawal.

6.5.1.3   Option 38 (Delete the
exclusions)

Following
this scenario, payment transactions through commercial agents, telecom and IT
devices, payment activities in the context of a limited network as well as cash
withdrawals through stand-alone ATMs would become subject to the PSD rules.

In
comparison to the option 37 above, the deletion of the commercial agent exemption
would bring disproportional impact on businesses that rely on such agents to do
their payments. At the same time, it would not change the situation of other
stakeholders, in comparison with the clarification of scope scenario. As the
reason for the exemption did not disappear and is not put into question, the
exemption should therefore exist, with the more focused wording.

A
similar reasoning would apply if the limited network exemption would be
deleted. The rationale for the exemption, in its originally intended, limited
scope, remains valid. This exemption is very important for some categories of
niche payment providers (such as meal vouchers, petrol cards etc.) and they
would be disproportionally affected by its deletion. At the same time, the
situation of other stakeholders would not change in comparison to the new
definition option.

As
regards the deletion of the telecom exemption, there appears to be
indeed no rationale for maintaining this provision, even in a more limited
form. Thanks to advances in the technology, mobile payments are now a
fully-fledged payment channel thanks to the arrival of a smartphone. Accordingly,
access to payments by mobile phone should no longer be subject to a special
exception. Issues specific to payments for mobile network services could be
addressed more simply through the improved limited network exemption.

Finally,
the deletion of the independent ATM provider exemption would appear
justified. Independent ATM providers need to enter into agreements with a card
scheme or with the PSPs holding accounts of the users in order to offer ATM
services. The ATM owner acts only as an agent or proxy of the PSP and provides
access to the funds available on the bank account of the PSU, in order to make
the cash withdrawal possible. The matter of remuneration for withdrawal should
be negotiated between PSP and ATM deployer and not dumped on consumers, leading
to high or double charges.

6.5.1.4   Option 39 (Require payment
service providers that make use of the exclusions to inform the competent
authorities and ask for their clearance (negative clearance requirement)

This
scenario is independent from the actions proposed in options 37 and 38. A PSP
that intends to benefit from the exemptions would be obliged to consult the
competent authorities on the applicability of these exemptions and to receive
their approval before starting the payment activities. In order to avoid
excessive administrative burden, the necessity of clearance would apply to
larger providers (full PIs or their exempted equivalent), while small providers
(equivalent to waived PIs) would only inform authorities about their
activities.

Such a
measure would benefit the competent authorities, who currently have little, if
any, formal knowledge on the size of the exempted market. It would also put the
authorised and exempted PIs on equal footing as regards the application of the
exemption criteria, thus reinforcing the level playing field on the market. The
necessity of scrutiny would also, indirectly, contribute to the better and more
coherent protection of consumer rights in the Member State.

For
potentially exempted operators, the burden of scrutiny would be marginal in
comparison with the potential costs of getting and maintaining a full PI
license (below 1% of costs) and fully justified in view of the potential abuses
and PSU detriments that could otherwise occur.

Conclusion

The clarification
of the scope is recommended for the “commercial agent” and “limited network”
exemptions. The deletion of the exemption is recommended for the “telecom” and “ATM”
exemption. Independently, negative clearance requirement is also the preferred
option. The clarification of the scope is supported by most payment services
providers and public authorities; consumers are divided on limited network
exclusion, calling for its deletion or narrowing of scope. The deletion of the telecom
exception is supported by all payment service providers except the telecoms and
by the consumers; public authorities expressed the need for a change of the
current provision, but their opinions vary between deletion and narrowing of
the scope. The ATM exemption deletion did not raise many comments, but was
supported by the ATM sector itself and the consumers.

Estimated
costs of these legislative changes for all PSPs are between 128 and 193 million
euros, related mostly to the necessity of maintaining adequate own funds and to
the costs of acquiring the PI licence. Estimated costs for supervisory
authorities of all Member States are between 0.38-0.88 million euros. The
benefits of changes are non-quantifiable and encompass better consumer
protection, increased security of payments and level playing field for
competition.

Table
21 - Summary of the impact for operational objective 5 (options 36 to 39)

Policy option || Description || Effectiveness || Efficiency

Option 36 || Baseline scenario || 0 || 0

Option 37 commercial agents limited network Telecom ATM || New definition/clarification of scope || (+++) (+) (++) (+) || (++) (++) (++) (++)

Option 38 commercial agents limited network Telecom ATM || Deletion || (--) (---) (+++) (+++) || (+++) (+++) (+++) (+++)

Option 39 || Negative clearance || (++) || (++)

Table
22 - Summary of the impact for main stakeholder categories (options 36 to 39)

Policy option || Description || Consumers || Merchants || PSPs (exempted/ authorised)

Option 36 || Baseline scenario || 0 || 0 || 0

Option 37 commercial agents limited network Telecom ATM || New definition/clarification of scope || (+++) (+++) (++) (++) || (+) (+) (+) (0) || (-/0) (--/0) (-/0) (-/0)

Option 38 commercial agents limited network Telecom ATM || Deletion || (+) (+) (+++) (+++) || (--) (+) (++) (0) || (-/0) (---/0) (-/0) (-/0)

Option 39 || Negative clearance || (+) || (+++) for authorities || (-)

6.5.2      "One-leg"
transactions and payments in non-EU currencies

(Operational
objective 7 and 9)

6.5.2.1   Option 40 (No policy change)

Under
this baseline scenario one-leg transactions and payments in non-EU currencies
would remain outside the scope of the PSD and non-harmonised across the Member
States. Consequently, there would be limited protection of PSUs in many Member
States (some 50% of them) that did not introduce the national rules on such
transactions. Differences in geographical scope of application, in currencies
covered and in the extent to which the PSUs are protected by the PSD provisions
in particular Member States will remain. This will have detrimental effects for
PSUs and contribute to unlevel playing field across Member States.

6.5.2.2   Option 41 (Full extension to
all one-leg transactions and all currencies)

Full
application of the PSD to one-leg transactions and payments in non-EU
currencies would bring the protection of PSUs, in terms of transparency,
information requirements and their rights and obligations to the same, high
level as for the intra-EU, two-leg transactions. Extension of the geographical
scope to one-leg payments and payments in non-EEA currencies would benefit,
first of all, consumers sending remittances to non-EEA countries (some 32
billion EUR annually for 27 EU Member States). Another group of better
protected consumers would be those involved in cross-border online shopping
outside the EU. A significant drawback of a full application could consist of the
fact, that some rules included in the directive may be too complex to implement
in practice or simply unreasonable in a one-leg or non-EEA currency context.

6.5.2.3   Option 42 (Selective
extension of certain PSD rules to one-leg transactions and to all currencies)

This
would allow for application of only certain rules of the PSD to one-leg payment
transactions and payments in non-EU currencies. In particular, rules on
information requirements and transparency could easily be applied. As regards
rights and obligations a selective approach could be followed, keeping the high
protection of consumer rights in place. Those obligations that could be
fulfilled by the PSP should be applicable.  Obligations out of control of
EU-based PSPs or not realistic from the technical perspective in case of
discussed transactions would not apply. The benefits of such approach would be,
in terms of PSU protection, almost the same as of the previous option. The
difference – in favour of this solution – is that the possible negative impact
of the extension on PSPs is neutralised through the exclusion of certain
obligations out of control of PSPs.

Conclusion

The
preferred option is a selective extension of PSD rules to one-leg and all
currencies. The cost of its implementation would be marginal (as PSPs already
have the necessary technical solutions and procedures in place and would be
able to use them) and limited mostly to the clear and easy to understand
information on consumer rights and consumer protection upon the extension. They
are estimated at 1.3 to 2.8 million euros for all PSPs in the EU. In terms of
benefits, the value of transactions covered by the extension is estimated at
some 60 billion EUR or roughly 5% of consumer transactions. Some 32 million
PSUs could potentially be positively affected. The extension is opposed by most
banks, but supported by consumers, some non-bank PSPs and most public
authorities (though there is no agreement on the exact scope of the extension).

Table
23 - Summary of the impact for operational objective 5 (options 40 to 42)

Policy option || Description || Effectiveness || Efficiency

Option 40 || Baseline scenario || 0 || 0

Option 41 || Full extension || (+++) || (--)

Option 42 || Selective extension || (++) || (++)

Table
24 - Summary of the impact for main stakeholder categories (options 40 to 42)

Policy option || Description || Consumers || Businesses || PSPs

Option 40 || Baseline scenario || 0 || 0 || 0

Option 41 || Full extension || (+++) || (+) || (--)

Option 42 || Selective extension || (++) || (+) || (0)

7            Choice
of the most appropriate policy instrument

The
choice of the policy instrument is partly predetermined and facilitated by the
specific area of action – Single Market in payments – a “by definition” complex
and sensitive area of financial services, which calls for strong common EU
rules and harmonised approach. Furthermore, the choice is also based on the
existing legislation in the area of payments. A large part of this impact
assessment adresses the issues of regulatory deficiencies in the existing
Directive – PSD – identifing several regulatory failures and legal gaps and
proposing to amend them. A natural choice for amending these deficiencies is to
do it through the revision of this Directive, which is also reflected in the
considered options.

A
substantial part of this impact assessment discusses issues that were, until
now, not covered by legislation at the EU level, in particular when the card
payments structures and their business, technical and organisational set-up are
concerned. However, these very issues were subject to numerous competition policy
procedures and court rulings, both at the EU and the national level, over the
last 15-20 years. As a result of such procedures, several self-regulation
commitments were reached, including two at the EU-level. As this impact
assessment amply demonstrates, these commitments did not influence
significantly the way the card schemes operate. In the wake of such
disappointing outcome, several Member States have engaged independently into
attempts of regulating card business, both through more vigorous competition
policy and through legislation[70]. These
attempts remain however uncoordinated and concentrate only on the purely
national dimension of the card business, while most aspects of the card payment
business are pan-European or global in their nature. Therefore, a rationale for
a binding legislation on these issues is very strong.

In
terms of the legislative instruments for the card area, the preferred options
call for the use of Regulation for the core provisions, including MIF. This
would take into account the specific, technical character of card provisions,
distinctly different from the more general articles of the PSD. Furthermore, it
would ensure a possible maximum harmonisation of rules in an inherently
pan-European card business, with a limited number of stakeholders competing on
EU wide basis. These stakeholders would be subject to one, consistent set of
rules and supervisory practices and would not attempt to play on national law
differences, likely to appear in case of the transposition of a Directive.
However, some of the flanking measures accompanying the MIF Regulation, for
example those that impact on PSU rights and obligations, as surcharging, could
well be included in the revised PSD.

It
should be also noted that some of the options, in particular in the
standardisation of card and mobile payments area, call for a soft law approach
(improved governance arrangements, involvement of the standardisation bodies)
as described under 6.1.

In
conclusion, a combination of a Directive (PSD review) and a new IF Regulation
would therefore offer the best way forward for addressing the problems
identified in this impact assessment.

8            Cumulative
impacts, impacts on stakeholders and choice of policy instruments

1.17 Cumulative
impact of the recommended policy options

For the
purposes of a final, summary analysis the discussed policy options can be
divided into four main packages:

1.
governance
and standardisation (including SEPA governance and standardisation in the
domain of card and mobile payments, options 1-11),

2.
interchange
fees (including the core of the interchange regulation, options 12 and 14‑17),

3.
flanking
measures for interchange fees (including cross-border acquiring, restrictive
business practices and surcharging, options 13 and 18-25),

4.
scope of
the PSD (including access to the information on funds by TPPs, PSD exemptions
and rules related to one-leg transactions and all currencies, options 26-35).

Various
ancillary and fine-tuning measures, discussed in the Annexes 10 and 11, can be
attributed to these packages.

These
policy packages could in principle be discussed and adopted in three different
combinations, if strictly necessary. However, it is important to note that
there are strong interdependencies between the packages as well as the
recommended options. Therefore, discarding one of the packages or recommended
options would in many cases have negative implications across all potential
benefits identified in this impact assessment and may in some cases turn to be
counter-productive.

Possible legislative packages || Main impacts

1+4 || + addresses most identified weaknesses in the PSD (except surcharging); guarantees the  involvement of all stakeholder categories in the development and governance of EU retail payments market; gives additional impetus to the market-driven standardisation in the field of card and mobile payments - does not solve or touch upon the existing problems of lack of transparency and ineffective competition in the card area, with repercussions on the development of e- and m- payments; negative effects for PSUs will mostly persist; in case of the main regulatory change – inclusion of TPPs - the impact on competition is much diminished without IF regulation and other measures in packages 3 and 4 Estimated benefits for main quantifiable element of the package (access to information on the availability of funds for TPP): up to 3.5 billion EUR per annum in savings for merchants; a part of this amount could be passed through to consumers; additional 4 billion EUR per annum in benefits (mainly for businesses and consumers) if card standardisation is pursued.

1+3+4 || + in addition to package (1+4) adds market transparency measures (HACR, steering/surcharging) and market-based mechanisms promoting competition (cross-border acquiring, ancillary measures –as e.g. blending and co-branding) to alleviate the market fragmentation and competition problems; remedies some negative effects for the PSUs (but not all the underlying problems) - addresses only some important, but secondary problems related to market failures; does not address the main competitive and market entry problem identified in this impact assessment – interchange fees; the impact of most transparency and competition-promoting measures in this package is much diminished without direct IF regulation measures Estimated benefits for main quantifiable elements of the package (access to information on the availability of funds for TPP, cross-border acquiring, restrictive business practices, surcharging): up to 4 billion EUR per annum in savings for merchants; a part of this amount could be passed through to consumers; additional 4 billion EUR per annum in benefits (mainly for businesses and consumers) if card standardisation is pursued.

1+2+3+4 || + in addition to package (1+3+4) addresses comprehensively IFs, greatly reinforces the effectiveness of transparency and competition promoting measures in package 3; directly addresses all problems identified in this IA; brings positive effects for PSUs - requires a direct regulatory intervention in the business model of the (international) card schemes as well as card issuing and acquiring PSPs; implies a careful monitoring of application by competent national authorities (both for merchant and consumer fees) Estimated benefits for main quantifiable elements of the package (access to information on the availability of funds for TPP, cross-border acquiring, restrictive business practices, surcharging, regulation of cross-border and national MIF): up to 13 billion EUR per annum in savings for merchants; a part of this amount could be passed through to consumers; up to 730 million EUR per annum  for consumers; additional 4 billion EUR per annum in benefits (mainly for businesses and consumers) if card standardisation is pursued.

A more
detailed rationale for a comprehensive package (1+2+3+4), including IF
regulation measures, is presented in the box below.

Rationale
for all-inclusive package including interchange fees

It should be considered
whether reviewing the PSD and adopting IF flanking measures, without however
attempting direct MIF regulation, could be effective. Such an approach would
follow a traditional, classic economic theory, where improved transparency
measures (e.g. abolishing HACR, addressing the steering/surcharging) and other
market mechanisms promoting competition (discussed as the ancillary measures
e.g. free choice of brand in case of co-branding) could lead to the desired
economic outcome and to market balance.

However the functioning of the
card market does not resemble the traditional market model from the classic
economics textbooks. The card market, as mentioned before, has certain
characteristics of a two-sided market (a market having two distinct groups of
users and intermediaries necessary for the market to function), with
intermediaries (card schemes and banks) able to increase the transaction costs
imposed on one or both groups without facing diminishing returns typical for a
traditional market. Thus, any regulatory intervention addressing only a part of
this market will have limited effects.

When the realities of payment
markets are considered, introducing more transparency and creating more
effective market mechanisms could help create a positive dynamics towards more
efficient pricing and a more competitive environment, but is far from sufficient.

The current differences in
fees across the Internal Market are such that it would seem difficult to
‘bridge’ them just by steering consumers to lower cost payment instruments. For
instance, the difference in interchange fees between certain credit cards in
Belgium can amount to 250% whilst in the UK certain credit cards are 24 times
as expensive as certain debit cards[71].

Furthermore, steering
mechanisms in practice might not in isolation make much of a difference.
Retailers tend to make limited use of them since they have limited incentives
to do so. There is a risk that consumers do not react favourably to steering
and in particular to 'negative' price signals, as surcharging, retailers would
often refrain from steering. This would require 'Educating' consumers about the
relative costs of payment instruments and the logic of making them pay for high
fee instruments that inflict costs on others. However this may take a long time
and bring limited results. Retailers may also not want to be the first-movers
in this respect as they fear that consumers would go to their competitors not
using surcharges (business-stealing effect). In the end, merchants can always
pass on the costs of all payment means, including the most expensive ones, to
all consumers (including the ones using 'cheap' payment means) through
increased retail prices.

Transparency and market
measures would therefore only suffice for payment instruments that merchants
can reasonably refuse (e.g. commercial cards, three party systems), as they are
not too widespread. For instruments that are ‘must take’s’ (consumer debit and
credit cards), in order to create the required level playing field, all
interchange fees – cross border and domestic – should be regulated. Conversely,
to avoid a shift to expensive three party systems, the regulation of
interchange would have to be accompanied by effective steering measures.

Regulating cross-border
interchange fees only would mean covering a small part of the transactions
(5-10%), with limited if at all impact on domestic fees, which would remain
highly divergent, fuelling an un-level playing field and preventing market
integration. Cross border acquiring would go some way in addressing the current
market failures, but it would mostly benefit large retailers - able to make the
investment in applying one system (‘protocol’) to make cross border acquiring
possible and only work in Member States where common protocols exist (in at
most only 10 MS and on the Internet). Market entry for new pan-European players
would remain difficult, as they would have to offer issuing banks the highest
level of interchange fee prevailing in the market they want to enter – which
impacts the viability of their business model.

In
summary, the recommended policy options, assembled in the “full” package
1+2+3+4, imply that i) market fragmentation is decreased, ii) obstacles for
competition in the area of card payments are addressed, in particular by
regulating MIFs, eliminating restrictive business rules and improving market
access, iii) possibilities for surcharging by merchants are limited the
instruments left outside the scope of MIF regulation, iv) the access to the
information on funds by TPPs becomes regulated, v) the regulatory gaps and
inconsistences in the PSD are greatly reduced.

In
combination, these measures will substantially improve the further integration
of the EU payments market, yielding the following key benefits:

–
A level playing field across service providers,
merchants and consumers and more competition between service providers;

–
A broader range of payment services for
consumers and merchants;

–
The provision of new and innovative payment
services at European level; and

–
More transparent and secure payment services.

The
economic impact of the recommended options varies between the different areas
under which measures are proposed.

Standardisation
measures: General benefits of market integration, in
particular through standardisation, would apply to the market as a whole. Based
on a previous study and some simplified assumptions, such integration benefits
could amount up to more than EUR 4 billion per annum for the card market. The
benefits for mobile payment standardisation are more difficult to estimate as
the proximity m-payment market is nascent but a study suggests that a
standardised market could be up to 70% larger than a non-standardised one by
2016.

Measures
increasing competition: Savings from these measures
would mostly apply to merchants through reduced payment fees. Conversely,
revenues of payment service providers and card schemes would be reduced by the
according amounts. Merchant savings from a direct reduction of MIFs could
amount to EUR 9 billion. Merchant savings from better alternatives for cheaper
payment means are estimated at EUR 1.5 – 6 billion. Some of the overall savings
for merchants could be passed through to consumers.

Limitation
of surcharging: Direct savings for consumers are
estimated at a portion of EUR 731 million annually. Merchants would also
benefit from lower costs especially if seen in combination with the MIFs
options and transparency measures, although revenues from opportunistic
surcharging are expected to decrease.

More
consistent application of PSD: This could lead to higher
costs of EUR 128 – 193 million (one-off) for those PSPs to be moved into the
revised scope of the PSD. Changes in liability rules (PSD fine-tuning measures)
could lead to a reduced exposure for consumers of up to EUR 295 million
annually.

Table
25 - economic impact of the recommended options.

Identified issue || Recommended Option || Economic Impact at EU level

Governance and standardisation

Governance arrangements || Through formal body (European Retail Payments Council) || Better involvement of stakeholders. Costs marginal.

Standardisation card payments || Through payments  governance framework (under European Retail Payments Framework) || Contributes to fully integrated card market. Benefits estimated at 4 billion per annum mainly for businesses and consumers

Standardisation mobile payments || Through European Standardisation Organisation || Drives volume of m-payment transactions. Estimate: 68% more transactions if standardised

Interchange fees (for card-based payments)

IFs regulation (Phase 1) || Cap cross-border IFs (debit and credit) and allow choice of IF for cross-border transactions (through cross-border acquiring, see below) || Operational savings for large merchants.  Estimated at EUR 3 billion annually.

IFs regulation (Phase 2) || Cap MIFs for debit and credit cards at EU level at 0.2% and 0.3% respectively (cross-border and domestic) || Operational savings for all card accepting merchants. Estimated at EUR 6 billion annually. Part of these could be passed through to consumers.

Interchange fees – main flanking measures

Cross-border acquiring || Remove obstacles imposed by card schemes and laws to cross-border acquiring || Operational savings for large merchants up to EUR 3 billion annually (if supported by cross-border IF regulation), a small part of this amount if a stand-alone measure

Restrictive business rules || Prohibit Honour All Cards and Non-Discrimination Rules || Operational savings for all card accepting merchants. Estimated at most at EUR 0.4 – 1.5 billion annually. Under caps of 0.2% and 0.3% for debit and credit cards, savings estimated at EUR 0.095 – 0.4 billion annually. Part of these savings could be passed through to consumers.

Diverging charging practices between MS || Ban surcharging for payment instruments with regulated MIF (see MIF options above) || Savings for consumers: part of EUR 731 million annually

Scope gap and inconsistent application of the PSD

Access to the information on the availability of funds by TPPs || Define the conditions of access to the information on the availability of funds, define rights and obligations of the TPPs, clarify the liability repartition || Better market access for Third Parties including new card schemes and other innovation.  Savings for merchants if PIS substitute credit cards in online transactions estimated at EUR 0.9 – 3.5 billion annually. These savings are at least maintained if IFs regulated as above. New online payment solution for consumers, including those not possessing credit cards.

Negative scope (exemptions) || Re-definition of scope for commercial agents and limited networks; Include IT / mobile initiated transactions and independent ATMs in scope; Require clearance for exempted services by competent authorities || Cost for relevant PSPs estimated at EUR 128 – 193 million (one-off). Benefits not quantifiable but include improved consumer protection, increased payments security and a level playing field for competition.

Positive scope (one-leg and non-EU currency transactions) || Selective extension (Title III and IV) of PSD scope to one-leg and non-EU currency || Costs marginal. PSD benefits extended to payment transactions with an estimated total value of EUR 60 billion annually for some 32 million PSUs.

1.18 Impact
on different stakeholders

Generally,
payment service users (merchants and consumers) benefit most from the package
of proposed measures. On the supply side, there are significant benefits for
new entrants and payment institutions. Incumbent providers benefit least from
the recommended options.

Consumers:
Beyond the direct economic benefits through a limitation of surcharges and
possible pass-through effects of merchant savings through their pricing of
goods and services, consumers mostly benefit through:

–
increased choice of payment means, in particular
online-banking based and mobile payments and

–
strengthened consumer protection rules through
the inclusion of additional payment services and transactions under the PSD
regime, stronger information requirements for PSPs and a revised liability
regime

–
stronger involvement in retail payments
governance

On the
negative side, there is a risk that consumers face increased card issuing and maintenance
fees by PSPs that compensate for reduced revenues from MIFs.

Merchants:
The vast majority of direct economic benefits applies to merchants through a
significant reduction of fees as applied by banks and card schemes and more
freedom in terms of not having to accept expensive payment means. Merchants
also benefit from more standardisation (for example in the area of card
payments) and the possibility for cross-border / central acquiring.

New
entrants on the supply side: The recommended measures address
a number of market access hurdles, in particular for payment initiation
services, new card schemes and payment institutions. New entrants will also
benefit from the elimination or significant reduction of reverse competition on
MIFs for cards. Overall, the key benefits for new market entrants therefore
stem from a more level playing field versus incumbents.

Existing
PSPs and card schemes: Incumbent banks and card
schemes will be affected by a revenue reduction through the limitation of
anti-competitive fee models and restrictive business rules. They will also face
stronger competition from new entrants as obstacles for market entry and market
access will be addressed through the proposed measures. They may however see
benefits in the long run through more standardisation, i.e. a reduction of
operational cost and possibilities for new value-adding services, for example
in the area of mobile payments.

Table
26 - Impact of the recommended options for different stakeholder categories
(based on the terminology introduced in chapter 6).

Identified issue || Recommended Option || Economic Impact at EU level ||

Governance and standardisation ||

Governance arrangements || Through formal body (European Retail Payments Council) || Consumers: (+) Merchants: (+) PSPs: (+) ||

Standardisation card payments || Through payments  governance framework (under European Retail Payments Framework) || Consumers: (+) Merchants: (++) PSPs: (0) ||

Standardisation mobile payments || Through European Standardisation Organisation || Consumers: (++) Merchants: (++) PSPs incl. MNOs: (+) ||

Interchange fees (for card-based payments) ||

IFs regulation (Phase 1) || Cap cross-border IFs (debit and credit) and allow choice of IF for cross-border transactions (through cross-border acquiring, see below) || Consumers: (0/+) Merchants: (+) PSPs: (-/0) New entrants: (+) ||

IFs regulation (Phase 2) || Cap MIFs for debit and credit cards at EU level at 0.2% and 0.3% respectively (cross-border and domestic) || Consumers: (0/++) Merchants: (++) PSPs: (-/0) New entrants: (++) ||

Interchange fees – main flanking measures ||

Cross-border acquiring || Remove obstacles imposed by card schemes and laws to cross-border acquiring || Consumers: (0) Merchants (big retailers): (+) Merchants (SMEs): (0) PSPs: (0) Card schemes: (-) ||

Restrictive business rules || Prohibit Honour All Cards and Non-Discrimination Rules || Consumers: (+/0) Merchants: (++) PSPs: (-) Card schemes: (-) ||

Diverging charging practices between MS || Ban surcharging for payment instruments with regulated MIF (see MIF options above) || Consumers: (+) Merchants: (-) PSPs: (0) Card schemes: (0)

Scope gap and inconsistent application of the PSD

Access to the information on the availability of funds by TPPs || Define the conditions of access to the information on the availability of funds, define rights and obligations of the TPPs, clarify the liability repartition || Consumers: (++) Merchants: (++) TPPs (++) Banks: (0)

Negative scope (exemptions) || Re-definition of scope for commercial agents and limited networks; Include IT / mobile initiated transactions and independent ATMs in scope; Require clearance for exempted services by competent authorities || Consumers: (+++) Merchants: (+) PSPs (exempted): (-) PSPs (authorised): (0)

Positive scope (one-leg and non-EU currency transactions) || Selective extension (Title III and IV) of PSD scope to one-leg and non-EU currency || Consumers: (++) Businesses: (+) PSPs: (-/0)

1.19 Other
impacts

Impact
on Member States: The impact of the proposed options on the
Member States should be limited. Member States would incur the costs of
legislating and transposing of the revised PSD. Once this is done, the Member
States would need to cover some one-off costs, related to the implementation of
the preferred options, as well as recurring costs of supervising and monitoring
the new law rules. These costs are, whenever possible, calculated and indicated
in the impact assessment under the respective options. However, the total costs
indicated are not necessarily cumulative as heavier supervision and monitoring
in some areas, implying higher administrative costs for Member States, would be
at least partially compensated by lower expenses in other areas of the public
administration. For example, thanks to the card regulation, significantly lower
administrative burden and expenses could be expected for national competition
authorities and courts, currently involved in investigating card market
practices and MIFs.

In the
longer perspective, Member States (and society as a whole) would benefit from
the possibly lower costs of payments and more varied payment means that could
be used for public payments. For example, if electronic payments are used more
frequently, Member States could realise important tax gains on those
transactions that currently go unregistered in the “black” or “grey” economy.

Administrative
burden for businesses: As estimated under various
options of this impact assessment, the administrative burden for stakeholders
related to the introduction of new legal rules is marginal. As much as possible
the preferred options took into account the minimisation of impact into account
e.g. by applying a light-touch information regime for exempted, low-value PIs.
Administrative obligations arise basically only in three cases, i.e. for
prudential, security and PSU protection reasons. Furthermore, it is important not
to associate some capital-intensive prudential requirements (own funds,
licensing) that are introduced on some categories of PIs with purely
administrative burdens.

Social
impact: The recommended measures do not imply a direct
social impact. Economic downsides for incumbents are compensated by benefits
for new entrants, resulting in a neutral impact on employment at worst. To the
extent that the proposed policy options contribute to the further development
of e-commerce (and m-commerce), jobs are more likely to be created than to be
reduced. As highlighted in the Commission Communication on e-commerce[72], in the
G8 countries, the internet economy has brought about 21% of the growth in GDP
in the last five years. It also generated 2.6 jobs for every job cut.

Environmental
impact: The preferred policy options will not have any
direct impacts on the environment. In terms of an indirect impact, many of the
proposed options would facilitate and promote the development and more
extensive use of the electronic means of payment, including card, mobile and
online payments. This should contribute to the reduction of the level of cash
in circulation and lead to environmental benefits.

Impact
on third countries: If the preferred options were
extended to the three European Economic Area countries which are not members of
the EU, the same impacts as described above would affect the relevant
stakeholders in Iceland, Liechtenstein and Norway. With regard to the impact on
third countries, the regulation of MIF as well as the revision and extension of
PSD rules will not lead to discrimination or competitive advantages for PSPs,
businesses and other stakeholders offering or making payments in Europe, as
they would be subject to exactly the same legal rules.

Impact
on Union resources: No mesurable impact on Union
resources is expected. In the medium time perspective (5-10 years), thanks to
the regulation of the card business some of the human resources currently
involved on the card issues could be redeployed in other areas of the EU
institutions activities.

Impact
on other EU legislation: Many provisions of the PSD are
applicable, mutatis mutandis, to Directive 2009/110/EC (E-money Directive,
EMD). Therefore, changes to the current PSD text would also affect the EMD,
insofar the provisions of PSD are applied to the EMD.

9            Evaluation and
monitoring

Both
the revised Payment Services Directive and the legally binding instrument would
include a provision stating that a review of its appropriateness and
effectiveness in meeting the objectives should be carried out. This review
should take place a few years after the implementation and could focus on
evaluating the impact of the revised provisions on:

–
the reduction of the divergences between Member
States in the implementation of the PSD

–
the reduction of barriers to effective
competition and related effects, such as the emergence of new innovative means
of payment, better access of newcomers to the market and increased
standardisation

–
the level of Merchant Service Changes for card
payments and possible side-effects on banking revenues and consumer prices

The
review may include a public consultation and/or survey stakeholders to review
the effect of the revised PSD and legally binding instrument on the different
categories of stakeholders. Regard would also be given to monitoring
quantitative indicators, such as the number of new players in the market (PIs,
card schemes, etc.) and the use of the different payment methods (cash, debit
cards and credit cards), the level of MSCs, cardholder and current account fees
prior to and after full implementation.

[1]               See Annex to the Commission Work Programme 2013, item
25. http://ec.europa.eu/atwork/pdf/cwp2013\_annex\_en.pdf

[2]               http://ec.europa.eu/governance/impact/planned\_ia/docs/2013\_markt\_005\_secim\_en.pdf

[3]               Report on the transposition of Directive 2007/64/EC
by Member States (general report and 27 national reports) done by tipik
communication agency, 2011

[4]               London Economics and iff in association with PaySys
Study on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013).

[5]               http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0941:FIN:EN:PDF

[6]               http://ec.europa.eu/internal\_market/payments/docs/cim/gp\_feedback\_statement\_en.pdf

[7]               These are collectively agreed
payment service provider (PSP) fees between the acquiring leg (i.e. the PSP of
the merchant) and the issuing leg (i.e. the PSP of the cardholder) of a payment
transaction.

[8]               Cross-border acquiring refers to a situation in which
a merchant uses the services of an acquiring PSP established in another
country. Under this arrangement, not only do all merchants benefit from more
competition on Merchant Service Charges (MCSs) but companies can also appoint a
single acquirer for their transactions, resulting in administrative
efficiencies and cross-border competition.

[9]               Internet-based payment initiation services allow
consumers to immediately pay for purchases of goods and services using their
payment account instead of other instruments, such as cards. Once a consumer
chooses the online banking payment option, a credit transfer from the
consumer’s to the merchant’s account is executed automatically. The consumer authorises
the purchase by entering his or her online banking credentials.

[10]             This is a term commonly used in reference to the charge
applied by a merchant on top of the requested price for goods and services when
a certain payment instrument (usually a card) is used by the consumer, in order
to cover the costs borne by the merchant for such a use.

[11]             http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2012-0304&language=EN

[12]             Source: SEPA:
potential benefits at stake, CapGemini, 2007, http://ec.europa.eu/internal\_market/payments/docs/sepa/sepa-capgemini\_study-final\_report\_en.pdf

[13]             Starting from the point in time when pan-European
payment instruments have reached a critical mass

[14]             London Economics and iff in association with PaySys
Study on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p19

[15]             Co-badging allows  different payment brands for
instance domestic and international to co-exist on the same card or device

[16]             However, in some cases three party schemes issue
licences to several PSPs for the issuing of cards and the acquiring of
transactions. In this case the scheme is not a ‘pure’ three-party scheme but
resembles a four-party system.

[17]              Source:
ECB Payment Statistics (http://www.ecb.int/press/pr/date/2012/html/pr120910.en.html),
see Annex 5 with basic payment statistics for more details

[18]             London Economics and iff in association with PaySys
Study on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p23

[19]             http://www.forrester.com/European+Online+Retail+Forecast+2010+To+2015/fulltext/-/E-RES58597

[20]             See Commission Staff Working Document Online services,
including e-commerce, in the Single Market available at
http://ec.europa.eu/internal\_market/e-commerce/docs/communication2012/SEC2011\_ 
1641  \_en.pdf

[21]             McKinsey Global Institute, Internet matters: The net's
sweeping impact on growth, jobs, and prosperity, May 2011, on the G8 countries,
South Korea, Sweden, Brazil, China and India. Available at: 
http://ww1.mckinsey.com/mgi/publications/internet\_matters/pdfs/MGI\_internet\_matters\_full\_report.pdf

[22]              http://ec.europa.eu/internal\_market/consultations/2010/e-commerce\_en.htm

[23]              See
Commission Communication "A coherent framework for building trust in the
Digital Single Market for e-commerce and online services" January 2012 p11
- http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0942:FIN:EN:PDF

[24]             Third party providers that facilitate the use of the
consumer’s online banking platform to make immediate guaranteed internet
payments on the basis of credit transfers

[25]              iDEAL,
Giropay and EPS

[26]             E.g. Sofortbanking, Trustly, or Safetypay.

[27]             Whether or not fees can be charged for internet
payments will have an effect on the cost for potential market participants.
Legal uncertainty in this regard slows down the growth of e-commerce

[28]             http://www.gartner.com/it/page.jsp?id=2028315

[29]                    http://www.iemarketresearch.com/documents/3Q2011GlobalMobilePaymentMarketForecastOverview-September6-2011.pdf

[30]             http://www.simonwhatley.co.uk/mobile-payment-users-on-the-rise-says-gartner

[31]             The 2011-2016 Outlook for Mobile Payment (mobile Money)
Services in Africa, Europe & the Middle East by Icon Group International,
Inc. USD data was converted at 1.3 USD/EUR.

[32]             These services facilitate the use of the consumer’s
online banking platform to initiate immediate internet payments (typically on
the basis of credit transfers) to the accounts of retailers, providing added
value for consumers (easy to use, no possession of a credit card is required)
and merchants (low cost, payment initiation confirmation, payment
reconciliation). Payment initiation services are usually provided by third
party providers (TPPs) i.e. PSPs different than the bank that holds the account
of the consumer.

[33]             2011 Eurobarometer on Retail Financial Services, p. 9

[34]             See Recital 5 of Regulation EU 260/2012 of the European
Parliament and the Council of 14 March 2012 establishing technical and business
requirements for credit transfers and direct debits in euro and amending Regulation
EC 924/2009.

[35]             This includes social costs for households.

[36]             ECB report on the cost of retail payments systems of
September 2012. http://www.ecb.int/pub/pdf/scpops/ecbocp137.pdf.
See in particular table 9. See also Annex 8 of this IA on the effects of
ineffective competition.

[37]             Cf. Table 50 under 9.2.1.1 (option 12 – no policy
change)

[38]             Commission estimates based on figures from Worldpay 21
May 2012 and Payment Cards and Mobile, Nov.-Dec. 2012 p. 16-17e

[39]             Commission estimates

[40]             These estimated figures include
the amounts corresponding to interregional fees, whose average weighted levels
are considerably higher than for intraregional EU transactions, i.e. when the retailer and the cardholder are from the EU. In spite of a very limited share of inter-regional transactions in
the total volume of card payments in the EU, the annual MIF amounts involved
could be estimated at around 0.5 Bio €.

[41]             See: Case COMP/34.579 MasterCard, COMP/36.518
EuroCommerce and COMP/38.580 Commercial Cards, section 7.3.2.1.3. (paras
426-439).

[42]             Commission estimates

[43]             Judgment of the General Court
(Seventh Chamber) of 24 May 2012, case T-111/08 - MasterCard and Others v
Commission.

[44]             Cf. The analysis for option 15 under 9.2.1.4 below

[45]             Case
COMP/34.579, MasterCard, Commission Decision of 19 December 2007. http://ec.europa.eu/competition/antitrust/cases/dec\_docs/34579/34579\_1889\_2.pdf

[46]             http://europa.eu/rapid/press-release\_MEMO-09-143\_en.htm?locale=en

[47]             Case COMP/39.398, Visa MIF, Commission Decision
of 8 December 2010

[48]             OJ C 319 from 20.10.2012, p.4.

[49]             http://europa.eu/rapid/press-release\_IP-12-871\_en.htm?locale=en

[50]             http://europa.eu/rapid/press-release\_IP-13-314\_en.htm?locale=en

[51]              For
a more detailed overview see for instance the - Information paper on competition
enforcement in the payments sector of the banking and payments
subgroup of the European Competition Network
(ECN) of 20.03.2012 at
http://ec.europa.eu/competition/sectors/financial\_services/information\_paper\_payments\_en.pdf

[52]             http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:304:0064:0088:EN:PDF Article 19

[53]             See the executive summary and conclusions section of “Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013)” by London Economics and iff in
association with PaySys

[54]             Payments Committee meetings of 21 March, 9 July and 17
October 2012, accompanied by written consultations.

[55]             Payment Systems Market Expert Group meetings of 27
March and 6 November 2012, accompanied by written consultations

[56]             http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2012-0304&language=EN

[57]             For example, the market driven adoption of the EMV card
standard took some 15 years.  The rates of migration to pan-European SEPA
credit transfer and direct debit were also very disappointing and prompted an
EU regulatory intervention in 2012.

[58]             The source for these figures, the RBR report classifies
co-branded domestic debit cards as either Visa debit or Maestro cards; hence
the market share of Visa and MasterCard is overestimated.

[59]             For example, it took five years between the MasterCard
Decision (2007) and the General Court judgement. The judgement is now being
appealed by MasterCard.

[60]             In view of huge differences in MIF and MSC on national
and cross-border basis, different surcharges could apply to payments with cards
issued nationally and cards issued in other Member States, leading to indirect
discrimination based on nationality.

[61]             Regulation (EU) No 1025/2012 of the European Parliament
and of the Council of 25 October 2012 on European standardisation

[62]             Consulting firm Booz and Company estimates that a
standardised environment would lead to 62% more proximity m-payment
transactions in Western Europe in 2016 (versus a fragmented environment).
http://www.gsma.com/publicpolicy/wp-content/uploads/2012/03/mp12simbasednfc.pdf

[63]             One of the drafts was submitted
by the Polish Senate and is supported by the government. This draft act aims at
regulating card payments in a more comprehensive manner proposing to cap MIFs,
with caps progressively falling to 0,5% by the start of 2016, abolish the HACR
and some aspects of NDR, as well as allowing surcharging (for credit cards
only), while providing for a 3-year exemption for genuinely new card
organizations. A special subcommittee was created to discuss the draft acts and
introduce amendments.

[64]             In the framework of Decree n.
201/2011 (converted into Law n. 214/2011)

[65]             ECB data, 2012

[66]             Cf. figure 45 p.132 of the Report of the retail banking
sector inquiry of 31 January 2007

[67] MIF revenues on
domestic transactions constitute the majority of EU banks income from card
transactions.

[68]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p75

[69]             For example, cases of abusive premium SMS services,
reported in some Member States, would no longer be possible.

[70]             It is also the global regulatory trend, where the MIFs were
subject to Regulation e.g. in Australia and USA.

[71]             Cf. annex 7, problem 3.2.2. Ineffective competition

[72]              See
Communication “A coherent framework for building trust in the Digital Single
Market for e-commerce and online services”, COM(2011) 942 final; p.1

Annexes

Annex 1: Glossary

Term || Definition

Acquirer (card acquirer) || In point-of-sale (POS) transactions, the entity (usually a credit institution) to which the acceptor (usually a merchant) transmits the information necessary in order to process the card payment. In automated teller machine (ATM) transactions, the entity (usually a credit institution) which makes banknotes available to the cardholder (whether directly or via the use of third-party providers).

Authorisation || The consent given by a participant (or a third party acting on behalf of that participant) in order to transfer funds or securities.

Automated teller machine (ATM) || An electromechanical device that allows authorised users, typically using machine-readable plastic cards, to withdraw cash from their accounts and/or access other services (allowing them, for example, to make balance enquiries, transfer funds or deposit money).

Card (payment card) || A device that can be used by its holder to pay for goods and services or to withdraw money.

Cardholder || A person to whom a payment card is issued and who is authorised to use that card.

Card issuer || A financial institution that makes payment cards available to cardholders, authorises transactions at point-of-sale (POS) terminals or automated teller machines (ATMs) and guarantees payment to the acquirer for transactions that are in conformity with the rules of the relevant scheme.

Card scheme || A technical and commercial arrangement set up to serve one or more brands of card which provides the organisational, legal and operational framework necessary for the functioning of the services marketed by those brands.

Cheque || A written order from one party (the drawer) to another (the drawee; normally a credit institution) requiring the drawee to pay a specified sum on demand to the drawer or a third party specified by the drawer.

Consumer || Any natural person who requests and makes use of a payment account for purposes other than his trade, business, craft or profession.

Credit card || A card that enables cardholders to make purchases and/or withdraw cash up to a prearranged credit limit. The credit granted may be either settled in full by the end of a specified period, or settled in part, with the balance taken as extended credit (on which interest is usually charged).

Credit institution/ bank || A credit institution is a company duly authorised to carry out banking transactions on a regular basis (i.e. to receive deposits from the public, carry out credit transactions, make funds available and manage means of payment).

Credit transfer || A payment service for crediting a payee’s payment account, where a payment transaction or a series of payment transactions is initiated by the payer on the basis of the consent given to his payment service provider.

Cross-border payment || A payment where the financial institutions of the payer and the payee are located in different countries.

Debit card || A payment card not allowing payment transactions which exceed the balance of the account.

Direct debit || Direct debit is a payment service that allows a payee (e.g. an electricity company or a mobile phone operator) to instruct its bank to collect (to debit) varying amounts directly from a customer's account. The transaction is initiated by the payee (the company in the example provided) on the basis of the payer's (consumer's) consent given to the payee or to the payer's own service provider.

Electronic money || A monetary value, represented by a claim on the issuer, which is: 1) stored on an electronic device (e.g. a card or computer); 2) issued upon receipt of funds in an amount not less in value than the monetary value received; and 3) accepted as a means of payment by undertakings other than the issuer.

Electronic money institution || A term used in EU legislation to designate credit institutions which are governed by a simplified regulatory regime because their activity is limited to the issuance of electronic money and the provision of financial and non-financial services closely related to the issuance of electronic money.

EMV || An acronym describing the set of specifications developed by the consortium EMVCo, which is promoting the global standardisation of electronic financial transactions – in particular the global interoperability of chip cards. “EMV” stands for “Europay, MasterCard and Visa”.

Interchange fee || A transaction fee payable between the payment service providers involved in a transaction.

Four-party card scheme || A card scheme where the stakeholders involved are: 1) the issuer; 2) the acquirer; 3) the cardholder; and 4) the card acceptor. By contrast, in a three-party card scheme, the issuer and the acquirer are always the same entity.

Governance || Procedures through which the objectives of a legal entity are set, the means of achieving them are identified and the performance of the entity is measured. This refers, in particular, to the set of relationships between the entity’s owners, board of directors, management, users and regulators, as well as other stakeholders that influence these outcomes.

Interoperability || The set of arrangements/procedures that allows participants in different systems to conduct and settle payments or securities transactions across systems while continuing to operate only in their own respective systems.

Means of payment || Assets or claims on assets that are accepted by a payee as discharging a payment obligation on the part of a payer vis-à-vis the payee.

Merchant Service Charge || A fee paid by the acceptor/merchant to the acquirer.

Mobile payment || A payment where a mobile device (e.g. a phone or personal digital assistant (PDA)) is used at least for the initiation of the payment order and potentially also for the transfer of funds.

Money remitter || A payment service provider that accepts funds from a payer for the purpose of making them available to a payee, without necessarily maintaining an account relationship with the payer or payee.

Payer || A natural or legal person who holds a payment account and allows a payment order from that payment account, or, where there is no payment account, a natural or legal person who gives a payment order.

Payee || A natural or legal person who is intended recipient of funds which have been the subject of a payment transaction.

Payment Initiation Services (PIS) || These services facilitate the use of the consumer’s online banking platform to initiate immediate internet payments (typically on the basis of credit transfers) to the accounts of retailers, providing added value for consumers (easy to use, no possession of a credit card is required) and merchants (low cost, payment initiation confirmation, payment reconciliation).

Payment institution || A legal person that has been granted authorisation, in accordance with Article 10 of the Directive 2007/64/EC on payment services in the internal market, to provide and execute payment services throughout the Union.

Payment instrument || A tool or a set of procedures enabling the transfer of funds from a payer to a payee. The payer and the payee can be one and the same person.

Payment scheme || A set of interbank rules, practices and standards necessary for the functioning of payment services.

Payment service provider || Any of the categories referred to in Article 1(1) of Directive 2007/64/EC and the legal and natural persons referred to in Article 26 of that Directive, but excludes those institutions listed in Article 2 of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions benefiting from a Member State waiver exercised under Article 2(3) of Directive 2007/64/EC, to which belong: – credit institutions/banks; – payment institutions, e.g. GSM companies, bill payers, money remittance institutions, etc.; – electronic money institutions; – post office giro institutions; – other payment services providers, e.g. public authorities or national central banks (in some cases).

Payment service user || A natural or legal person making use of a payment service in the capacity of either payer or payee, or both.

Payment transaction || An act, initiated by the payer or by the payee of transferring funds, irrespective of any underlying obligations between the payer and the payee.

Payment system || It refers to the set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area.

PIN (Personal Identification Number) || A personal and confidential numerical code which the user of a payment instrument may need to use in order to verify his/her identity. In electronic transactions, this is seen as the equivalent of a signature.

Pre-Paid Card || A card on which a monetary value can be loaded in advance and stored either on the card itself or on a dedicated account on a computer. Those funds can then be used by the holder to make purchases.

Refund || In the field of direct debits, a claim made by a debtor for the reimbursement of debits effected from its account (with or without a specific reason being indicated by that debtor).

Remote payment || A payment made from a distance, without the payer and payee being present at the same physical location.

Retail payment || These payments are typically made outside of the financial markets and are both initiated by and made to individuals and non-financial institutions.

Reverse competition || In the context of card payments, reverse competition means that card schemes compete with each other by offering higher MIF revenues to banks that issue their cards. This results in higher fees for card payments in general, which are passed on merchants and, ultimately, consumers (rather than lower fees which would be the case under normal competition). As a result there is a welfare loss for merchants and consumers and a restricted market entry for new players, as ever increasing levels of MIFs are considered as a minimum threshold by banks that issue cards.

Single Euro Payments Area || A process initiated by European banks and supported, inter alia, by the Eurosystem and the European Commission with a view to integrating retail payment systems and transforming the euro area into a true domestic market for the payment industry.

Third Party Provider (of payment services) || Payment initiation services (see above), and account information services are usually provided by third party providers (TPPs) i.e. providers different than the bank that holds the account of the consumer.

Three-party card scheme || A card scheme involving the following stakeholders: 1) the card scheme itself, which acts as issuer and acquirer; 2) the cardholder; and 3) the accepting party. This contrasts with a four-party card scheme, where the issuer and the acquirer are separate entities and are separate from the card scheme itself.

Value date || The date on which it is agreed to place a payment or transfer at the disposal of the receiving user. The value date is also used as a point of reference for the calculation of interest on the funds held on an account.

Annex 2: Table of Abbreviations

AML || Anti-Money Laundering

ATM || Automatic Teller Machine

CEN || Committee for European Standardisation

CRD || Consumer Rights Directive

E-payments || Internet payments

EBA || European Banking Authority

ECB || European Central Bank

EEA || European Economic Area

ESO || European Standardisation Organisation

ETSI || European Telecommunications Standards Institute

GDP || Gross Domestic Product

HACR || Honour All Card Rule

IF || Interchange Fee

IT || Information Technology

M-payments || Mobile payments

MIF || Multilateral Interchange Fee

MSC || Merchant Service Charges

NDR || Non-Discrimination Rule

NFC || Near Field Communication

PI || Payment Institution

PSD || Payment Services Directive

POS || Point of Sale

PSP || Payment Services Provider

PSU || Payment Services User

SCT || SEPA Credit Transfer

SDD || SEPA Direct Debit

SEPA || Single Euro Payments Area

TPP || Third Party Provider

Annex 3: Main findings of the consultations on the Green
Paper and the PSD review

The
extensive consultation processes, carried out by the Commission, have allowed
for the identification of a number of key messages from all stakeholder
categories (supply side, demand side and other participants of the payments
market, including public authorities), which are summarised below.

First,
in response to the Green Paper, the most significant points included:

Consistent
cross-stakeholder support for the legal clarity concerning MIFs for
card payments and for higher transparency of rules and conditions concerning
MIFs on the market.

Wide support
for facilitating and removing all potential obstacles to cross-border acquiring
of card payments by demand side, public authorities and many of the
supply side stakeholders.

Large
majority of stakeholders across all categories considered it important to
extend the regulatory framework and adequate supervision to service providers
offering online-banking based payment initiation services in the market and, in
the wider context, to clarify the issue of access of third party providers to
the information on the availability of funds in the payment accounts – with the
consent of the payment service user.

Clear
majority of stakeholders across most categories expressed the view that
surcharging should be banned or else fully harmonised across EU and limited to
the actual cost borne by the merchant. If surcharging was retained in the
future, it should become possible on all payment means, including cash or
cheques, according to many stakeholders from supply side and public
authorities.

As regards
mobile payments, most stakeholders from all groups believed it important to
establish technically neutral and open common standards as soon as possible.
For internet payments, market participants acknowledged that, based on the
common platform of the internet and its established protocols, technical
standardisation does not have to start from scratch. However, the risks
inherent to the use of the internet call for common security requirements for
online-banking based payment initiation services, which have to be developed.

A
number of important findings follow also the consultations and studies
undertaken in the process of the review of PSD and of Regulation 924/2009,
including during the meetings of the Commission’s advisory committees (PC,
PSMEG). Some findings mirror and reinforce the messages gathered in the
consultation on the Green Paper, most notably the issue of access to the
information on payment accounts and the feedback on surcharges. Others are
related to the existing regulatory provisions in the PSD.

The
most important points include:

Clearly
expressed need for changes in the scope of the PSD (including both the
geographical scope and the so-called negative scope – limitations to the
exclusions from the application of the directive) by many stakeholders from all
categories,

Calls for
further harmonisation of the prudential requirements and of supervisory
practices, in particular on passporting rules (including the use of agents) for
payment institutions (PIs), expressed by both authorities and payment service
providers,

Need for
further precision and harmonisation as regards certain rights and obligations
of users and providers, in particular on surcharging and rebating practices,
liability for unauthorised payment transactions and on refund rights, expressed
by authorities and demand side of the market,

Need to
provide a coordinated and consistent legal framework for payments and not to
concentrate on isolated issues, was expressed by all stakeholder categories.

The
table below summarises the position of different stakeholder categories on the
key aspects discussed in this impact assessment.

Area || Stakeholders

Supply side: (1) banks (2) card schemes (3) technical payment providers (4) internet and mobile payment providers (5) other PSPs || Demand side: (6) merchants/retailers (7) consumers || Other market participants: (8) public authorities  (9) consultants, academics, think-tanks

Governance and standardisation issues

Establish a formal governance body (European Retail Payments Council) || Divided  Some support for clear governance leadership by (1) (2) (3)(4) and (5) Preference for self-regulation rather than a formal governance body by majority of (1) || Strong support by (6) and (7) to involve end-users and give a leading role to the Commission/ECB || Support for clear governance structure and greater role of the end –users by (8)

Standardisation of card payments by payments governance framework (European Retail Payments Council) using existing industry-led projects || Divided Support for industry-driven standardisation by (1) and (2) Support for greater involvement of end-users in standardisation by some (2)(3)(4) and (5) Support for better implementation and enforcement of existing standards by some (3)(4) and (5) || Strong support to fully involve end-users in the card standardisation process by (6) and (7) Strong support for better implementation and enforcement of existing standards by (6) and (7) || Strong support to fully involve end-users in the card standardisation process by (8) Strong support for better implementation and enforcement of existing standards by (8) and (9)

Standardisation of mobile payments by European Standardisation Organisations (ESOs) || Divided Preference for no intervention by ESOs  and natural market development by most (1) and (2) Support to greater involvement of ESOs by some (3)(4) and (5) || General support to greater involvement of ESOs by (6) || Neutral/ No views expressed

Interchange Fees (IFs)

Regulation of cross-border IF (first phase)  N.B the issue was discussed together with cross border acquiring || Divided Cross-border IF regulation opposed by majority of (1) and (2), IF harmonisation across borders should be achieved by natural market development and voluntary integration Cross-border IF regulation supported by most (4) and (5) || Cross-border IF regulation supported as an ancillary solution by some (6) Clear preference for pan-European regulation based on maximum common caps or a complete ban on IF supported by a great majority of (6) General support for pan-European harmonisation of IF levels by (7) || Cross-border IF regulation supported by some (8), no clear views expressed by others General support for pan-European harmonisation of IF levels by (8)

Maximum caps on IF for debit and credit cards , domestic and cross-border (second phase) || Regulation of IF levels generally opposed by (1)(2)(4) and (5). || Regulation of IF on the basis of a common EU-wide cap supported by (6) and most of (7). Both (6) and (7) call for basic card payment functionality or debit card without IF. || Divided Support of many (8), in particular competition authorities for IF regulation/limitation of MIF. Support by some (8) to limit IF taking into account national criteria. Support by some (8) to ban IF for some payment instruments (debit cards, internet or mobile payments) Preference for no IF regulation and competition enforcement only by some (8)

Exemption of commercial cards and third party card schemes from IF regulation N.B. the issue was discussed without taking into account the IF flanking measures discussed in this impact assessment || Divided Support for the same IF rules for three and four party schemes by most (1) and (2) Different rules for three party schemes supported by few (1) and (2), including three party card schemes Some (1) and all (2) support different rules for commercial cards. Some other (1) opposed to make the distinction between consumer and commercial cards. || Support for the same rules for three and four party schemes by (6) and (7). Support for the same treatment of consumer and commercial cards by (6) and (7) || Support for the same rules for three and four party schemes by (8) Support for the same treatment of consumer and commercial cards by (8)

IFs - flanking measures

Cross-border acquiring || Preference for market – driven initiatives over regulation. Support for the removal of obstacles to cross-border acquiring of technical or standardisation nature by the majority of (1) and (2) Some (1) and (2) claim that no obstacles to cross-border acquiring exist. Domestic card schemes and three-party schemes indicate that rules of four-party schemes are a significant obstacle to cross-border acquiring. In contrast, (4) and (5) claim that both international and domestic scheme rules make cross-border acquiring very difficult. || Strong support to facilitate the cross-border acquiring through the regulatory intervention by (6) and (7). Both (6) and (7) identify numerous obstacles to cross-border acquiring, in particular the rules of both international and domestic card schemes. || General support for cross-border acquiring by (8). Some (8) identified card scheme rules (international and national) as the main difficulty, others indicated problems of technical and standardisation nature. Neutral/no expressed opinions on the regulatory approach

Prohibition of Honour All Cards Rule || Divided Most (1) and (2) opposed to the abolishing of Honour All Card Rule Some (2) and most (4) and (5) in favour of the prohibition || Most (6) in favour of abolishing Honour All Car Rule Most (7) cautious about the prohibition. They support the principle but are afraid of the negative impact on the choice of payment methods if no other measures are taken || Support for the prohibition by most (8), including all competent authorities.

Ban on surcharging for IF-regulated instruments N.B: the issue was discussed separately from the IF regulation || Prohibition of surcharging supported by most (1)(4) and (5) A limited number of (1)(4) and (5) in favour of surcharging as a steering mechanism || Surcharging discussion seen as secondary to the decision on IF. Strong support of (7) to the prohibition of surcharging. Divided opinions among (6) – some considered as a useful tool for steering, some considered as damaging for relations with consumers || Divided The views of (8) reflected national decisions on surcharging, with some authorities supporting the idea, others rejecting it, and some taking a neutral stance

Scope of the PSD

Allow access to the information on the availability of funds by TPPs provided data protection requirements are met || Divided Most (1) and (2) opposed to granting access. At the same time, many (1) would accept access to information by TPPs if contracts between banks servicing the accounts and TPPs were signed and a suitable financial compensation was offered. Most (4) and (5) in favour of granting access through the regulatory intervention, including on security and confidentiality aspects of the access. || Both (6) and (7) in favour of granting access preferably through the EU-wide legal framework. Focus of (7) on obligation of banks servicing the account to grant access if consumer consent is given. || Most (8) and (9) in favour of extending the scope of the PSD to TPPs and of granting them access to the information on the availability of funds. Some (8) in favour of unconditional access if criteria set in the legislation are fulfilled, some other see the role for contracts between banks and TPPs.

Define rights and obligations of TPPs || Strong support for defining rights and obligations of TPPs, including security and confidentiality of data in the legislation by (1)(4) and (5). Many (1)(4) and (5) call also for clear definition of liabilities between bank and TPP || Support for defining rights and obligations of TPPs by (6) and (7). Focus of (7) to grant TPPs access only to the information that is strictly necessary to perform the transaction. || Strong support for defining rights and obligations of TPPs, including security and confidentiality of data in the legislation by (8) Many (8) call also for clear definition of liabilities between bank and TPP.

Update and clarify the scope of exclusions (commercial agents, limited networks) || Most (1)(4) and (5) support the clarification of scope for commercial agents exclusion Many (1)(4) and (5) support the clarification and the narrowing of scope for limited network exclusion. Some call for its deletion, though. || Most (7) are in favour of deleting the commercial agent exclusion. (7) are more divided on limited network exclusion, some calling for its deletion, some supporting the clarification and the narrowing of scope. || Support of (8) to clarify the scope of commercial agent exclusion Most (8) support the clarification and narrowing of limited network exclusion

Delete the exclusions (independent ATMs, telecom exemption) || Most (1)(4) and (5) support the deletion of telecom exclusion. The deletion is opposed by telecom operators. Very few mixed opinions expressed on ATM exemption; however independent ATM providers are in favour of the deletion.  || Support of (7) for the deletion of telecom exclusion. Support for the deletion of independent ATM exclusion by (7); clear concern about pricing of ATM withdrawals if independent ATM providers remain unregulated. || A clear need for change of the current text expressed by (8) Some (8) support the deletion, indicating that the narrowly defined telecom related payments will still enjoy the limited network exemption. Some other (8) argue for a deep revision and narrowing of the scope of the exemption. Very few, mixed opinions expressed on ATM exemption

Extension of certain PSD rules to one-leg transactions and to all currencies || Most (1) opposed to the extension of any PSD rules to one-leg and all currencies transactions. Some (4) and (5) in favour of the extension. || Support of (7) for the extension of PSD rules to one-leg and all currencies transactions. || Support of (8) for the extension of PSD rules to one-leg and all currencies transactions. N.B. 13 Member States already apply some or all PSD rules to one-leg transactions and, to some extent (information obligations) to all currency transactions.

N.B. Some
stakeholder groups expressed their opinions only on selected topics

More
detailed information on the position of particular stakeholder groups may be
found in the Green Paper feedback statement[1]
and in the minutes from the meetings of the Commission advisory committees.[2]

Annex 4: Background on market actors and payment methods

Main
actors in the market

The
demand side of the market is basically comprised by two categories of Payment
Service Users (PSUs). The typical purchasing transaction for the payment
methods discussed here consists of a consumer making a payment and a merchant
accepting it. Merchants can be distinguished between those having only a
physical presence (bricks-and-mortar merchants), the ones exclusively
operating on the internet (web merchants) and the growing number of
merchants combining both approaches.

On the
supply side of the market, there are a number of different classes of Payment
Service Providers (PSPs). Retail banks historically dominate the
payments market. However, for the payments methods discussed here, many
intermediaries or new players have emerged.

Card
payments are enabled through card schemes at domestic and cross-border
level. A distinction can be made between debit card schemes and credit
card schemes. In many cases, payment cards are provided to the consumer by
the issuing bank. On the acceptance side, merchants usually have one or
several acquiring bank(s). More details on the card market are provided
in Annex 5.

Internet
payments are currently still most often performed with payment cards. However,
there are different types of dedicated e-payment providers as well as wallet
solutions, combining different payment methods, such as cards and pre-paid
accounts. Internet payments can also take the form of credit transfers
based on the consumer's online banking platform, for example through bank
controlled e-payment schemes or so-called third-party payment initiation
services.

The
situation for mobile payments is similar as the one for internet payments, with
the addition of some other payment-relevant key market actors, in particular Mobile
Network Operators (MNOs) and handset manufacturers.

Independent
of the payment methods above, the PSD has established non-bank Payment
Institutions (PIs) which can be licensed at European level under certain
prudential requirements. Generally, the technical execution of payments is
often, but not always, performed by dedicated payment processors.

Illustration
of card, internet and mobile payments

Card
payments can be made with debit of credit cards. Debit
card payments imply a "near-time" deduction of the funds for the
individual transaction from the cardholder's account. Deferred debit or
credit card transactions are aggregated for some period of time and settled
on the cardholder account at regular intervals, for example monthly. When cards
are used for payment transactions at the point-of-sale (POS) this usually
implies the existence of a payment or card terminal. Cards, especially credit
cards, are also often used for purchasing transactions on the internet in which
case the cardholder needs to authenticate and validate the payment online.

Internet
payments take place in the context of e-commerce, i.e.
the purchasing of a good or service at a web merchant. In many cases, these
payments are actually card payments but there are other "non-card"
internet payment methods. Examples include payments based on the online-banking
facilities of the consumer, in which case they mostly take the form of credit
transfers or payments on the basis of pre-funded accounts (E-money). So
called internet wallet solutions combine several of the above mentioned
payment methods.

Mobile payments are
initiated and validated with the mobile phone of the consumer. Such
payments can, for example, be made by using the web browser of the mobile phone
for making the payment in which case they would also qualify as an internet
payment. But many other forms of mobile payments exist. These can be remote
payments, for example through the consumer sending a text message to a
pre-determined phone number upon which a payment is initiated. Or they take
place as so-called proximity payments, requiring some form of interaction
between the phone and a tag or terminal at the point-of-sale, e.g. through
so-called Near Field Communication (NFC) technology, or bar / QR code scanning.
Next to purchasing transactions in shops or supermarkets that are equipped with
the necessary technology, typical use cases of mobile payments currently
include public transport or parking spaces.

The
above classification implies that the line between card, internet and mobile
payments is often blurred. A transaction which is initiated on a mobile phone
by using its web browser for making a card-based payment in principle qualifies
as a card, internet and mobile payment at the same time. Nevertheless, card,
internet and mobile payments can each have specific characteristics in the
context of the problems described further below.

Annex 5: General background on the payment card market (including
MIF theory and competition proceedings)

Payment
card networks operate in a two-sided market, under which two sets of agents
(consumers + issuers / retailers + acquirers) interact through an intermediary
or platform. The decisions of each set of agents affect the outcomes of the
other set of agents.

Four-
vs. three-party schemes

The
most common type of card scheme is the so-called 'four party' or 'open' scheme
(for example MasterCard and Visa), under which usually a collectively agreed
inter-bank fee or Multilateral Interchange Fee (MIF) is in place between the
acquiring leg (i.e. the PSP of the merchant) and the issuing leg (i.e. the PSP
of the cardholder) of the payment.

Interchange
fees for such schemes are retained by the issuing PSP on transactions carried
out with cards it has issued. The issuing PSP pays to the acquiring PSP the
amount of the transaction after deduction of the MIF. The MIF along with other
fees (a scheme fee and a fee for the acquiring PSP) is passed on by the
acquiring PSP to the merchant through the Merchant Service Charge (MSC). Hence,
when a customer uses a payment card to buy from a merchant, the acquiring PSP
pays the merchant the sales price after deduction of the MSC. Merchants have
difficulty negotiating MSCs below the level of the MIF. MIFs thus act as a
collective 'floor' in MSCs. The interchange fee effectively determines to a
large extent (in general 50 % or more) the price charged by PSPs to merchants
for card acceptance. It restricts price competition between acquiring PSPs at
the expense of merchants and subsequent purchasers.

Figure
7 -
Illustration of the operation of a four-party scheme, including the transfer of
the IF

A
second type of card scheme model is the so-called 'three party' or
'proprietary' scheme (e.g. American Express, Diners Club). In
the case of a three-party scheme, only one PSP is involved, being at the same
time the issuer and the acquirer. However, in some cases three party schemes
issue licences to several PSPs for the issuing of cards and the acquiring of
transactions. In this case the scheme is not a ‘pure’ three-party scheme but
resembles a four-party system. ‘Pure’ three-party schemes do not have a MIF
explicitly agreed between PSPs. There are only the fees paid by the cardholder
(annual fees, fees per transaction, etc.) and Merchant Services Charges paid by
the retailer. Nevertheless, the scheme may use the collected fees to subsidise
one ‘leg’ or the other (i.e. the merchant or the cardholder), resulting in an
implicit MIF. Even if three party schemes use an issuing and an acquiring PSP
(Diners Club model), there is no direct financial link (MIF) between the two
PSPs.

These
schemes typically operate in certain sectors that attract a large number of
corporate clients (e.g. travel or leisure). Here the scheme itself acts as an
issuer and acquirer without the explicit involvement of banks in this function.
Three party schemes are often more expensive to accept for merchants. Even
though three party schemes do not have explicit IFs, they do charge
proportionately higher fees to merchants than to cardholders. It can therefore
be said that these schemes have an implicit IF, as one side is 'overcharged' for
the service.

Figure
8 - Basic operation of a three-party scheme

Generally,
the justification for charging a MIF has been to stimulate the card issuing
business by increasing their revenues from card payments. Issuing banks often
use part of the revenues from these inter-bank fees to incentivise the use of
payment cards through bonuses (air miles, etc.). In principle, the higher the
inter-bank fees the more card use is stimulated by issuing banks. Cardholders
are therefore encouraged by bonuses and other rewards to use cards that
generate higher fees.

On
the cardholder side, typically the direct cost of using the payment instrument
is often not apparent unless merchants are ready to convey the information
about the costs weighing on them to consumers, for instance through
differentiated price signals (steering). Merchants tend to refrain from giving
such signals for fear of losing business and prefer to pass on to all their
customers the costs of accepting card payments through the pricing of their
goods and services. Also, merchants generally are reluctant to turn down
payment instruments which are costly to them (and ultimately to their
subsequent purchasers) for fear of losing business.

The
bank of the cardholder (the issuer) typically charges an annual fee for holding
an account at the bank. This annual fee is a package (blended) fee covering all
sorts of costs related to the account, often including debit or credit card
issuing and usage. Sometimes banks also charge additional dedicated annual fees
for cards.

Debit
vs. credit and corporate vs. consumer cards

Debit
cards, when used at a Point of Sale (POS) withdraw money directly from a
cardholder's current account provided there are sufficient funds in the account
or an overdraft facility is granted by the issuing PSP. Debit cards are the
most widely used type of payment card for consumers worldwide. Credit cards or
'deferred debit' cards do not immediately withdraw funds from the current
account, but charge the cardholder for all the transactions at a fixed date,
usually once a month. Credit cards may also have a wider credit facility
attached to them.

Corporate
or business cards are issued to corporations or small businesses and are
intended for 'business related transactions' whereas consumer cards are intended
for general use. In practise the difference is not always clear.

Three-party
schemes mostly issue credit cards both for corporate clients/small business
owners and for consumers. These credit cards are subdivided into a number of
different categories that offer certain additional 'benefits' to the users. On
the merchant side, the cost of acceptance differs between the various 'brands'
within the same scheme. Card brands offering more cardholder benefits (e.g. air
miles, (cash) rebates, and member points), are more expensive to accept on the
merchant side.

Four-party
schemes in addition to issuing credit cards, also issue debit cards. Within the
MasterCard and Visa schemes, the number of sub-brands is virtually limitless.
Just like three party schemes, the cards offering higher 'benefits' to
cardholders are more costly for merchants to accept.

Transparency
issues

Within
the scheme rules that apply to all members (issuers/acquirers), there are a
number of rules related to the IF that restrict the ability for merchants and
consumers to identify the true cost paired with a specific payment instrument.

Under
the Honour All Card Rule (HACR), imposed by Visa and MasterCard schemes,
merchants are obliged to accept all cards within the same brand, from the
cheapest credit card to the most expensive, commercial or premium credit card[3].

As
a result of blending only an average fee for card payments is charged to
merchants, without information on the real  cost of accepting a particular card
category.

In
addition to the HACR, card schemes impose a Non-Discrimination Rule (NDR).
Under the Non-Discrimination Rule merchants are prohibited from directing
consumers towards the use of the payment instrument they prefer through
surcharging, offering rebates or other forms of steering. Consequently,
merchants are unable to charge consumers more for high-cost payment cards such
as the premium cards and therefore have different costs but a single price and 
pass on these costs to all consumers through higher prices for the goods and/or
services they offer.

High
MIFs also form barriers to entry for cheaper and more efficient schemes – not
only card schemes but also other means of payment – that offer lower inter-bank
fees and have difficulty convincing issuing banks. In the SEPA context, MIF is
the main factor causing issuing banks to stop issuing cards from low MIF or no
MIF national schemes and prefer issuing cards from the two international
schemes MasterCard and Visa.

Payment
card market in figures[4]

In
2011, 727 million payment cards were issued in the EU, 63% of which were debit
cards. This figure implies on average 1.45 payment cards per citizen (0.9
debit; 0.54 credit) – that is including children. In the same year, the value
of payment card transactions exceeded 1.9 trillion EUR (62% of which was
through debit cards). France and the UK alone was responsible for more than 50%
of the EU card transaction value, the share of the top 7 Member States in this
regard (France, Germany, Italy, Netherlands, Spain, Sweden, the Netherlands)
was above 82% of the total. The value of payment card transactions in the EU
increases continuously, not only in absolute terms (more than doubled in the
last decade), but also as a percentage of the EU GDP. In 2011 the total value
of payment card transactions amounted to 15.2% of the EU GDP, as compared to
9.5% in 2001. In 2011 consumers could pay with their payment cards at close to
9 million POS terminals in the EU.

The
EU payment card markets overall are dominated by the two major international
four-party payment card scheme, Visa and MasterCard. Their market share in
issuing in 2008 was 41.6% (Visa) and 48.9% (MasterCard) respectively[5].
Other international payment card schemes were far behind the two market
leaders; the following American Express had a mere 1.6% share, while Diners
stood at 0.3%. Certain national debit card schemes still have significant
market shares in particular countries (examples are France, Belgium, Germany,
the Netherlands, Italy, Denmark), but not in others, and lately there is a
clear trend of replacing national payment card schemes by Visa and MasterCard
(recent examples are the UK, the Netherlands, Austria, Finland Ireland) in the
SEPA process.

The
merchant service charges (MSC) paid by the retailers to acquirers for payment
card acceptance adds up to an amount of app. 13 billion EUR annually in the EU[6].
Close to 70 % of these charges, app. 9 billion EUR is transferred to issuers as
MIFs, although a large share of this corresponds to credit cards, and expensive
ones in particular (e.g. premium). MIF levels show significant variation, their
weighted average levels range between 0.1-0.2% to 1.4-1.5% among various Member
States[7].
The country average MSC rates naturally follow the variations in MIFs and range
between 0.3 - 0.4 % up to 1.9 %. MSC rates also vary between merchants within
the same Member State. Smaller merchants may end up paying average MSCs of up
to 3–3.5% of the transaction value.

Table 27:
Card payments in the EU (2011)

Member State || Number of payment cards issued per capita || Number of card transactions per capita[8] || Average value of card transaction per card (EUR) || Number of POS transactions per card[9] || Annual value of POS transactions per card (EUR)

Belgium || 1.82 || 106 || 55 || 58 || 3 164

Germany || 1.60 || 37 || 63 || 23 || 1 438

Estonia || 1.33 || 148 || 16 || 111 || 1 778

Ireland || 1.32 || 75 || 70 || 57 || 3 990

Greece || 1.22 || 6 || 84 || 5 || 418

Spain || 1.50 || 48 || 44 || 32 || 1 419

France || 1.27 || 121 || 50 || 95 || 4 742

Italy || 1.11 || 29 || 82 || 26 || 2 127

Cyprus || 1.52 || 43 || 83 || 28 || 2 314

Luxembourg || 3.27 || 124 || 74 || 38 || 2 810

Malta || 1.74 || 33 || 74 || 19 || 1 406

Netherlands || 1.82 || 146 || 40 || 80 || 3 160

Austria || 1.31 || 39 || 50 || 30 || 1 493

Portugal || 1.89 || 117 || 45 || 62 || 2 774

Slovenia || 1.60 || 58 || 37 || 36 || 1 336

Slovakia || 0.98 || 21 || 37 || 21 || 772

Finland || 1.45 || 204 || 34 || 141 || 4 731

Euro area sub-total || 1.42 || 65 || 52 || 46 || 2 412

Bulgaria || 1.07 || 4 || 48 || 4 || 193

Czech Republic || 0.93 || 25 || 41 || 27 || 1 115

Denmark || 1.36 || 181 || 45 || 133 || 6 008

Latvia || 1.13 || 51 || 20 || 45 || 914

Lithuania || 1.21 || 34 || 18 || 28 || 502

Hungary || 0.89 || 24 || 46 || 27 || 1 247

Poland || 0.84 || 27 || 25 || 32 || 799

Romania || 0.63 || 6 || 37 || 9 || 335

Sweden || 2.15 || 185 || 36 || 86 || 3 119

United Kingdom || 2.35 || 157 || 59 || 67 || 3 929

Total EU27 || 1.44 || 72 || 52 || 50 || 2 596

Source: ECB Payment Statistics, September 2012

Brief overview of the recent economic
litterature on interchange fees[10]

Over the last decade, several
contributions to the economic literature on payment cards have aimed at improving
the analytical framework, to understand better the impact of indirect network
externalities and market power on the interchange fee under different
hypotheses in relation to issuing and acquiring markets and merchants' and
cardholders' behaviours . This has fostered an intense debate among economists
not only on the potential impact of an antitrust intervention but also on the
right way to intervene, if any. As a result, today regulation based on issuing
banks' costs has been put into question[11].

The starting point was
Baxter's[12] analysis of payment cards and the
welfare effects of collectively determined interchange fees which included
indirect network externalities. The interchange fee is seen as necessary to
balance the demand of consumers and merchants for card services and the costs
among issuers and acquirers as the total demand is determined by consumer and
merchant demands jointly and by the total cost for card services which includes
both issuer and acquirer costs. As a consequence, the equilibrium price and
quantity of card services occur when the joint demand for card services
equals the joint cost of providing those services. Because acquirer and issuer
costs and consumer and merchant demands are not usually symmetric, the
interchange fee that balances them will most likely not be zero. Furthermore,
given that banks in card schemes are competitive, they cannot influence the
price structure but only the number of transactions. As a result, banks set the
MIF that maximizes output by letting users who value the card service more pay
more. Baxter thus finds that banks set a MIF at the level that maximizes output
and such privately set fee maximizes both total and consumer welfare.

The analysis however relies on
three strong assumptions. First, it is assumed that issuers and acquirers are
perfectly competitive, i.e. they have no market power, and make no profit
respectively in the issuing and acquiring market. As a result, card schemes are
indifferent towards the level of interchange fees and the structure of the
cardholder fee and merchant service charge does not matter. As in reality the
structure of the issuing and acquiring markets is different, Baxter's result
cannot be used under a positive analysis of interchange fees. The same is true
for the second assumption under which merchants do not accept cards for any
strategic purpose (in particular, they do not accept cards to attract customers
from rival merchants who do not accept cards). In other words, Baxter neglects
the business stealing motive for accepting cards, which can have an important
bearing on the level of both the privately optimal and the socially optimal
interchange fees. Thirdly, in working out the interchange fee implied by his
analysis, implicitly it is assumed there is no variation in the benefits that
merchants get from accepting cards. This leaves unanswered how interchange fees
should be set given heterogeneity across merchants.

Only during the last decade
economic doctrine has seen substantial changes, with Baxter's strong hypotheses
being progressively relaxed to guarantee a more reliable and refined
representation of the underlying dynamics of the payment market, and especially
Rochet and Tirole (2002)[13]  providing the basis for the current
welfare analysis on interchange fees.

By relaxing Baxter's
assumptions on perfect competition in the acquiring and issuing markets and by
including competition between merchants, a more rigorous and comprehensive
framework for a normative welfare analysis could be provided. Rochet and Tirole
(2002) find that the privately set interchange fee either is socially optimal
(but only total welfare has been analysed) or it is too high leading to an
overprovision of card services. The strategic nature of merchants who are
willing to pay more for card services as long as they anticipate that consumers
are likely to choose among shops on the basis of card acceptance is central to
this result. In particular, merchants are then willing to accept cards gain a
competitive edge, even if by doing so they support a monetary loss. Card
systems can exploit such merchants' eagerness leading in equilibrium to
overprovision of cards. On the other hand, issuers have market power thus the
exploitation of merchants' eagerness can also offset the underprovision of cards
by incentivizing issuers to issue more. This can lead to privately set
interchange that maximizes social welfare.

The paper also analyses the
case when the no-surcharge rule is lifted and merchants can price differently
according to the means of payment selected by the purchaser. In this case, the
interchange fee no longer affects the level of card services, the merchant's
price for cardholders is increased and that for non-cardholders is decreased,
and there is a lower diffusion of card services. The welfare consequences of
this depend on whether there is overprovision or underprovision of card
services under the no-surcharge rule, a question that is ultimately linked to
the degree of market power on the issuing side.

Using this framework, the
economic literature has developed in different directions bringing constantly
new results. Non-exhaustively, it is worth mentioning Wright (2004)[14], Rochet and Tirole (2011)[15] and Guthrie and Wright (2007)[16].

Wright (2004) introduces
heterogeneity among merchants by way of establishing different industries with
different relative transactional benefits across means of payments. The paper
illustrates that the privately set interchange fee can be higher or lower than
the socially optimal one, and can involve more or fewer card transactions. In
the paper, two sources of divergence between the privately set interchange fee
and the social optimum are investigated. On one hand, privately set fees can be
too high if merchant fees increase with interchange fees but issuers do not
pass-on (e.g. via rebates or bonuses) the additional interchange fee revenue to
cardholders. In this case, modifying the balance between merchants and
cardholders fees by increasing the interchange fee is a way to increase profit
by charging more the side where profits are least competed away (i.e. the
issuers' side), resulting in a restriction of output. On the other hand,
socially optimal interchange fees may be higher or lower than the profit
maximizing interchange fee because of an asymmetry in inframarginal effects.
This reflects the fact that the privately optimal interchange fee is set to
balance extra card transaction on the cardholder's side following a higher
interchange fee with the loss in card transaction due to lower merchants'
acceptance. However, a cardholder's decision to use cards has an impact
on the benefit of merchants who accept cards, and conversely, a
merchant's decision to stop accepting cards has an impact on the surplus of
cardholders who can no longer use cards in its store. Thus the usage decision
of each type of user affects the transactional benefits obtained by
inframarginal users of the opposite type, and if there is any asymmetry in
these inframarginal effects, the socially optimal fee structure should reflect
this, whereas the scheme’s private choice of interchange fee would not take
this into account.

Based on the framework they
had developed, Rochet and Tirole (2011) examine welfare issues to respond to
Vickers (2005)[17] who from a policy perspective argues
that cards are "must take" and merchants accept to pay high fees
because turning down cards would impair their ability to attract consumers.
Rochet and Tirole (2011) argues that it is not obvious that merchants'
internalization of cardholder surplus is detrimental for social welfare. Much
depends on the difference in average versus marginal consumers benefits across
the two sides. To illustrate this, they identify two opposite cases. Under
merchants' homogeneity and absence of platform competition the privately set
interchange fee exceeds the short term socially optimal level. On the contrary
with heterogeneous merchants and platform competition (multihoming) the
privately set interchange fee is lower. Thus it is difficult to establish the
direction of the bias. In this context, they discuss extensively the so-called
tourist test and its relevance as an indicator of "excessive interchange
fees" from the point of view of total user (cardholders' plus merchants')
welfare. The tourist test caps the MIF at a level at which the payment system
cannot exploit the internalization effect  to make merchants accept cards even
when their net cost of card transactions is positive. They conclude that in the
short-run the tourist test is a proper and practical tool when issuers' margins
are constant and merchants are homogeneous. However, under cost amplification,
for long-run considerations and with heterogeneous merchants they also argue
that the tourist test may yield false positive, i.e. it may result in
interchange fees that are lower than the value that maximizes total user
surplus.

Guthrie and Wright (2007)
building on Rochet and Tirole (2002) and Rochet and Tirole (2003)[18] include competition between
two identical payment schemes. The results obtained in this paper very much
depend on the extent of multi-homing (the affiliation to more than one scheme)
of different cards by cardholders and on the heterogeneity of merchants.
Guthrie and Wright (2007)'s main results is obtained in the context of
single-homing and heterogeneous merchants, i.e. elastic merchants'
demand. In this case, they find that competition between payment schemes
may lead to merchants being charged more and consumers less, which means higher
interchange fee relative to what a single scheme would set. As a consequence,
they conclude that competition between schemes is not necessarily more likely
to yield a socially optimal interchange fee than when card services are
provided by a single network.

Economic doctrine on payment
card continues to evolve. In particular, one stream of literature finds that
privately set interchange fee are too high. Wright (2012)[19] challenges the conclusion
that the bias in the privately set interchange fee can be either way (i.e. too
low or too high) by showing that instead there is a systematic and unambiguous
upward bias. In the model, a monopoly card network sets a fee structure that is
systematically biased against retailers, resulting in excessive usage of
payment cards and inflated retail prices to the detriment of cash customers. As
a result, a small decrease in fees to retailers offset with an equal increase
in cardholder fees would increase consumer surplus, total user surplus and
welfare, and decrease retail prices and card transactions, although customers
paying by card would end up paying more.

The paper observes that
contrary to previous literature the bias does not depend on the relative level
of cardholders and retailers benefits from different payment instruments nor on
assumptions on asymmetric market power in the issuing and acquiring market. The
result stems from the fact that first merchants post prices that do not depend
on the means of payments and second they are quite insensitive to changes in
the price structure given that they internalize cardholder benefits by charging
higher final retail prices (and consequently taxing cash payers). This is
ultimately the driving factor for creating a bias in the interchange fee
against retailers.

In recent years economic
literature has also been considering more prominently the issue of whether
regulatory intervention could be an appropriate tool to deal with the
competition and welfare issues raised by collectively set interchange fees in
payment markets, notably the 'inflated' interchange fees as explained above.
Based on the fact that the privately set interchange fees might be
systematically excessive from a social optimum perspective, Rysman and Wright
(2012)[20] argue that further entry
resulting would not address such distortion since it tends to result in greater
upward pressure on interchange fees due to intersystem competition. Also
banning the no-surcharge rule would be unlikely to be effective since in
reality few merchants do surcharge when they have the possibility to do so.
More importantly, whilst pointing at the complexities in devising such a
possible regulation and in finding an appropriate cap level, when discussing
the rationale for IFs in open system, Rysman and Wright (2012) contrast
privately set IFs in monopoly and competitive markets with socially optimal
IFs. Distortions could exist due to asymmetries in the way issuers and
acquirers compete, due to merchant internalization or due to the inability of
merchants to perfectly steer consumers to their preferred means of payments.

The competition proceedings

Whilst
economic doctrine has shed light on the market mechanisms surrounding
interchange fees and they sometimes have been or are the subject of legislative
action, such fees have also been the object of a number of competition
proceedings at European or national level. Recent developments with respect to
the European Commission's actions regarding interchange fees and related
arrangements under the European competition rules can be summarized as follow.

The Commission’s Decision of 19 December 2007[21]
('the Prohibition decision') is particularly
important. This prohibits MasterCard’s multilateral intra-EEA fall back
interchange fee for cross-border payment card transactions made with MasterCard
and Maestro branded debit and consumer credit cards. It states that the MasterCard's
MIF restricts price competition between acquiring banks by artificially
inflating the basis on which these banks set their charges to merchants and
effectively determining a floor under the merchant service charge below which
merchants are unable to negotiate a price.  In addition, MasterCard had not
demonstrated that they were covered by the exception in Article 101(3).

The
Commission's view was that MIFs are a restriction of competition by effect.
MIFs arguably also restrict competition by object as they reduce the level of
uncertainty on the market for acquiring banks and they have an impact on MSCs,
as the Commission argued in its subsequent case against Visa[22]. It
was established in the MasterCard decision that they anyway restricted
competition by effect between acquiring banks by artificially inflating the
basis on which these banks set their charges to merchants and effectively
determining a floor for the merchant service charge below which merchants are
unable to negotiate a price.

According
to the Decision, it is in principle not excluded that MIFs may be justified
under Article 101(3) but the burden of proof is on the scheme. The main
argument brought forward by MasterCard was based on the efficiencies created by
encouraging the issuing and use of cards to match greater demand from merchants
to receive card payments ('scheme optimisation'). The Commission however
challenged these efficiencies and the indispensability of MIFs to achieve them
and held that in any case under Article 101(3) the MIFs must be set at a level
that allows merchants overall to receive some of the benefits of these alleged
efficiencies.

In
2009, MasterCard offered Undertakings to reduce its cross-border consumer MIFs
to 0.2% for debit cards and 0.3% for credit cards[23] (this
latter category including deferred debit cards); it introduced a number of
changes to its scheme rules to facilitate competition in the card payments
markets; and it repealed the increases in its scheme fees to acquirers which
could have had a similar effect on the market to MIFs. The Commissioner for
competition at the time stated that, in light of the Undertakings, she did not
intend to open proceedings against MasterCard for non-compliance with the
Decision[24].

In the
light of the MasterCard decision and following the expiry of the Visa II
exemption decision[25],
the Commission opened an antitrust investigation against Visa Europe, Visa Inc.
and Visa International Service Association. In 2009 the Commission issued a
Statement of Objections ("SO") to Visa for all the MIFs it sets in
the EEA (cross-border MIFs and the MIFs for domestic transactions in eight
Member States). In 2010 Visa Europe offered commitments, very much based on the
MasterCard Undertakings, but the MIF reduction only covered debit transactions
(reduced to 0.2%) and not credit. These commitments were made binding in
December 2010[26].

In
May 2012, the General Court rejected MasterCard's appeal against the Decision,
supporting the framework of assessment under the competition rules applied by the
Commission[27].
The General Court confirmed in particular that MIFs are not objectively
necessary for the operation of a four party payment scheme. There are examples
of four party payment schemes operating without a MIF. According to the Court
it was also perfectly conceivable that banks operate within a payment system
without a MIF or, if necessary, with a less restrictive default, such as the
prohibition of ex post pricing. In Australia a significant reduction in
MIF levels had not led to a decrease in card use. And in general banks save
costs from card issuing (eg the use of debit cards reduces the need for cash
handling by banks) and receive additional revenue from card issuing (eg
interest on credit card balances). According to the Court it was therefore
unlikely that banks would stop issuing cards if MIFs did not exist and the
argument that MIFs were indispensable for the functioning of a payment card
system was rejected.

MasterCard
appealed the judgment to the ECJ[28].

In July
2012 the Commission issued Visa a supplementary SO covering its MIFs for credit
card transactions. The 2009 Visa SO and the 2012 Visa supplementary SO express
the preliminary concern that Visa's MIFs restrict competition by object and by
effect and Visa has not demonstrated that they fall within Article 101(3). In
the supplementary SO sent to Visa in 2012, the Commission also expressed the
preliminary concern that Visa's rules on the conditions on which merchants
could make use of the services of acquiring banks established in other Member
States ('cross border acquiring rules') were an infringement in their own right
of the competition rules[29].
Such rules may for instance require all acquirers, even if they are based in
another country, to apply the domestic MIF of the country of the merchant.

In
April 2013 the Commission opened further proceedings against MasterCard, this
time addressing MasterCard's MIFs applied to so-called inter-regional
transactions (ie payments made to merchants established in the EEA with
cards issued outside the EEA, for instance by American tourists in Europe) and
MasterCard's cross border acquiring rules[30].

A
number of competition proceedings have also covered interchange fees at Member
State level, following the approach under the MasterCard case. The French
Competition Authority for instance made binding the commitments from the Groupement
des Cartes Bancaires – the domestic card scheme- on 7 July 2011 to reduce
its interchange fees on payment cards by 20 to 50%, to level equivalent to the
ones agreed by MasterCard and Visa for their cross-border transactions.
Proceedings are on-going in a number of other Member States[31],
including in the UK, Germany and Italy.

In
addition to addressing the level of MIFs and exclusionary behaviour, the
Commission has examined the business rules of card schemes. In the MasterCard
Decision of 2007 the Commission found that some of MasterCard's business rules
reinforced the effect of the MIFs on competition. In response, MasterCard
included a number of changes to its business rules in its Undertakings of 2009.
Similarly, Visa's commitments of 2010 modified its business rules.

Under
the MasterCard Undertakings and Visa Commitments, the card schemes modified
their business rules to promote competition and transparency:

·
Honour All Cards Rule (HACR) and unbundling. The
card schemes would only apply the HACR within a brand and not across brands.
For example, a merchant could accept Maestro cards but not MasterCard cards.
Merchants could also have separate acquirers for different brands of card if
they wanted.

·
Non-discrimination. Merchants would not be
prohibited from steering their customers to different payment means. This issue
was addressed under the Payment Services Directive for surcharging and rebating
(see below) and so there was no justification for the schemes to impose their
own rules.

·
Unblending and publication. The acquiring banks
would offer unblended prices (eg MIF+ pricing) by default to merchants, so
merchants would benefit from the use of cheaper cards by their customers. The
card schemes would publish all their MIF rates.

Commercial
cards: The schemes would ensure that commercial cards issued in the EEA are
visibly and electronically identifiable at POS terminals if the terminal has
the necessary capability.

Annex 6: Main impacts of the PSD to date

Prior
to the adoption and implementation of the PSD, payment services markets were
highly fragmented along national lines. Technical and legal barriers were
hindering the creation of an integrated, efficient and reliable EU market.

In this
context, the PSD aimed to impact the retail payments market firstly by
generating more competition. A new type of payment was established and a
passporting regime was introduced to guarantee fair market access across the EU
(Title 2 PSD). The PSD also aimed to provide a simplified and fully harmonised
set of rules regarding the information requirements (Title 3 PSD) and the
rights and obligations in relation to the provision and use of payment services
(Title 4 PSD). The objective was to ensure high level consumer protection
whilst improving efficiency and reducing the costs for payment services
providers.

The
Payment Services Directive has now been in place for the last three years.
Substantial positive developments in the payment services market clearly
demonstrate that the Directive has significantly improved the environment for
providers and users[32]. The
PSD created the legal foundation for the creation of an EU-wide single market
for payments by establishing a comprehensive set of rules applicable to payment
services in the European Union. The provision of payment services across the EU
has become easier notably with the creation of the new Payment Institutions,
next to banks and e-money institutions, and with the definition of a common
framework on conduct of business rules for payment services. According to
London Economics and iff, in France, Greece, Hungary, Ireland, Luxembourg and
Norway, the Payment Institutions created during the transition years[33]
and the post PSD period[34]
account for 50% or more of all the PIs which exist currently in each of these
countries[35]. In
Germany for instance, about 38% of the PIs were not regulated before
implementation of the PSD[36] and
where service providers did exist before, they could not benefit from the wider
European market. Sound and proportionate requirements were established for
these new Payment Institutions and by meeting these requirements the authorised
PI is able to passport its licence to any other EEA country without the need to
apply for any further authorisation in any other country. It hence makes it
easier for businesses to become established in other markets, including those
that were previously extremely difficult to enter. Also passporting provides
PIs with a means to expand in other markets without the high market entry costs
and having to operate under multiple regimes and authorisations. About 600
payment institutions have been licenced up to now which provides a wide range
of payment services across the EEA via simple "passports"[37] and in total, the value of transactions
undertaken by authorised PIs undertaking money remittance, transfers and retail
foreign exchange activities, foreign exchange brokers and card acquirers was €
594.5 billion in 2010[38].

Table 28 - Value and number of transactions of different API groups - 2010

Group of APIs || Value of transactions (in billions of €) || Number of transactions (in millions)

Money remittance, transfers and retail foreign exchange activities || 30.7 || 113.6

Foreign exchange brokers || 24.7 ||

Card acquirers || 458.6 || 8792.5

Three-party card schemes || 78.8 || 592.0

Specialised internet payment service providers + general service providers - turnover || 1.7 ||

Source: Nilson Report, London Economics and
PaySy[39]

Many
authorised PIs indeed sought a large number of passports. Although analysis has
shown that PIs asking for 27 passports (or more) typically were only providing
services in 3 or 4 EEA States outside their home Member State[40],
this shows the extent to which passporting could develop and create competition
in the future. Lastly, according to the London Economics and iff study, there is
a broad consensus among the innovative payment institutions consulted as regard
to the positive impact of the PSD as far as innovation is concerned. This is
mainly because the Directive opened new business opportunities both
domestically and abroad[41]. It should
also be added that competent authorities also benefit from the PSD passporting
regime in the sense that they save resources which otherwise would have to be
dedicated to authorising payment institutions which already have been assessed
and authorised by a competent authority in another Member State[42].

The PSD
also provides for a Member State option to introduce a "lighter
regime" for so-called "small payment institutions". They are
also being registered at national level but they do not get a full licence with
an EU passport. The requirements to become an authorised PI are more stringent
than those to become a small PI and thus proportional to the operational and
financial risks faced by such institutions. Seven Member States have introduced
the category of small PIs and in these countries, the establishment of small
PIs overall has been widely welcomed by users and providers as this is shedding
light on otherwise dark areas of the market. About 2,000 small PIs have been
registered so far in the EEA[43].

As
regard to the information requirements and the rights and obligations of users
and providers, the PSD has improved the environment for the all the market
players. The PSD ensures that consumers have full information about their
transactions[44] which
ultimately mean that they can make informed decisions in the payment market.
The PSD also creates increased transparency for rates and charges as well as
consistent execution times and customer protection. According to London
Economics and iff, the majority of credit institutions are of the view that
that is has become easier to offer cross border payment services as a result of
the harmonisation[45]. For a
study on behalf of the European Commission, consumer associations were asked
about the main benefits to consumers derived from the PSD; costs, efficiency,
executions times, safety, liability, access and flexibility were mentioned[46].
Indeed for instance as regard to execution time, the PSD provides that all
credit transfers without any currency conversion must be carried out at the
latest by the end of the next business day which is very beneficial for users.

However,
although the PSD has had a positive impact of the payment services market, some
shortcomings can also be identified. For instance, while the PSD's general
approach is one of full harmonisation, some of its provisions provide for a
high level of flexibility in the form of options offered to Member States. In
addition, a number of activities were excluded from the scope of the PSD, these
being notably cheques and cash transactions. Payment transactions, where either
a non-EU currency was involved or where one of the payment service providers
involved in the payment transaction was located outside the EU, were also
excluded. Furthermore, the Directive does not apply to a number of specific
payment transactions as listed in the so-called negative scope. The PSD
approach to a number of issues, including the ones mentioned above, could be
considered as shortcomings. In addition, while the PSD did bring significant
improvements in many areas a number of specific regulatory failures and gaps
remain. These are described in more details in Section 3.2 (problem
definition).

Annex 7: Additional background on the identified specific
problems

Problem
3.2.2.1 – Market fragmentation

Card
payments: As illustrated below there are domestic debit
card schemes in 9 EU Member States, amongst which four out of the five largest
in terms of population (Germany, France, Italy and Spain). Unless debit cards
issued under these schemes are 'co-badged' with an international payment
scheme, these cards are not accepted in other EU countries.

Table
29 – Domestic card schemes

Member State || Domestic scheme

Belgium || Bancontact / Mr Cash

Bulgaria || Borica

Denmark || Dankort

France || Carte Bancaire

Germany || Girocard

Italy || Bancomat

Portugal || Multibanco

Slovenia || Karanta / BA

Spain || Euro6000 / ServiRed / Sistema 4B

Moreover,
the different national schemes apply non-interoperable standards and messaging
protocols in the different domains of a card transaction, mainly in the
terminal-to-acquirer and the acquirer–to–issuer domains.

Table
30 - Overview of the different protocols between the POS and the acquirer

Member State || Terminal to acquirer protocols in place

Austria || APSS protocol

Belgium || C-TAP

Bulgaria || Information not available

Cyprus || Information not available

Czech Republic || SPDH and ISO8583

Denmark || ORTS

Estonia || Information not available

Finland || FBA

France || CB2A

Germany || ZVT, GICC

Greece || SPDH

Hungary || SPDH and ISO8583

Ireland || APACS, ELAVON

Italy || CB1, CB2

Latvia || Information not available

Lithuania || Information not available

Luxembourg || C-TAP

Malta || Information not available

Netherlands || C-TAP

Poland || Depending on acquirer: APACS, SPDH, ELAVON

Portugal || SIBS proprietary

Romania || Information not available

Slovakia || Information not available

Slovenia || Information not available

Spain || PRICE/PUC (ISO8583)

Sweden || SPDH

UK || APACS 30, 40, 70

Similarly,
card acceptance terminals are subject to different, often national,
certification procedures in order to comply with obligatory security criteria.
The table below shows an overview of the different processes and certificates
currently in place. Merchants with European operations hence need to comply
with up to seven different certification procedures even if they use the same
type of terminal in all countries.

Table
31 – Security certification by Member States

Member State || Security certification

Austria || PCI PTS

Belgium || PCI PTS

Bulgaria || PCI PTS

Cyprus || PCI PTS

Czech Republic || PCI PTS

Denmark || PNC SAC

Estonia || PCI PTS

Finland || PNC SAC

France || PCI PTS

Germany || GBIC/DK

Greece || PCI PTS

Hungary || PCI PTS

Ireland || PCI PTS

Italy || Consorzio Bancomat

Latvia || PCI PTS

Lituania || PCI PTS

Luxembourg || PCI PTS

Malta || PCI PTS

Netherlands || Currence (PCI+) and now CAS+ based on PCI PTS+ additional tests

Poland || PCI PTS

Portugal || PCI PTS

Romania || PCI PTS

Slovakia || Information not available

Slovenia || PCI PTS

Spain || PCI PTS

Sweden || PNC SAC

UK || UK Cards Common Criteria

There have been important achievements by several European
market initiatives regarding the development of
standards in different domains of the card transaction chain. These include:

EMV, standing
for Europay, MasterCard and Visa, is a global standard for inter-operation of
Chip & PIN cards, POS terminals and ATMs, for authenticating credit and
debit card transactions.

SEPA-FAST,
developed by the payment card industry and based on EMV technology, describes
the financial software application on a POS terminal.

EPAS
(Electronic Protocols Application Software) is a non-commercial European
cooperation which aims at developing common data protocols for terminals,
retailers and acquirers to be applied at the POS environment.

ATICA
(Acquirer-to-Issuer Card Messages) and the Berlin Group are industry
cooperations aiming at the harmonisation of protocols between card issuers and
acquirers of card payments.

The OSeC
initiative has the objective to establish a certification Framework aiming at a
single scheme for security in POS terminals and multiple recognition of security
certification by card schemes and banking organizations across Europe.

Table 32 - Overview of these initiatives in the different card
transaction domains

Domain || Card to terminal || Terminal application || Terminal to acquirer || Acquirer to issuer || Certification

Standard initiatives || EMV (chip & pin) || SEPA-FAST || EPAS || ATICA / Berlin Group || OSeC

Some of these standards, for example EMV, already achieved
critical mass uptake. For other initiatives however (e.g. EPAS for acquiring
protocols or OSeC for a common security certification approach), the adoption
and implementation of these standards across the market represents a major
challenge and national protocols and approaches therefore still prevail. As
a consequence, merchants consistently complained during public consultations
that they suffer from inefficiencies due to missing possibilities for
cross-border or central acquiring.

Internet
payments: In the context of e-commerce, credit cards are
currently still the most widely used payment instrument as shown by the survey
results below.[47]

Figure 8 - Consumer survey –
Which of the following payment methods have you used for your online purchases
over the last 12 months?

On the
other hand, as shown below a recent survey undertaken by the Commission
indicates that less than half of the citizens in the EU own a credit card while
more than 80% of EU citizens have a bank account.[48]

Figure
9 - Consumer survey – Which of the following financial products and services do
you have, if any?

In many
cases, current bank accounts can be used for online banking and hence could
also be used for making online credit transfers for the purposes of e-commerce
purchasing transactions. The initiation and confirmation of such payments
requires online banking based payment solutions. However, such solutions are
not yet available at a pan-European level.

A few
of the existing solutions have been established directly or indirectly by banks
while others are operated through third-party providers, some of which are not
licensed as payment institutions under the PSD.

However,
there is currently no clearly defined and common set of non-discriminatory
security requirements for the necessary access to the consumers' payment
account by such online banking based solutions.

Mobile
payments: As illustrated in 3.1.1., mobile payments are
the payment method with the highest growth potential. In developed markets,
this is driven by the massive proliferation of smartphones in recent years and
by emergence of applications with additional functionalities, which change
consumer behaviour. Smartphones account for 63% of all handsets on the US
market and 51% of handsets on selected European markets.[49]
However, while certain solutions, such as Near Field Communication (NFC),
currently seem to emerge as possible lead technologies for proximity
m-payments, common standards for m-payments at the POS are either not existing
or in their very early stages of development. As a consequence, the current
landscape for proximity m-payments remains fragmented and is characterised by
applications for niche users and a limited number of pilot projects, mostly at
domestic or even local level.

Table 33 - Exemplary and
non-exhaustive list of examples for mobile payment initiatives[50]

In
those regions outside Europe where m-payments are more successful they are
typically based on initiatives that were launched by MNOs, often on the basis
of inter-operability agreements.[51]
Agreements on a business model have been reached in some of these cases (e.g.
the so-called 'Weve' joint-venture between the three largest mobile network
operators in the UK), but in many cases discussions are still on-going amongst
all or a subset of the key market actors (mobile network operators, banks,
other payment service providers, mobile phone manufacturers). A lack of
standards and inter-operability is identified as one of the key obstacles for
mobile payments by numerous studies.[52]
[53]
[54]
[55]

Problem
3.2.2.2 – Ineffective competition

In the
area of cards there are several restrictive business rules and practices that
lead to a situation of ineffective competition. One of these rules applied by
card schemes is the Honour All Cards Rule (HACR). There are two relevant
aspects to the Honour All Cards Rule. The first is that the rule requires
merchants to accept cards regardless of which bank or financial institution
issued the card (Honour All Issuers Rule). The second is that the rule requires
merchants to accept all products issued under the same brand (Honour All
Products Rule), even if the fees related to them are not the same. For example,
in the case of so-called premium cards, the higher cost of the card associated
with individual extra benefits for the card holder is borne by the merchant
having the obligation to accept the card on the basis of the HACR[56].
The difference between the fees paid for a basic card and those for a premium
card can be quite substantial. In Belgium for example we find that the lowest
interchange fee applied by a certain card scheme for a credit card payment is
0.55%, compared to the highest fee of 1.90% for a credit card of the same
brand.[57]
This results in fee that is almost 3,5 times higher for the premium card than
the one for the basic card. The difference is even bigger when comparing debit
and credit card fees. In the United Kingdom we find that the lowest debit card
fee of a certain card scheme is a fixed amount of 0.08 GBP whereas the highest
fee for a credit card of the same brand is 1.90%. For a payment of £100, this
results in a fee that is almost 24 times higher. According to card schemes
applying the rule, it assures consumers that their cards will be accepted
anywhere in the world if the logo on the card is displayed, and therefore the
rule is a cornerstone of the card schemes' payment system[58].
However merchants incur higher costs because of the rule and these are passed
on to consumers, also those consumers using cash, or payment cards with lower
costs for the merchant. Additionally it prevents merchants from negotiating
lower fees for the more expensive cards as they have to accept them if they
wish to accept lower cost cards.

In
addition to the HACR, card schemes impose a Non-Discrimination Rule (NDR).
Under the Non-Discrimination Rule merchants are prohibited from directing
consumers towards the use of the payment instrument they prefer through various
forms of steering. Consequently, merchants are unable to steer consumers away
from high-cost payment cards such as the premium cards and therefore they have
an incentive to pass on this cost to all consumers through higher prices for
the goods and/or services they offer. However, even if retailers would have the
choice to refuse certain high-cost payment cards, several other obstacles stand
in the way. The first one is card identification. If a merchant cannot visually
or electronically identify which kind of card is presented, he will be unable
to determine whether he wishes to accept this card. In order to assess the cost
related to the specific payment card, merchants would also need to receive
information in real time about the MSC to be charged per transaction. This
leads to another obstacle, which is the practice of blending. Blending occurs
when the acquirer offers the retailer a single rate for all card payments, thus
neutralizing competition between the various brands, as the rule restricts the
ability for merchants and consumers to identify the true cost paired with a
specific payment instrument. A related issue concerns the choice of application
for co-badged cards. Co-badged cards often contain a mechanism in the chip which
determines automatically in what order the brands on the card will be used.
This mechanism is inserted by the issuing bank, therefore the brand given
priority may be the one generating the highest MIF (and thus the highest MSC).
The problem will become even more relevant with the mobile wallets, combining
several payment applications.

As
indicated in the problem drivers, the way Multilateral Interchange Fees (MIFs)
are applied today also causes market failure. This is because of several
reasons, one of them being the current existence of reverse competition
resulting in high interchange fees and MSCs. Consumers are generally unaware of
the costs borne by merchants for the use of the cards, unless merchants are
ready to convey this information, for instance through differentiated price
signals. Merchants may refrain from giving such signals for fear of losing
business – or because of restrictive business rules imposed by schemes- and
pass on to all their customers the costs of accepting card payments through the
pricing of their goods and services. From a consumer's perspective, this raises
an issue of cross-subsidisation: as retailers charge the same price regardless
of the payment instrument used by the consumer, those not using expensive means
of payment implicitly subsidise the ones using them. Also, merchants – with few
exceptions - are reluctant to turn down payment instruments which are costly to
them (and ultimately to their subsequent purchasers) again for fear of losing
business.

A large
part of the merchant service charge paid by the retailers to
acquirers for payment card acceptance ('MSC') is
determined by the interchange fee. MSCs in the EU add up to
an amount of app. 14 billion EUR annually[59].
Close to 70 % of these charges, app. 10 billion EUR is transferred to issuers
as MIFs, although a large share of this corresponds to credit cards, and
expensive ones in particular (e.g. premium). MIFs
made up 60% of MSCs in
Czech Republic in 2003, 60% in Italy in 2003 and 73% in Belgium in 2002[60].
These estimated figures would include the amounts corresponding to
interregional fees, whose average weighted levels are considerably higher for
both debit and credit card transactions than for intra EU cross border debit
and credit transactions, i.e. when the retailer and
the cardholder are from different countries in the EU. In
spite of the limited share of inter-regional transactions in the total of
transactions, the annual MIF amounts involved could be estimated at around 0.5
billion €.

Since
interchange fees are set by card issuers themselves or by a card system, they
are hardly negotiable as those paying for the service cannot influence their
levels (the retailers) or are unaware of their existence (the consumers)[61].
In addition, cardholders are encouraged by issuing banks through bonuses and
other rewards –using part of their revenues from interchange fees - to use
cards that generate higher fees. Competition
in payments currently results in sub-optimal market outcomes and relatively
high prices, with the ECB estimating the total social cost of payments at €156
billion per year in the EU or 1,2% of GDP[62].
The ECB also estimates that revenue from payments represents about 25% of total
bank revenue in the EU[63].

In
addition to reverse competition we also find a high variety of interchange fees
and a lack of market integration. The ability of merchants to resist high IFs –
to exert some form of countervailing power - is not only  hindered by rules
that limit their ability to differentiate their prices according to the cost of
a given means of payment (no surcharge, non-discrimination rule), or force them
to accept all cards of a given brand (honour all cards/products). In the
current situation, scheme rules also force acquiring banks to apply the
interchange fees applicable in the country in which the merchant is located
even if the acquirer is based in a different country with a potentially lower
domestic MIF level. Cross-border acquiring takes place when an acquirer
recruits, for card acceptance, merchants based in a different country from the
acquirer. This allows merchants to have their transactions acquired in a
country other than their country of residence. It also allows merchants who
operate in several countries to centralize their card processing activities. Since
the MIF accounts for a major share of the merchants’ service charge (MSC), the
rule prevents merchants from benefitting of lower MIF-levels and consequently
lower MSC-levels offered by acquirers in other Member States since it is the
merchants’ location that determines the fees, not the location of the acquirer.
This rule therefore hinders the development of cross-border acquiring by making
it much less attractive for merchants.

The
European merchants’ vision of how cross-border acquiring should function is as
follows, as explained by their European association, Eurocommerce:

“The following simple
example illustrates a situation with only 2 countries[64].  In each
country, we assume different cross-border and domestic MIFs, but there is only
one MSC per country (in order for the acquirer to respect Regulation 924/2009).

Figure 9 – Situation
with 2 countries

Nowadays,
with the current restrictions on cross-border acquiring, the merchant in
Country 2 pays the MSC to the acquirer 2 (the 0.3% margin being the only part
of the cost that the merchant can potentially negotiate). Acquirer 2 has no
other choice than to pay the domestic MIF (1%) to the issuer bank I2.

It
must be noted that, because of the MIF’s ‘upward pressure on price’ effect, any
competition between issuers at national level makes the situation worse.
Indeed, in order to attract consumers to apply for and use their card, issuers
have incentives to push for ever increasing MIFs (because the benefits to
cardholders are not paid by cardholders but by merchants).

The
merchant located in country 2 would like to have his transactions acquired in
country 1, where the rates are lower. He is able to negotiate a lower MSC
(0.70% in this example) with Acquirer 1, but Acquirer 1 is obliged, according
to Visa and MasterCard’s rules, to pay the MIF of Country 2 to Issuer 2, i.e.
1%. On the other hand, Acquirer 1 has to respect Regulation 924/2009, i.e.
offering the same MSCs for domestic and cross-border transactions.  Therefore,
Acquirer 1 will lose money on each transaction presented to him by the
merchant. There is no business case for any acquirer to acquire card payments
from more expensive countries.

'Real'
cross-border acquiring would be when banks would be allowed to apply the
interchange fee applicable in the country in which the acquiring banks are
located. In case 1, the consumer is located in the same country as the
merchant.

Figure
10 – Case 1: Domestic transactions

If
restrictions to cross-border acquiring were lifted (the situation is depicted
with the plain red arrows), the merchant in country 2 could go to acquirers in
country 1 and negotiate for a better price. While Acquirer 2 would
(potentially) lose a merchant, Acquirer 1 would gain one. Being faced with some
real competition, Acquirer 2 would have an incentive to lobby for a lower MIF
towards the card schemes. Similarly, the profit of issuer 2 would be reduced,
but certainly not to a level where issuing that card would cease to be
profitable (if issuing such a card is profitable in Country 1, why wouldn’t it
be profitable in Country 2?). There is, however, a risk of a general increase.
Given that MIFs are set by card schemes, there is a high likelihood that
schemes would much prefer to increase MIFs in Country 1 to the rates of Country
2.

In
case 2, the consumer is located in a third country. The conclusions are
similar.

Figure 11 – Case 2:
Cross-border transactions

In
merchants’ ideals, the acquirer would apply the same fees level across Europe,
leading to substantial cost savings on top of considerable scale efficiencies.
Feedback from Groupe Auchan SA[65] suggests
estimated savings of €90 million on a yearly basis for the 8 countries in the
EU Member States where they are present. This estimated saving is calculated on
a yearly basis, and only based on the MIF optimisation[66].
As the number of transactions has increased since the calculation of these
estimates, and European acquiring would improve the bargaining power of the
merchant, this estimate is a minimum saving. Real savings are likely to be even
higher.”

In
addition to the POS rule, rules of domestic schemes often prescribe national
messaging protocols and specific authorisation regimes or certification
procedures which also hinder the development of cross-border acquiring.
Therefore, absent scheme rules, the delays in the adoption and implementation
of harmonized technical standards at a pan-European level limit the
possibilities of cross-border acquiring to big merchants who are ready and
willing to invest in making cross-border acquiring work. In any case, this
absence of arbitrage results in a lock-in effect, under which merchants located
in one country are forced to pay the fees applying in this country instead of
being in a position to benefit from the Internal Market.

Figure 12 - Average domestic
MIF levels in the Member States, 2012

The
above graph illustrates that MIF levels show significant variation among member
states. When looking at consumer card transactions, their weighted average
level range between 0.1-0.2% to 1.4-1.5% among various Member States. Country
average MSC rates range between 0.3-0.4% to 1.9%. MSC rates also vary between
merchants within the same Member State, smaller merchants may end up paying
average MSCs of up to 3–3.5% of the transaction value.

Next to
the lack of arbitrage, the limited legal certainty is fuelling a lack of level
playing field. The ruling of the General Court of 24 May
2012[67]
on MasterCard's appeal against the Commission's decision prohibiting
MasterCard's multilateral interchange fees (MIFs) that apply to cross-border
transactions with consumer cards rejected the appeal confirming that
MasterCard's cross border MIFs restricted competition in the cards payment
market and were not justified for efficiency reasons. However, MasterCard
has appealed the judgement, and the ruling still leaves the question of the
appropriate level of MIFs open, even if it the General Court
endorsed the Commission’s assessment that debit cards generate important
commercial benefits for banks apart from interchange fees, and therefore
questioned the necessity of a MIF for debit cards[68].

In a
context of competition law enforcement carried out by the
different National Competition Authorities - in close cooperation with the
Commission- against the various national banking communities operating under
the 'umbrella's' of the MasterCard and Visa systems it is unlikely that there
will be a coherent and consistent outcome across the EU sufficiently fast to
ensure market entry, innovation and competitiveness of the European payments
market at a global level. Also, competition between payment card schemes is
based on offering higher fees to convince issuing banks to issue their
cards. Consequently, it is difficult for individual schemes to reduce their
fees in order to align with the General Court's assessment in the MasterCard
judgment, since this would risk 'leaving the market to their competitor(s)'. 
Arguably, only an 'across the board' lowering of fees by all market players,
for instance on the basis of regulation, could assure such alignment with the
assessment in the judgment.

On top
of maintaining the status quo for incumbent card schemes, high MIFs also form
barriers to entry for cheaper and more efficient schemes that offer lower
inter-bank fees and have difficulty convincing issuing banks. This results in
limited innovation and market entry.

Another
problem causing ineffective competition, concerns information on the
availability of funds. In many business models for third parties (e.g. new card
schemes) providing payment services, prior information on the availability of
funds on the consumer's payment account, is a key element. It is both necessary
for the authorisation and the payment guarantee of a specific payment
transaction. So far, PSPs are not obliged and may be reluctant to share
information on the availability of funds on a payment account regardless
whether the cardholder agrees or not. Given the importance of the security of
the payment transaction and confidence in the payment system in general, such
refusals may be justified in some cases. However, PSPs have a commercial
incentive to refuse to cooperate with third parties, even if there is no
justified security concern. The restriction of this information could hamper
the emergence of new schemes for card, internet or mobile payments. While there
are many concerns about third party services, they have a very strong potential
for true innovation on the payment market[69].
Closely linked to the information on availability of funds is the access to
payment account information for e-payment initiation by third party providers.
This is discussed under 3.2.2.4.

Finally,
due to the exemption of payment systems designated under the Settlement
Finality Directive from the general PSD provisions[70]
on access to payment systems, Payment Institutions (PIs) are often not allowed
under the Settlement Finality Directive to participate ‘directly’ in designated
payment systems. As a result, in most Member States, PIs participate in payment
systems only ‘indirectly’, using the service of a ‘direct’ participant who
initiates the payment orders on behalf of the PI in the system, carrying the
legal and credit risk, against remuneration. In some countries, PIs do not opt
for indirect access either, but simply participate as ‘customers’. While this
is also the case for smaller credit institutions unable/unwilling to fulfil the
access criteria of designated payment systems or that have simply decided, for
commercial reasons, against direct participation, PIs are not given this
freedom of choice, and possibly suffer from a competitive disadvantage[71].

Problem
3.2.2.3 – Diverse charging practices

A
surcharge is a charge that is added by merchants on top of the requested price
for goods and services when a certain payment method (usually a card) is used
by the consumer. The PSD explicitly empowers merchants to use surcharging and
rebating for the use of a given payment instrument in order to steer consumers
to the most cost efficient payment instrument. However, Member States may still
prohibit or limit surcharging (but not rebating) under certain conditions at
national level. According to the official notifications from the Member States,
surcharging is allowed in 12 Member States, 14 other EU countries opted to
prohibit the use of surcharges and 1 Member State has prohibited surcharging
for the use of debit cards but allowed it for credit cards. Nonetheless, even
in some of those Member States prohibiting surcharging, the practice is
sometimes still applied. The table below gives an overview of all Member States
and which ones prohibit or allow surcharging.

Table 34 - Surcharging in EU Member States

Countries, which prohibited surcharging || Countries with different surcharging rules for credit and debit cards || Countries allowing for merchant surcharging

Austria Bulgaria Cyprus Czech Republic France Greece Hungary Italy Latvia Lithuania Luxembourg Portugal Romania Sweden || Denmark (prohibition for debit cards, no prohibition for credit cards) || Belgium Estonia Finland Germany Ireland Malta Netherlands Poland Slovakia Slovenia Spain UK

Source:
European Commission[72]

It
should be noted, however, that the UK Office of Fair Trading has recently
announced that it was forcing airlines to eliminate surcharges for the use of a
debit card to pay airline tickets bought on-line[73].
At EU-level, The Consumer Rights Directive will prohibit above-cost surcharges
in most retail sectors for all types of payment method by the Directive’s June
2014 deadline.

In
order to better assess the phenomenon of merchant surcharging the Commission
asked its consultant, London Economics-iff, to investigate surcharging
practices in detail, in the framework of the study on the impact of the PSD and
Regulation 924/2009[74].

The
surcharging survey was run in 9 Member States: Belgium, Denmark, Finland,
France, Germany, Ireland, Netherlands, Spain and the UK. It should be noted
that France, officially a Member State where surcharging is prohibited, was
included in the survey as various sources from the payments industry indicated
that merchants were applying surcharges despite the legislation.

The
table below suggests that surcharging is well present, but not a wide-spread
practice in countries allowing surcharging.

Table 35 - Proportion of merchants that apply surcharges on credit cards, by country

Country || No surcharge || Surcharge

Belgium || 93% || 7%

Denmark || 91% || 9%

Finland || 99% || 1%

France1 || 96% || 4%

Germany || 91% || 9%

Ireland || 86% || 14%

Netherlands || 90% || 10%

Spain || 92% || 8%

UK || 86% || 14%

Source:
Study on the impact of the PSD and Regulation 924/2009 for the European Commission[75]

Detailed
survey results from the London Economics and iff study show that surcharging
practices in 2012 are more predominant than in 2009. The best example to
illustrate this is the surcharging practices of merchants in Denmark as 9% of
merchants are surcharging in 2012 but only 5% did so in 2009. While surcharging
was not a widespread practice in general, ranging from 1% of all merchants in
Finland to some 15% in Ireland , it was concentrated in some sectors of the
economy, above all in travel, hotel and hospitality industry, recreation and
entertainment and, to a much smaller extent, in catering and restaurant
business. It is in these sectors that 'expensive' cards are being used most,
such as commercial cards, third party credit cards and premium credit cards.
This may explain why these sectors are at the forefront of using surcharges.
The study confirmed also the expansion of surcharging practices in all but two
of these nine Member States in comparison to 2009 situation (before the entry
into force of the PSD).

The
average surcharge across sectors and countries ranges from 1% in the
travel/hotel/hospitality sector in Belgium and entertainment/recreation sector
in Ireland in to 4.1% in the same sector in Spain. Across all sectors and all
countries, the average surcharge is 2.7%.

Table 36 - Average surcharge, by country and sector (%)

Country || Catering/ Restaurants || Entertainment / Recreation || Retail || Travel/Hotel/ Hospitality || Other

Belgium || || || || 1.0% || %

Denmark || 2.6% || || 1.6% || 1.7% || 2.1%

Finland || || || || 1.0% || 0.4%

France || 3.0% || 2.2% || 3.3% || 3.5% || 3.4%

Germany || 3.9% || 3.7% || 2.5% || 2.7% || 2.9%

Ireland || 2.8% || 1.0% || 2.6% || 2.4% || 2.7%

Netherlands || 2.7% || 2.7% || 3.0% || 3.0% || 2.0%

Spain || 3.3% || 4.1% || 2.6% || 3.0% || 2.5%

UK || 3.9% || 2.3% || 2.2% || 2.6% || 2.7%

Source:
Study on the impact of the PSD and Regulation 924/2009 for the European
Commission[76]

It is
important to note that not all sales of merchants applying surcharges attract
such surcharges as some sales may involve payment instruments not subject to
surcharges. The average proportion (in a particular sector) of sales subject to
the surcharging ranges from 0.1% in France (catering/hospitality) to 26.9% in
the UK (travel).

Table 37 - Average share of total annual sales subject to surcharge, by country and sector (%)

Country || Catering/ Restaurants || Entertainment / Recreation || Retail || Travel/Hotel/ Hospitality || Other

Belgium || || || || 0.8% || 0.0%

Denmark || 9.7% || || 0.6% || 2.6% || 1.2%

Finland || || || || 0.7% || 1.7%

France || 0.1% || 1.4% || 1.5% || 2.2% || 0.5%

Germany || 0.8% || 3.0% || 1.1% || 8.4% || 1.9%

Ireland || 3.6% || 3.3% || 3.2% || 34.8% || 2.4%

Netherlands || 18.5% || 2.9% || 1.5% || 10.0% || 4.0%

Spain || 1.7% || 11.0% || 4.1% || 10.2% || 3.4%

UK || 1.6% || 4.0% || 4.8% || 26.9% || 5.3%

Source:
Study on the impact of the PSD and Regulation 924/2009 for the European
Commission[77]

The
results of the calculation of the monetary value of the surcharge are shown in
the table below. The largest monetary value of the surcharges is observed in
the travel/hotel/hospitality sector in the UK, reflecting a relatively high
surcharge rate and a high incidence of surcharging. Altogether, the monetary
value of the surcharges in these countries stands at €731 million.

Table 38 - Total value of the surcharge (EUR millions), by country and sector

Country || Catering/ Restaurants || Entertainment / Recreation || Retail || Travel/Hotel/ Hospitality

Belgium || || || || 0.24

Denmark || 4.44 || || 0.31 || 0.79

Finland || || || || 0.10

France || 0.05 || 2.38 || 3.44 || 5.17

Germany || 2.46 || 17.70 || 5.92 || 49.45

Ireland || 2.19 || 0.14 || 1.53 || 42.69

Netherlands || 12.16 || 3.06 || 1.63 || 19.87

Spain || 4.16 || 21.24 || 9.80 || 60.07

UK || 5.53 || 11.64 || 22.70 || 398.59

Source: Study on the impact of the PSD and
Regulation 924/2009 for the European Commission[78]

It is
important to note that the surcharge cost does not reflect the savings that
consumers may make in the absence of surcharging as the merchants applying
surcharges to compensate for the costs of accepting certain instruments would
then increase their retail prices to recoup the costs they incur.[79]
Obviously, the precise response of merchants in such a situation will depend on
the state of competition of the sector in which they operate and whether the
surcharge reflected the costs faced by merchants when accepting a card payment
or was at least in part a source of profit for merchants.

Surcharging
was originally devised as a steering mechanism. In practice, however, most
merchants, in particular in the traditional retail sector, were reluctant to
adopt them, mostly because of fears of losing customers to competition, but
also because certain categories of merchants are not often faced with
'expensive' cards, or because small merchants, in a face to face environment,
prefer to turn to cash instead of having to accept debit cards because of their
relatively higher marginal costs as compared to bigger merchants. Another
effect was that, at least some merchants saw surcharging as a 'threat' they
could use in negotiations with their acquirers in order to decrease their MSCs.
Moreover, the practices of some merchants and business sectors were criticised
as surcharging was used to generate extra revenues, in particular when other
forms of payments than cards were not accepted or not practical. Furthermore,
undifferentiated surcharging (e.g. to apply the same surcharge for all credit
card brands, even if there might be differences in the MSC), lowers the
steering effect towards cheaper brands within one type of payment instrument.
At the same time, at least in the "brick and mortar" trade, it has
been argued that surcharging cards was stimulating the use of cash. When London
Economics and iff surveyed competent authorities of Member States who chose to
prohibit surcharges, the prohibition was justified on the grounds of
encouraging consumers to switch away from cash-based transactions to more
efficient payment instruments. A 2008 study in the Netherlands for instance
showed that "consumers do react to payment fees and adapt their payment behaviour
accordingly. Effectively, consumers try to avoid the extra surcharge, mostly by
resorting to cash". On the other hand, surcharging may lead to increased
card acceptance from merchants in particular for transaction amounts above a
threshold under which alternative payment instruments (e.g. cash) are less
costly. In a 2011 study by the Dutch Central Bank[80],
it was concluded that surcharging has contributed to debit card acceptance
in the Netherlands.

The
problem lies in the divergence of the charging practices as well as in the
limited effects it had in the way it was intended. Because of the divergence,
it is often unclear for consumers whether merchants can surcharge them.
Especially in the case of e-commerce this can be confusing as merchants located
in a country where surcharging is allowed can offer products and services in
countries where it isn't and in this case surcharge the consumer. Therefore the
lack of harmonisation in this regard is a problem in itself. In addition, the
concept of surcharging which was intended to allow merchants to steer consumers
to the most cost-efficient payment method, has not led to the intended results.
Many merchants cannot or prefer not to surcharge. One of the difficulties for
merchants to efficiently steer consumers follows from the HACR. Merchants are
obliged to accept all cards within a brand and often fees for the use of these
cards are blended so that it is unclear for merchants which cards are most
expensive.

Transposition
of the Consumer Rights Directive and the surcharging

The
issue of surcharging has been recently addressed also in Directive 2011/83/EU
on consumer rights, adopted on 22 November 2011 by the European Parliament and
by the Council. The Directive should be transposed by the Member States by 13
June 2014.

Article
19 (Fees for the use of means of payment) modifies effectively provisions of
Article 52(3) of the PSD that allow surcharging without any specific criteria.
It states that "Member States shall prohibit traders from charging
consumers, in respect of the use of a given means of payment, fees that exceed
the cost borne by the trader for the use of such means". In other words,
the provision aims at limiting the surcharge to the actual cost of a payment
instrument for the merchant and tries to put an end to the practices of some
merchants, who use surcharge as an additional source of revenues.

The
drafting of the Article does not provide a detailed definition of the costs
borne by the trader. The Commission's services are currently working with national
authorities to reach a convergence on the criteria to be applied in assessing
real cases.

A risk
associated with such defined limitation of surcharges is that in some cases,
cardholders (consumers) using their cards in a cross-border context within the
EU could be subject to significantly higher surcharges by merchants. This is
because card acquirers may decide to charge different rates of MIF and MSC for
cards issued nationally and those issued in other Member States. Consequently,
a surcharge based on such costs could lead to different surcharge amounts for
cards issued nationally and in other Member States. This phenomenon could be
already observed in Denmark, the first Member State that has transposed Article
19 of the Consumer Rights Directive.

Problem
3.2.2.4 – Legal vacuum for certain payment service providers

Third
party providers for payment initiation services, account information services
and other equivalent services

Typically,
payment service providers (PSPs) as defined by the PSD issue and operate
payment accounts to initiate and receive payments. Since the PSD was passed in
2007, new services have emerged in the area of internet payments where so
called third party providers offer e-merchants specific payment solutions which
do not necessarily require customers to open accounts with the third party
provider. For example, there are systems/software's which collect and
consolidate information on the different bank accounts of a consumer in a
single place ("account information services"). These will typically
also allow a consumer to make payments from these different bank accounts. To
access these services a consumer typically stores their log in and other secure
identifiers for the different bank accounts on their device or on a website/'cloud'.
In addition, there are third parties who facilitate the use of online banking
to make internet payments ("payment initiation services"). They help
prepare online credit transfers, transmit consumer's security codes (typically
one-time codes that can only be used for this transaction) to their bank with
the credit transfer and inform the merchant that the transaction has been
initiated.

The
account information services consist in the consolidation of the information of
different accounts a customer may have with different banks and the
presentation of this information in a user-friendly way and in single place.
The payment initiation services are designed mainly for e-merchants and offer
them less-costly payment solutions as an alternative to the card-based
payments. In order to provide these two types of services, the third party
providers need to access the accounts of the customers, using the existing
account infrastructure put in place by banks and the costumers' credentials.
This access is sometimes refused by banks which invoke security and liability
reasons, as well as intellectual property rights, protection of property and
possible reputational risks. The existence of a contract between the third
party provider, the bank and the customer (or alternatively framework
contracts) and the payment of a financial compensation could be seen as a
condition for the access to the payment accounts. But this approach raises
serious competition concerns.

These
new services are in most cases not addressed by the EU legal framework on
payment services as they never enter into possession of the funds transferred. The
fact that these new services and their providers are not covered by the
existing legal framework has raised a wide range of concerns amongst banks and certain
Member States (ranging from consumer protection, security, competition and data
protection concerns) and triggered legal proceedings in one Member State (case
under analysis by the German courts)[81]. 
Furthermore, as these service providers are typically not licensed, they are in
most cases neither supervised nor overseen by any competent authority. Regulation
of these activities would help to ensure the security of these transactions,
consumer trust in these providers and possibly help to address any liability
issues that could arise.

The
European Forum on the Security of Retail Payments[82],
SecuRe Pay, a voluntary cooperative initiative established by the European
Central Bank  between authorities aimed at facilitating common knowledge and
understanding – in particular between overseers and supervisors of payment
service providers – of the issues at stake in the field of retail payments
security. In its plenary composition, SecuRe Pay is composed of EU overseers
and supervisors of payment service providers, the European Banking Authority
and, as observers representative of EEA countries, the European Commission and
Europol and it is chaired by the European Central Bank. SecuRe Pay has
identified several potential security risks related to payment account access,
if no action was taken by the third parties themselves or by regulators:

third party
providers may not be subject to supervisory requirements,

the risk of
weak (technical and/or organisational) access controls for systems,

the risk of
handling of sensitive payment data without appropriate controls and/or use of
sensitive payment data without informed approval by the user,

the risk of a
loss of control over online banking/ payment session by user and/or PSP,

the
accountability risk and the risk that allocation of liabilities in case of
problems is more difficult,

the risk of
inducing potentially unsafe customer behaviour.

Table
39 - Existing market participants identified and consulted by SecuRe Pay on the
risk analysis

Company name || Service name || Country of headquarter

STUZZA || eps || AT

Buhl Data Service GmbH || finanzblick HD Lite || DE

Giropay || Giropay || DE

Haufe-Lexware GmbH & Co. KG || Quicken || DE

Kontoblick GmbH || Kontoblick || DE

Payment Network AG || Sofortbanking || DE

Star Finanz GmbH || StarMoney || DE

stoeger it GmbH || iOutBank || DE

Eurobits Technologies || || ES

Safetypay || Safetypay || ES

Balancion || || FI

Suomen Verkkomaksut || Suomen Verkkomaksut || FI

Boursorama || Money Center || FR

EBA Clearing || MyBank || FR

Fiduceo SAS || Moneydoc || FR

Linxo || Linxo || FR

PERSPECTEEV || Bankin’ || FR

Currence || iDEAL || NL

Centrum Elektronicznych Usług Płatniczych eService || eService || PL

Dotpay S.A. || || PL

eCard S.A. || || PL

Krajowa Izba Rozliczeniowa S.A. (KIR S.A.) || PayByNet || PL

PayU S.A. || PayU || PL

Trustly || Trustly || SE

Although
most of the third party providers are not licensed as payment service
providers, few of them obtained such a licence for the provision of other
services.

Considering
the limited number of exiting services providers, this is to be seen as a niche
market.

Problem
3.2.2.5 – Scope gaps and inconsistent application of the PSD

Negative
scope of the PSD

Certain
exemptions in the PSD, discussed more in detail below, lead to very divergent
interpretation and application of this law across Member States. First, the
definitions and exemption criteria set out in the directive appear sometimes to
be too general. Second, the exemptions seem in some cases too generous,
outdated or unreasonable, in particular when technological and business
developments in the payments industry are taken into consideration. Third, the
interpretation of these provisions by the competent authorities varies from one
Member State to the other.

The
inconsistences are amplified by the fact that some Member States may have
apparently decided to change the wording or scope of exemptions in comparison
to the originally agreed text and that despite the fact that PSD is a maximum
harmonisation directive. Furthermore, there is a lack of general harmonisation
or individual guidance on exemptions by the competent authorities of the Member
States.

A
further challenge is that the to-be-exempted service providers do not consult
authorities on whether their activities are covered by the PSD but instead rely
on their own assessments. Some exemptions may have even been used by PSPs to
redesign business models so that the offered payment activities are on purpose
"outside scope" of the PSD[83].

These
divergent applications of the PSD imply risks for PSUs and a lack of a level
playing field for PSPs which is not conducive to a competitive market. Four
following exemptions should be in particular mentioned:

Commercial
agents: Under the current PSD, certain payment transactions are exempted if
done through a commercial agent on behalf of the payer or the payee. While the
provision is formulated rather narrowly, evidence suggests[84] that it is being interpreted very
differently between Member States. The exemption is e.g. used by some
e-commerce platforms[85] that
act as commercial agents on behalf of individual consumers and offer
escrow-type services (a third party between a buyer and a seller – e.g. a
consumer and a company – who receives the funds from the buyer and keep them
until buyer receives the goods or services from the seller) outside the
protection of the general PSD framework. The exception should possibly be
clarified and updated to better comply with new e-commerce business models. It
currently risks distortions of competition in the market and increases risks
for consumers.

Limited
networks: Examples of limited network payments are e.g. store cards, member
cards, public transportation cards, petrol cards, restaurant vouchers or
virtual wallets allowing for shopping on specific websites. The provision
exempts payment activities which take place in the context of a limited network
without however defining, for instance, the notion of what is a 'limited'
network and what is a ‘limited range of products/services'. As a result,
feedback from the market suggests that the activities covered by this exception
often comprise massive payment volumes and values and hundreds or thousands of
different products and services, which has nothing to do with the original
limited network concept. This implies uncertainties for market actors and
greater risks for PSUs.

Telecom
exception: The provision exempts certain payment transactions by means of any
telecom or IT device where the network operator does not only acts as an
intermediary in the delivery of digital goods and services through the device,
but adds value to them. Key examples of exempt digital network payments are
payments for ring tones, apps, games, etc. However, beyond traditional ring
tones and wallpapers, mobile operators increasingly provide access to various
services that combine the digital and physical worlds, thus going beyond the
scope of the exemption. Specific cases of such products with
"offline" characteristics are, for example, vouchers and ticketing
services. This market segment is growing quickly. The mobile network operators
also sell content provided by third parties, acting as a normal intermediary or
an online shop. The scope of the exception appears therefore unclear, too vague
and risks leading to distortions of competition in the payments market.

Independent
ATM providers: The current framework does not cover payment services offered by
providers of ATM services independent from banks or other PSPs. Originally
devised as incentive to install stand-alone ATMs in remote and poorly populated
areas e.g. by pub or shop owners[86],
the provision did not foresee the arrival of independent ATM providers with
networks comprising hundreds or even thousands of ATMs, covering one or more
Member States[87].
The rationale for this exemption raises many controversies, as it leads to
non-application of the PSD provisions for a growing part of ATM market. There
are indications that some PSP-operated ATM networks are seriously considering
the use of this exemption to redesign their business model and charge extra
fees directly on the consumers, while terminating their current contracts with
card schemes or card issuers. This solution has been in fact already introduced
by most bank-owned ATM networks in Germany in 2010 and is known as "direct
charging"[88].
While consumers having payment accounts with the owner bank still enjoy access
to ATMs on the basis of their contracts, all agreements on ATM use with other
banks have been terminated. Instead of a previous, limited fee on withdrawal
charged only by the bank of the PSU, "direct charging" by the ATM
owner has been applied. This has lead to a huge increase of charges for ATM
withdrawals for clients of other banks. As a consequence, the ATM charges in
Germany are currently the highest in Europe, with one-off charges for
withdrawals in non-own networks ranging often between 5 EUR as a minimum up to
12,50 EUR. In the UK, when independent ATM deployers own as much as 47% of all
ATMs, only 5% of all withdrawals in terms of numbers and 3% in terms of value
are made through them[89].
Additional charges demanded from PSUs by independent ATM deployers have a
clearly limiting effect on the ATM usage. Furthermore the exemption raises
concerns in the context of charges applied on consumers for cross-border ATM
transactions in euro and may lead to breaches of Regulation 924/2009.

Table
40 - Number of independent ATMs in selected countries of the EU

|| Total No of ATMs in the country || No of ATMs installed by independent ATM  deployers || ATMs installed by independent ATM deployers as % of total No of ATMs

Netherlands || 7,800 || 800 || 10%

Poland || 17,500 || 3,500 || 20%

Sweden || 3,200 || 650 || 20%

UK || 65,646 || 30,835 || 47%

Source: ATM Industry Association (ATMIA)

It
should be noted that the impact of the discussed exemptions is not always
negative. The reason for the exemptions was to exclude from the PSD these
payment services and providers, for which the PSD regulatory regime would be
excessive. Such services and providers would otherwise need to change their
offer (including price, availability) or may even disappear from the market to
the detriment of competition. However, the scale of positive impacts appears to
be relatively minor in qualitative terms, in comparison with the adverse
effects created by the exemptions.

"One-leg"
transactions and payments in non-EU currencies

Currently,
the most important parts of the PSD from users perspective – Title III and IV
(rules related to the transparency of conditions and information requirements
and those related to rights and obligations of PSUs and PSPs) - do not apply
for all payment transactions. When one of the PSPs involved in the transaction
is located outside the EEA (i.e. when one "leg" of the transaction is
international, e.g. located in Switzerland or USA) the rights and obligations
as well as transparency and information requirements become suddenly different
than in the case of purely intra-EEA transactions[90].
This leads to much confusion and, in many cases, to the detriment for the PSUs.
For example, non-sufficient information on all applicable charges and less
favourable liability rules for incorrectly executed transactions may apply.
Additional complexity, in particular for businesses, is added by sometimes
completely different national rules for such one-leg transactions. In effect,
instead of harmonised EU rules for all transactions, a patchwork of national
approaches exists.

Another
area, where a very similar situation occurs, are payments in non-EU currencies.
Titles III and IV of the PSD apply only to payments in euro or in the national
currencies of the Member States outside the euro area.  As a result
transactions in other currencies, such as US dollar, Swiss franc or Japanese
yen remain outside the scope of the legal protection, whether the transaction
takes place entirely or partly within the EEA. As in the case of
"one-leg" payments, this gap weakens the protection of PSUs and leads
to the adoption of different national rules.

Table 41 - Approach to two-leg and one-leg transactions in the EU Member States

Member State || two-leg rule (understood as:) || one-leg rule || comment to one/two leg || currency scope || comments to currency

EU || EEA

Austria || || || + || National approach, i.e. either PSP or payment service user is located in Austria. || all || Provisions concerning value date are applicable only to EEA currencies.

Belgium || || + || partially covered || Provisions concerning value date and prohibited clauses are applicable when either payer’s or payee’s PSP is located in Belgium. Provisions concerning liability for non-authorised payments are applicable if the payer’s PSP is located in Belgium. || EEA || Provisions concerning liability for non-authorised payments are applicable to all currencies.

Bulgaria || + || || || Either both payee’s and payer’s PSPs or the sole PSP are/is located in the EU. || not enacted || Legislation does not directly mention the application to certain currencies, however, the application to the currencies of the EU/EEA States can be inferred.

Cyprus || + || || partially covered || A list of provisions applicable in one-leg approach is provided in National Implementing Measure e.g. derogation from information requirements for low-value payment instruments, consent and withdrawal thereof for a payment transaction. || EU || A list of provisions applicable to all currencies is provided in the National Implementing Measure e.g. derogation from information requirements for low-value payment instruments, consent and withdrawal thereof for a payment transaction.

Czech Republic || || || + || There is a possibility of contractual derogation from some of the provisions in respect of one-leg transactions, e.g. PSP's liability for unauthorised payment transactions, execution time and value date. || all || There is a possibility of contractual derogation from some of the provisions in respect of transactions in currency of non-EU State, e.g. PSP's liability for unauthorised payment transactions, execution time and value date.

Denmark || || + || partially covered || A broad list of provisions applicable in one-leg approach is provided in National Implementing Measure, e.g. PSP's liability for unauthorised payment transactions, execution time and value date. As a consequence, the one-leg approach seems to prevail. || EU || According to TIPIK’s comments, the relevant provisions cover currencies of EEA States as well, however it does not stem from the wording of the National Implementing Measure’s translation. A list of provisions applicable to all currencies is provided in the National Implementing Measure e.g. PSP's liability for unauthorised payment transactions, execution time and value date.

Estonia || || || + || National approach, i.e. provisions of the National Implementing Measure are applicable to entities established and acting in Estonia as well as to Estonian activities of foreign entities unless foreign law provides otherwise. || not enacted || It is not specified to which currencies National Implementing Measure is applicable, thus it should apply to all currencies.

Finland || || add on || + || A list of provisions applicable in the one-leg approach is provided in National Implementing Measure, e.g. value date, liability of respectively the payer and the payee for an unexecuted or incorrectly executed payment order. || all || A list of provisions applicable only to EEA currencies is provided in the National Implementing Measure, e.g. value date, liability of respectively the payer and the payee for an unexecuted or incorrectly executed payment order.

France || || + || || || EU || The provisions apply if the PSPs of the payee and the payer are located in the territory of metropolitan France, in overseas departments, St. Barthélémy, Saint-Martin, Mayotte and Saint Pierre and Miquelon and if the transaction is conducted in euros as well as in the territory of metropolitan France, in overseas departments, Saint Martin r St. Barthélémy, the other on the territory of metropolitan France, in overseas departments, St. Martin, St. Barthélémy or in another Member State of the European Community or in another State Party to the Agreement on the European Economic Area, and if the transaction is conducted in euros or the currency of a Member State which is not part of the euro area.

Germany || || || + || Minister of Finance is empowered to decide that the rules are applicable to PSPs who are located outside the EEA. The scope of PSP's duty to inform users according to relevant provisions is limited to payment services which are provided within the EEA. || all || The scope of PSP's duty to inform users under the relevant provisions is limited to payment services which are provided in currency of one of EEA states.

Greece || + || || || || EU ||

Hungary || || add on || + || Provisions concerning PSP's duty to inform users under the relevant provisions, and commissions, fees and other payment obligations charged by the PSP are applicable to payment transactions within the EEA. || all || Provisions concerning PSP's duty to inform users according to relevant provisions and commissions, fees and other payment obligations charged by the PSP are applicable to payment transactions in a currency of one of EEA states.

Ireland || + || || || || EU ||

Italy || + || || || || EU ||

Latvia || || + || partially covered || According to the Latvian Financial and Capital Market Commission, the exception refers to one-leg transactions, where the payer's PSP is located in the EEA and the payee is located outside the EEA. || EEA ||

Lithuania || || add on || + || Law on Payments, Art. 3(1) “This Law shall apply to payment transactions executed within the Republic of Lithuania, and to and from other Member States and foreign states.” Foreign state means the state outside the EU and EEA. || not enacted || The National Implementing Measure does not limit the scope of applicability to particular currencies, so it is considered to be a reference to all currencies.

Luxembourg || || + || || || EEA ||

Malta || || add on || + || Application of some provisions is excluded in respect of one-leg transactions e.g. currency conversion services, applicable charges, derogation for low-value payment instruments and electronic money. || EU || The Maltese implementing measure refers only to “currency of a Member State”, whereas e.g. in Para. 2(2)d it differentiates between “Member State” and “EEA State”.

Netherlands || partially covered || + || || Art. 4:22 which implements Title IV of PSD (Rights and Obligations in Relation to the Provision and Use of Payment Services) is applicable only when both payer’s and payee’s PSPs or the sole PSP is located in the Community. || EEA ||

Poland || || + || || || EEA ||

Portugal || + || || || || EU ||

Romania || + || || || || EU ||

Slovakia || || + || || || all || Application of provisions implementing Titles III and IV of PSD (rights and duties of payment services provision, commercial terms and conditions and information provision on payment services and dispute resolution through the permanent arbitration court) is limited to payment transactions in currencies of EEA States.

Slovenia || || + || || || EEA ||

Spain || + || || || Credit institutions from Spain that responded the survey completed within the study report that Spain has extended PSD implementation to one-leg transactions. || not enacted || Legislation does not directly mention the application to certain currencies, however, the application to the currencies of the EU/EEA States can be inferred.

Sweden || || + || || || EEA ||

United Kingdom || || + || || || EEA ||

Source: London Economics and iff in
association with PaySys[91]

Liability
for unauthorised, non-executed or defectively executed transactions

The PSD
intended to limit the liability for PSUs in case of unauthorised payment
transactions so that PSUs are protected in all Member States in the same
manner. The Directive differentiates between
no-liability of PSUs in case of an unauthorised payment transaction, limited
liability up to 150 EUR in case of the use of a lost, stolen or misappropriate
used payment instrument and full liability of the user, notably in case of
gross negligence[92]. In
addition, it gives Member States the option to reduce the payer’s liability
further.

As the
notion of gross negligence is not harmonised at EU level and the concept of
limited liability and no liability is interpreted very differently, the legal
situation of PSUs in the EU is very different from one to other Member State.
For example, the amount of 150 EUR is sometimes treated as a fixed penalty (and
not the extent of maximum consumer liability) independently of the
circumstances and the true amount of a financial loss. What constitutes a gross
negligence is in practice left to the discretion of PSPs, with a consequence
that even clearly non-negligent cases, such as theft of a payment card from a
coat pocket in a shop or restaurant is sometimes treated as gross negligence.
Such interpretations are made possible by a too widely drafted PSD references
to the contractual terms and conditions of the PSPs, which allows in turn the
PSP to define on its own, what gross negligence and fraudulent behaviour is.

Table
42 - Liability arrangements in case of unauthorised or defectively executed
transactions

Member State ||  “How many days does it typically take in your country for a defective or unauthorised transaction to be remedied so that a debited account is restored to the state in which it would have been had the defective payment transaction not taken place?” || “Is the time for remedying a defective or unauthorised transaction specified in national legislation, a regulation, guidance by the competent authority, voluntary guidelines of the national banking association?”

Austria || Immediately || Yes

Belgium || Unknown || No

Bulgaria || no information || no information

Cyprus || 2 || No

Czech Republic || 1 || Yes

Denmark || Immediately || Yes

Estonia || Immediately(1) || Yes

Finland || Unknown || Partly(2)

France || Varies depending on the complexity of the claim || No

Germany || Unknown || No

Greece || Same day(3) || Yes

Hungary || Same day ||

Ireland || Unknown || No

Italy || Unknown || No

Latvia || Immediately || Yes

Lithuania || “Could not happen” || Yes

Luxembourg || Unknown || No

Malta || Same day || No

Netherlands || Unknown || In some cases(4)

Poland || Unknown || Yes

Portugal || Same day || No

Romania || 2(5) || No

Slovakia || Immediately || Yes

Slovenia || Unknown(6) || No

Spain || 1 || No

Sweden || 1-3 || Yes

United Kingdom || Immediately || Yes

Source: London Economics and iff in
association with PaySys [93]

Small
payment institutions

The PSD
provides the option for Member States to waive the application of all or some
the PSD’s provision to payment service providers (either legal or natural
persons) with payments volume not exceeding EUR 3 million per month. Waived
providers are subject to registration with competent authorities. But the
payments service provider benefits of this derogation only if maintaining a
limited scale of business. Furthermore it is not allowed to provide payment
services in other EU Member States unless the Member States provides for
further limitations. Waived providers denominated often as small payment
institutions may employ agents and set up branches only in home market.

According
to the study conducted by London Economics-iff, the waiver option is used only
in 9 EEA States[94]. In a
number of Member States, the waiver has been adopted, but with modifications
that had not been foreseen by PSD. This is for example, the case with the upper
threshold (set by the PSD at EUR 3 million monthly) which can be as low as EUR
100 000 per annum in Slovenia. In a number of Member States, waived entities
may provide only selected payment services. In several Member States despite
providing for waiver there are no providers registered under the waiver
(Slovenia, Luxembourg)[95].

In 2012, 2094 small
payments institutions (SPIs), the so-called waived institutions under the PSD,
were active in Austria, Czech Republic, Finland, Latvia, Netherlands, Norway,
Poland and the United Kingdom, which is about 3.7 times the number of
authorised payment institutions[96].

The
waiver ensures the continued existence of many providers, which were offering
niche services (including payment channels to very specific region or country
of the world), which would not otherwise be able or ready (in terms of costs,
resources, business scale, business concept) to upgrade their business to the
level of an authorised payment institution.

This is
especially important for small communities given the trend among credit
institutions to reduce coverage of the territory with physical offices. A
number of competent authorities noted in the survey conducted by London
Economics-iff that, in the absence of the waiver, a considerable number of such
providers might have continued to operate with no authorisation.

On the
other hand, the waiver distorts the level playing field between authorised and
waived institution in particular where the threshold of EUR 3 million per month
has been preserved and where there are no major limitations on the scope of
activities. Waived providers are free from most obligations including initial
capital, own funds, funds safeguarding. This gives waived entities a strong
comparative advantage over authorised providers. However, this advantage is
limited to their home country as they cannot passport.

Moreover,
the threshold does not prevent waived providers from effectively competing with
authorised institutions on a large scale because they are not prevented from
setting up multiple different legal entities, each one remaining under the
threshold. This is for example, a possibility reported by one competent
authority as a possible reason for the absence of any authorised payment
institution in Latvia[97].

Annex 8: Effects of the identified specific problems

Effect 3.2.3.1 - Unlevel playing field
between service providers/payment institutions

Effects
related to standardisation and interoperability gaps

Standardisation
and interoperability gaps prevent competition among incumbents and create a
significant barrier to the market entry for new and innovative payment service
providers, in particular in online and mobile payments context. They also
contribute to the fragmentation of the market along national boundaries. In
such an environment, even already existing and successful payment solutions
often face serious difficulties when they try to diversify their service
offering into new areas or expand geographically.

Because
of the existence of different technical standards and the lack of
interoperability, payment service providers who wish to offer their services in
more than one Member State will often face the necessity to adapt or redesign
their existing solutions for each market in which they operate. This is usually
expensive and time consuming, raises the issue of sunk costs and seriously
limits opportunities for the economies of scale. Providers entering a new
market will in effect often compete against incumbent PSPs on an unlevel
playing field. They will be hampered by lack of standardisation and might, in
addition, increase fragmentation of the market by making use of proprietary
solutions. This may in turn result in a market competition of standards instead
of competition based on common standards.

Effects
related to inconsistent application of existing rules and to a legal vacuum

The
regulatory inconsistences in the PSD, diverging licensing and supervisory
practices as well as a legal vacuum, in which certain categories of PSPs
operate, lead to a situation where some market players are subject to
authorisation and supervision by some Member States while others, operating on
the same market and providing similar payment services, are not. Thus, for
instance, organisations offering payments within a vaguely defined limited
network, through IT devices or offering payment initiation services in the
online environment are in most cases excluded by definition from any regulatory
and supervisory requirements, whereas their direct competitors, offering
similar payment services, are not. This leads to very different costs and
market access possibilities for regulated versus non-regulated players.
Furthermore, the cross-border dimension adds another layer of complexity and
inequalities on the market.

Key
exemptions, which are limited acceptance payment instruments (used mainly in
closed loop prepaid instruments and/or accounts), commercial agents (used in
bill paying services, online trade and networking platforms), third party ATM
services, and payments via network operators for purchases close to non-digital
goods (vouchers, tickets), impact the market very substantially, leading to its
considerable fragmentation. Given that exempt providers are bound neither by a
requirement to seek authorisation nor by any specific conduct of business
rules, the existing exemptions encourage providers to design or redesign their
products to meet the exemptions criteria and, thus, fall outside the PSD scope.
Fragmentation is detrimental to all stakeholders: it distorts competition among
providers, deprives users of the protection offered by the PSD, and makes it
difficult to apply rule of law and sanctions, where applicable, by the
competent authorities.

Market
intelligence suggests[98]
that a substantial number of PSPs made use of the exemptions to redesign their
current products and services to fall under exemptions and thus escape the PSD.
Given that the majority of providers offer payment services for the consumer
market, it may be assumed that those providers making use of exemptions decide
to do so in order to save on the costs of PSD compliance. This is true not only
for those PSPs that did not seek the authorisation (where the advantages are
the most visible – no need to apply for and maintain the authorisation, no need
to comply with the requirements of the PSD). For the authorised PSP, locating a
product outside the PSD can equally easy decrease overall compliance costs
(such as costs of raising and maintaining own funds, costs of safeguarding
funds, costs of providing required information, structure and transparency of
fees).

Moreover
as a feedback from the Member States suggest, most providers decide about the
applicability of exemptions without asking the opinion of the competent
authorities. The providers may deem it more probable that they will escape
sanctions for misunderstanding the exemption (which are usually instituted by
bodies close to public prosecutors and not by competent authorities) than
escape sanctions (including supervisory measures) for misconduct as an
authorised provider.

Such
exemption-seeking behaviour is already the case in a number of markets, in
particular those with the highest number of authorised PSPs. To give an
example, in the UK the exempt pre-paid cards market appears to be, according to
the UK competent authorities, already be much bigger than the market for cards
issued under the PSD and e-money directive. In some Member States non-regulated
providers have developed into powerful competitors to authorised providers in
their niche markets (pre-paid cards mentioned previously, independent ATM
deployers, bill payment providers, currency exchange bureaus).

Even
within the category of regulated PSPs the competitive playing field is far from
being equal or harmonised across the Member States. There are different
authorisation and prudential requirements for PIs, including different national
rules for registration of small, waived PIs. Flexibility offered by the
legislation and different approaches to authorisation and prudential
supervision contributed to the creation of an EU market with as much as 40% of
the authorised PIs (224 out of 568 in the EU) and 43% of e-money institutions
(30 out of 70) registered in the UK. A similarly divergent approach to the
possibility of creating a category of small, waived institutions (PIs with a
limited, national only license) lead to the creation of 2094 small PIs in eight
Member States, with the huge majority located again in the UK and Poland.

Yet
another example of the unlevel playing field for PIs can be found in inconsistent
application of the PSD passporting rules by the Member States and
ambiguities surrounding the role of agents. Thus, some Member States grant
numerous passports and allow for active provision of services by agents, while
other Member States are much more reluctant in this respect.

Regarding
the indirect access to payment systems, PIs end up in a weaker
competitive position, as they have to depend on banks for the settlement of
their payments.[99] This
also impacts further on other aspects of their services, such as pricing and
execution times. It should be also noted that the same difficulties in accessing
payments system will be increasingly affecting market players offering mobile
payments.

Effects
related to ineffective competition and charging practices

On a
more general level of analysis, the structure of the current payments market,
most notably the two-sided nature of the payment cards market and the existence
of the MIF-based pricing model, acts as a major factor against the introduction
of new and alternative payment solutions. The incumbents – in particular banks
issuing cards and card schemes - are vitally interested in protecting and, if
possible, increasing the revenues from card payments, above all from MIFs. Card
schemes competing with each other in order to get their cards issued lead to
the paradoxical situation that competition gives rise to increasing MIFs (that
encourage issuing banks to issue the cards concerned) instead of decreasing
MIFs. Some indirect evidence of this push toward high(er) interchange fees
can be seen in the trends regarding domestic card schemes, and the resulting
increasing duopoly. The EU payment card markets overall are
dominated by the two major international four-party payment card scheme, Visa
and MasterCard. Their market share in issuing in 2008 was 41.6% (Visa) and
48.9% (MasterCard) respectively[100].
In the context of the implementation of SEPA technical
standards, there has been a trend for national (low fee) card schemes to be
abolished; in a number of Member States banking communities chose not to invest
in the domestic payment card scheme to comply with SEPA. In this situation
banks move to issuing cards of the two existing international payment card
schemes, Visa and MasterCard, that offer higher fees to issuing banks than the
domestic payment card scheme. Recent examples of this include
the UK, the Netherlands, Austria, Finland and Ireland.

Any
payment solution offering lower profit opportunities will be seen by banks as
less interesting to implement from the commercial perspective. More
importantly, if such an alternative payment solution, for example online or
mobile payment based on SEPA credit transfer (SCT) or SEPA direct debit (SDD),
would compete for the same transaction that is currently served by card
payments based on MIF, it would also undercut the fees and profits that are now
linked with such card payments. Many of such solutions rely on some form of
access to the payment account hold by the consumer.[101]
However, even if the payment solution in question opens substantial new
opportunities in the payments market, PSPs will be very reluctant to offer access
to the consumer payment accounts they hold, as they find themselves in the
classical conflict of interest situation. As the market experiences already
show, banks indeed expect to get remuneration from third party providers, for
granting them access to the payment accounts of the consumers, at the level
approximating their card payment revenues.

Therefore,
e-payment solutions based on the online banking infrastructure that do not make
use of a payment card often have stalled or simply not been developed in most
Member States. With two notable exceptions (iDEAL in the Netherlands, Sofort
Überweisung in Germany) even those systems that have been developed nationally
are far from being widely accepted by merchants and consumers. A pan-European
e-payment platform allowing for cross-border online payments has yet to emerge.

Similarly,
issuing banks will in principle only issue cards of new schemes if they
generate MIFs at least as high as the cards they already issue. This
makes the emergence of 'new' pan European card players more difficult, to the
detriment of potential economies of scale and scope and their resulting
efficiencies.

In
fact, any service provider offering payment solutions that endanger or make
less viable the payment model based on MIFs encounters serious difficulties
in entering the market and in introducing its product onto the market. MIFs
applied in one payment method (i.e. cards or direct debit) not only
affect competition within that method (e.g. difficulty for new card
schemes to take off) but also more widely, across substitute payment
instruments. Failing a level playing field in MIFs for cards (i.e. in
the presence of high MIFs), banks seem reluctant to invest in/promote low or no
MIF innovative/secure alternative solutions since they do not want their
current MIF revenues to be 'cannibalised'. Alternative providers capable of
offering more efficient payment methods at a lower price are unable to enter
the market.

Table
43 - Effects of the identified problems (Unlevel playing field between service
providers / payment institutions)

Effect || PSPs || Consumers || Merchants || Other stakeholders

Barriers to the market entry for new and innovative payment service providers || X (main impact) || X || X || X (businesses)

Some providers operating with no authorisation and supervision by MS || X || X || X || X (waived providers, other businesses))

Different authorisation and prudential requirements for PIs + Different registration requirements for small PIs || X (main impact) || - || - || X (authorities)

Different treatment of PIs as regards passporting to other MS || X (main impact) || - || - || X (authorities)

No direct access to payment systems by PIs || X (main impact) || X || X || X (businesses)

Effect 3.2.3.2 - Negative impacts on Payment
Service Users

The
problems described above result in a variety of negative impacts affecting all
payment services users, but most importantly, consumers and merchants. These
impacts may be further divided into several categories, related to one or more
of the identified problems.

Effects
related to inconsistent application of existing rules and to a legal vacuum

An
important effect of the regulatory inconsistences in the PSD, diverging
licensing and supervisory practices as well as the legal vacuum, in which
certain categories of PSPs operate is the limited or non-existent protection
of PSUs for some categories of payment transactions. Good examples of such
transactions are one-leg payments between the EU and non-EU countries
(including remittances of immigrant workers), payments in limited networks (for
example by means of gift cards or meal vouchers) or all payments by means of IT
devices, including mobile payments (such as the purchase of a digital movie
ticket by using a non-card based payment application on a smart phone).  The
negative effects in such cases include, first of all, the lack of confidence of
PSUs in different payment services and, as a consequence, a serious impact on
the readiness to use the given payment service, which hits particularly hard
against the new payment solutions. Furthermore, cases of unprotected
insolvencies and other consumer detriments were reported in some Member States.

Another
impact that affects payment service users is the inconsistent application of
the liability rules by the Member States, often resulting in an overly
strict liability regime for PSUs. The situation is sometimes also
aggravated by contractual terms imposed by PSPs on PSUs. This concerns in
particular the liability for an unauthorised transaction and responsibility for
the use of lost, stolen or misappropriated payment instrument or credentials.

At the
same time, when consumers are using a payment solution of a third party
provider[102], some
PSPs  are treating access to the payment account by these providers as a breach
of contract rules if there is no formal agreement between these third party
providers and PSPs on fees. On such occasions consumers were reported to face a
denied online access to their accounts, to be obliged to collect new online
credentials in the bank offices or even to have their online payments repudiated.
This could be seen as PSPs preventing market access or foreclosing markets,
under the guise of security, anti-fraud measures or liability concerns.

Regarding
complex and intransparent information to consumers, the consequence is
that they are usually not able to compare PSP offers on even main payment
conditions, as they are presented in a very different manner. Crucial
information on charges is often not available or very incomplete online,
further decreasing the transparency. This is in particular the case of many
small PSPs (local co-operative banks, savings banks, credit unions) in some
Member States. The situation is further aggravated by the fact that most of
them also refuse to provide price information on the phone, requiring consumers
to physically appear in the branch to learn them. The study on the economic
impact of the PSD[103] found
that almost 30% of PSP (69 out of 243) websites did not show any or only very
incomplete information on pricing of the credit transfers and direct debits and
24% of the analysed websites (58 out of 243) showed insufficient information on
debit and credit card payments. This creates an important obstacle for any
consumer willing to look for the best offer on the market. In addition,
similarly to 'incumbent' PSPs, also new innovative payment solutions providers
do not always openly communicate on their terms and conditions, notably whether
the services they offer are within the scope of the PSD.

Case Study - Access to information in Germany

German consumer association, vzbv reported that it was confronted with an issue of access to the information and pointed towards a document available on its website, concerning a full survey conducted in the Hessian Region in Germany. The results of the survey conducted in March 2012 showed worrying levels of lack of PSD compliance with regards to access to consumer information, in particular in the case of savings banks, credit unions.[104] The survey found that the list of prices and services (Preis- Leistungsverzeichnis - PLV) was not published in 59% of the cases and the price display (Preisaushang) was not available in 52% of the examined websites. Even in those cases where the price lists were published on the websites, quite often the consumer could not find them easily. Moreover, the existence of two different price lists leads to confusion for consumers.

Source: London Economics and iff in association
with Paysys[105]

Further
effects of inconsistent application include higher fees for payment services
(affecting in particular one-leg transaction, and non-euro transactions[106],
which are not subject to the rule of equal fees for corresponding payments
under Regulation 924/2009), little or no protection and redress
possibilities in case of non-executed or incorrectly executed transactions
and lack of guarantees concerning execution times for transactions not included
under the PSD.

Effects
related to ineffective competition and charging practices

High and varied interchange fees are fuelling market segmentation.
The lack of a level playing field ultimately results in high merchant charges,
inflated retail prices, whilst market entry and innovation are limited.

The
existence of high MIFs has a substantial impact on the costs of payments.  The
recent ECB study on the social costs of payment instruments[107]
reveals some interesting data in this respect. The social costs of all retail
payment instruments in 27 EU Member States are estimated at being close to 1%
of the EU GDP or 130 billion EUR. Some additional 0.2% of the EU GDP or 26
billion EUR should be added if social costs of consumers and households are
taken into account.

The
average social costs per transaction in all 27 Member States taken together are
estimated to be the lowest for cash, at 0.42 EUR, followed by debit cards at
0.70 EUR (however, in 5 out of 13 Member States covered by the study unit costs
for debit cards were lower than for cash payments).  These are followed by
direct debits at 1.27 EUR per transaction and credit transfers, at 1.92 EUR per
transaction. The most expensive payment instruments are credit cards at 2.39
EUR per transaction and cheques, at 3.55 EUR per transaction.

However,
if the analysis is made on the basis of the transaction value the results are
quite telling: the cheapest instruments are credit transfers and cheques (0.2
EUR per 100 EUR transaction), followed by direct debits (0.4 EUR) and debit
cards (1.4 EUR). Cash comes next, at 2.3 EUR per every 100 EUR spent and the
most expensive instrument is credit card, at 3.4 EUR.

It
follows that the cost of a credit card payment is very high from the social and
consumer point of view. It is certainly the most expensive low value payment
instrument. As the MIFs are the most significant part influencing the cost of
credit cards, these data show a strong rationale for reducing the level of MIFs
across the EU. The ECB study find that retailers bear most of the costs of
payments – although in the end consumers pay for these costs as they are
reflected in retail prices.

Debit
cards appear to be, on the other hand, interesting from the EU policy point of
view, as a low value payment instrument with a potential to partly replace cash
as a much more efficient instrument for low value payments. As mentioned
before, 5 out of 13 Member States who participated in the study were able to
achieve lower unit costs of transactions with debit cards (and even despite the
existence of MIFs for debit card payments) once a certain degree of maturity of
electronic payments market is achieved (POS terminals and other electronic payments
infrastructure, payment habits, consumer education etc.).

Credit
transfers and direct debits offer the best efficiency for higher value payments
and, with the migration to SEPA payments by 1 February 2014, offer also an
opportunity to build new, innovative payment services on their basis also for
lower value payments.  Potential area of development could be in particular
online payments (e-commerce) and mobile payments (e.g. web applications based
on instant access to payment accounts).

Case study – savings to retailers and consumers from the
replacement of credit cards by less expensive payment means – The Netherlands

Similar welfare results can be derived from the replacement of
expensive card payments by cheaper payment instruments. In the Netherlands we
can calculate the amount of cost savings to retailers (ultimately also
consumers) realised by using the iDeal system instead of credit cards, using
the average MSC charged by IcePay (an e-commerce PSP). Based on an average
transaction value of 75 EUR,[108] the per transaction cost of accepting Visa or MasterCard online
would be: (0.027\*75 EUR)+0.25= 2.275 EUR per transaction.
The average per transaction cost of accepting iDeal stands at 0.55 EUR. The
difference reaches therefore 1.725 EUR per transaction. Based on the more than
93 million transactions completed through iDeal in the Netherlands in 2011, the
total cost savings can be estimated at 162 million euros. Put otherwise under
the assumption of a 100% cost pass through under a highly competitive market structure
and ceteris paribus, online retail prices would be that much higher
if iDeal or any other cheap alternative to credit cards would not have existed.

Reducing
high IFs would allow for efficient payment systems such as iDeal to be exported
into other (online payment) markets traditionally dominated by expensive credit
card usage. This would also create further incentives for new entrants to
expand on the European online retail payment market, resulting in (high) cost
savings to retailers and consumers.

Another
serious and negative effect for PSUs is limited acceptance of payment cards by
merchants, or more broadly, limited choice of payment instruments that
could be used for purchases. This could be attributed to a much extent to the
ineffective competition in the cards market and to the resulting charging
practices, most notably to the high level of MIFs which translate into high
Merchant Service Charges. Another contributing factor is also the excessive
complexity of card pricing models, which – especially for small businesses –
may often be too difficult to understand[109].
As a result many, in particular smaller, often family run merchants refuse
altogether to accept payments with cards or refuse payments below a certain,
minimum level[110]. It
has to be noted that in the case of Visa and MasterCard merchants are not able
under the HACR to refuse more expensive credit cards, including commercial and
premium consumer cards and accept only cheaper, debit cards.

Where
merchants accept cards, this brings about other effects. First and above all,
merchants treat the costs of payments as any other costs category. This means
that the cost of handling, processing and accepting payments in general have to
be covered and reflected in the price of the goods and services. The higher the
fees related to payment services, the more expensive those goods and services
will become.[111]
Secondly, as the cost of all payments, including the merchant costs of
accepting even the most expensive cards are included in the general prices, the
phenomenon of socialisation of costs of most expensive payment instruments
takes place. In other words, all consumers, even those that do not use cards,
are paying for the costs of using them through cross-subsidisation.

Finally,
in some Member States, merchants may decide to accept cards but demand a
charge, commonly called "a surcharge", on consumers using certain
payment instruments. Surcharges to consumers are directly visible and
therefore could be used to steer price-sensitive consumers towards cost-effective
(for merchants and, implicitly, for society) payment solutions. However, the
practical deployment of surcharging by merchants has led to a number of abusive
practices by some merchants (e.g. when consumers face surcharges without a
viable possibility to avoid them by choosing other payment instrument or when
surcharges are disproportionately high compared to the cost incurred by the
retailer for the transaction).

As a
result, surcharging in its current form resulted in some financial detriment to
consumers and may be seen as a source of problems in itself.  At the same time,
it only worked to some extent as a cost-effective steering tool for the society
at large and, for various other reasons, discussed previously in this impact
assessment, was not totally effective as a solution addressing the original
problem – the high level of MIF/MSCs imposed on merchants. Moreover, widely
differing choices and practices between Member States concerning surcharging
confuse or irritate consumers travelling abroad or doing online shopping on a
cross-border basis. Likewise, merchants establishing a presence in another EU
country could be subject to different surcharging rules, making it difficult to
streamline their operations.

Article
19 of the Consumer Rights Directive (Directive 2011/83/EU) introduces a
limitation based on costs to merchant surcharging possibilities. The Directive
shall be transposed by Member States by 13 June 2014. However, surcharges based
on costs could lead to different surcharge amounts for cards issued nationally
and in other Member States, thus treating differently cardholders using their
cards in a cross-border context.

Table
44 - Effects of the identified problems (High costs, limited choice and
protection for Payment Service Users)

Effect || PSPs || Consumers || Merchants || Other stakeholders

Socialisation of costs of expensive payment instruments through prices for goods and services || - || X || - || -

Higher fees for payments through surcharges || - || X || - || -

High fees for payments for certain payment instruments (due to high MIFs/MSC) || - || - || X || -

Limited choice of payment instruments || - || X || X || X (businesses, administration)

Inconsistent and often overly strict liability rules || - || X (main impact) || X || -

Limited or no protection for some categories of payment transactions (one leg, limited networks, IT devices, payment initiation services) || - || X (main impact) || X || X

Complex, insufficient or intransparent  information on charges || - || X || X || X

Effect 3.2.3.3 - Low cross-border activity

Effects
related to ineffective competition and charging practices

A
properly functioning cross-border acquiring would enable merchants to benefit
from more competition on Merchant Service Charges (MSCs) received by acquirers.
It would also make it economically more attractive for merchants to appoint a
single acquirer for their transactions in a number of countries in which they
operate, resulting in administrative efficiencies and cross-border competition.

The
existing barriers to cross-border acquiring described above impede or
make it less economically viable to use the services of an acquirer located in
another Member State. Even large European retail companies find it, up to now,
questionable, in terms of benefits, to use the services of acquirers located in
another Member State. The cross-border acquiring barriers do not allow
merchants to lower their cost of doing business, to exploit the possible
economies of scale and to streamline their operations.

On the
other hand, the same business and technical barriers block the possible
expansion of successful and competitive acquirers into the new markets and
prevent them from achieving greater volumes and therefore, lower their costs to
the levels possible on a truly integrated market. This translates into limited
choice of payment service providers and into lower or sometimes even no
real competition in acquiring on a Member State level, with the usual, negative
repercussions on the prices and conditions of service in the national markets
for the merchants.

Effects
related to standardisation and interoperability gaps

Online
and mobile shopping widens the choice available to consumers, including beyond
borders. Effective and efficient cross-border payment possibilities constitute
therefore an essential element of the single market in payments, as they allow
the payment service users to take advantage of the wide choice of products and
services available throughout the EU at the best possible prices. However,
consumers in all EU Member States often encounter difficulties and limited
possibilities of payment, both in the physical cross-border shopping and, to a
much greater extent, when they shop on the Internet.

The
standardisation and interoperability gaps are, until now, the main difficulty
when EU consumers travel to other Member States and try to use their payment
cards in shops, restaurants and hotels. As a result, in some cases, only the
use of locally issued cards (cards issued in accordance with the national
technical specifications) or local payment applications is possible[112].
While the physical presence abroad allows the consumer to use cash, in practice
it is sometimes not possible or entails significant additional efforts in order
to get cash (e.g. at self-service petrol stations, public parking or at some
hotels and restaurants located in isolated areas).

Arguably,
in the case of physical presence abroad, the interoperability problem is
gradually disappearing, at least within the euro area. According to the ECB
data from June 2012 (SEPA migration indicators for cards), some 82% of all card
transactions in the euro area where processed in accordance with the EMV
standard[113] and
some 93% of payment terminals where EMV compliant[114].

Table
45 - EMV migration levels in the Member States and SEPA area

This
suggests that from the consumer perspective, at least in the euro area, the
interoperability of cards will be soon achieved. However, on the supply side,
the cost of compliance with multiply standardisation and certification
procedures for cards will still constitute a barrier for a market integration, making
the issuing, acquiring and processing of card transactions much more expensive
and complicated than necessary.

For
online sales, the effects of limited choice of payment instruments are much
greater. Currently, from the consumer perspective, there appears to be no
online payment solution that would be comprehensively available and accepted on
a cross-border basis. The possibilities for online payments offered by
merchants on a cross-border basis are, in most cases, much more limited than
for national payments and often consists of one-only option – a credit
card.

Cash on
delivery is rarely offered in some Member States and in particular on a
cross-border basis[115]. Debit
cards are beginning to gain ground in online payments in some Member States,
but they are limited almost exclusively to the national borders. The
wallet-type solutions (such as PayPal or amazon payments) gained some ground in
the cross-border context, but they do not seem to offer a real difference to
credit cards in terms of acceptance by merchants, as the cost for merchants is
similarly high. With the arrival of SEPA credit transfers some merchants in the
euro area started to offer this option, not many consumers are ready to pay, in
particular for physical goods, before they are safely delivered to their hands[116].

It
is estimated that 60% of all European e-commerce transactions is done using
cards. This method of payment is prevalent in France and in the UK. Some 20% is
done using credit transfers and direct debits, including online banking
e-payment solutions. These are in particular popular in Germany, Austria and
the Netherlands. The remaining 20% is done through other means (such as
e-wallets, as Paypal) and payment on delivery.[117]
Paypal is estimated to have some 35 million active accounts in Europe (some 80
million globally).

Accordingly,
there is a growing gap between the popularity of domestic and cross-border
e-commerce. In 2011, 34% of consumers in the EU27 ordered goods or services
over the internet domestically, but only 10% of them did ordered some products
on a cross-border basis[118]. While
the popularity of cross-border shopping could be lower for some objective
reasons, first of all the existence of a language barrier, according to the
study of the Commission[119], 60%
of attempts of cross-border online shopping orders fail due to technical and
legal problems, such as the refusal of non-domestically issued cards. As
evidenced by Eurostat Survey on ICT usage by Households and Individuals from
2009[120],
the reliance of so many e-commerce sites on payment cards constituted an
important obstacle for those consumers who finally abstained from online
shopping. Around 13% of them indicated that they were discouraged because they
did not possess a payment card and 35% quoted payment security concerns,
related e.g. to the use of cards online.

In
summary, a credit card is often the only available option to shop online
abroad. This may be in itself a major obstacle for many consumers, as credit
cards (including delayed debit cards) are not very proliferated in some Member
States and not easily available for more economically vulnerable segments of
the society.

The
final effect of a restricted choice of payment instruments in cross-border
context is the decision to abandon the purchase by some consumers once
they realise at the end of a transaction that they do not have access to any of
the proposed payment instruments.

Effects
related to inconsistent application of existing rules and to a legal vacuum

While
the PSD introduced the possibility of passporting for activities in other
Member States, cross-border provision of payment services by PIs is still
very limited and has a niche product character. In effect, differences in
national passporting regimes (granting of passports to PIs), insufficient harmonisation
of national passporting procedures, inadequate exchange of information and
apparent resistance of some host Member State authorities (against provision of
payment services without opening an office or through an agent) contributed to
the much lower and narrower in scope provision of cross-border services than
expected by the legislator.

Against
the intentions, provision of payment services by PIs re-created the model of
services limited by national borders that could be observed for payment services
provided by banks. This means that one of the main competitive advantages of
PIs – ability to provide unified payment services across borders on the basis
of much lighter authorisation and supervision rules than credit institutions –
has remained largely theoretical. Consequently, there is no substantial
increase in the choice of payment services or in the level of competition
between different kinds of providers on the EU level.

Table
46 - Effects of the identified problems (Low cross-border activity)

Effect || PSPs || Consumers || Merchants || Other stakeholders

No genuine cross-border acquiring for retailers || X || - || X (main impact) || -

Limited choice of payment service providers || X || - || X (main impact) || -

Limited use of passporting by PI and hence limited provision of payment services across borders by PI || X || X || X || X

Limited possibilities for payments on cross-border basis, in particular in online context, frustrated cross-border payment attempts || - || X || X || -

Slower uptake of cross-border e-commerce || - || X || X || X (businesses)

Effect 3.2.3.4 - Dispersed and hampered
innovation

Effects
related to standardisation and interoperability gaps

Market
fragmentation currently hinders the emergence of potential pan-European payment
innovations in the areas of e- and m-payments and consumers can only benefit
from these services in their own domestic market. Technical differences between
national payment formats and infrastructures also represent a major hurdle for
the supply side. New market entrants or existing payment providers who would like
to start offering innovative services see their business case restricted to the
national market which limits the scalability of the potential revenues and
therefore discourages start-up investments. Similarly, market fragmentation reduces
potential economies of scale on the cost side of these new initiatives and
makes it difficult for existing schemes, interested in establishing
interoperability, to justify this with a viable business case. More
importantly, as innovative services mostly emerge at national level only, there
is a risk that market fragmentation is increased and perpetuated.

The
inevitable delay in the implementation of payment innovations (concerning both
payment means and channels) at pan-European level could have potential, negative
repercussions on the competitiveness of the EU payments market in
comparison to other regions, such as North America or Asia. First, companies
from such markets (not only the incumbent card schemes – Visa and Mastercard –
or other players from the payments sector, but also corporates offering
payments as an accompanying, value-added service, such as Facebook, Google or
Amazon) would make forays into the EU market and offer innovative payment
solutions in the absence of efficient EU payment alternatives, in particular in
online and mobile payments. This would increase the risk of EU becoming a
follower, not an innovator in the field of global payment services and
consequently loose part of revenues and of highly specialised workplaces in the
payment sector to other regions. Second, lack of efficient and best value for
money, modern payment services, offering e.g. immediate settlement,
reconciliation of payment and orders or e-invoicing, is harmful in particular
for many small companies that are the backbone of the EU economy. The weak cash
flow in such SMEs and microenterprises is one of the most frequent causes for
their bankruptcy.

Table
5 - Effects of the identified problems (Dispersed and hampered innovation)

Effect || PSPs || Consumers || Merchants || Other stakeholders

Limited economies of scale for providers || X || - || - || -

Competitive disadvantage of EU vs. other regions || X || - || - || X (businesses)

Annex 9: Impact and comparison of policy options

Market fragmentation

1.1. Weak
governance arrangements (operational objective 1)

1.1.1. Option 1 (No
policy change)

The
current informal status of the SEPA Council is not fully in line with the
Treaty, as it lacks a proper legal base. The demands of both suppliers and
end-users of retail payment for the Commission to address the weaknesses of the
current SEPA Council would remain unanswered. Therefore, the governance of
retail payments in Europe, particularly for payments in euro would remain
sub-optimal. The EPC is currently re-examining its raison d'être and it
might decide to decrease it level of involvement in standard-setting
activities.

The
status quo would translate in a much slower integration of the European retail
payments market to the detriment particularly of end-users of payments.

1.1.2. Option 2 (Set
up of self-regulatory body by market participants)

This
market-driven approach would not satisfy all stakeholders, especially the
consumer representatives, which clearly call for a strong guiding role of the
Commission and the European Central Bank in the whole SEPA project. Moreover,
all market participants are clearly in favour of a ‘co-operative approach’
between the respective stakeholders, national SEPA committees and the European
Institutions.

This
self-regulatory approach, where the SEPA Council would remain as it is, could
give rise to risks of foreclosure vis-à-vis new market participants that would
not be “founding” members. Lack of compliance with the new self-defined
governance arrangements could not be excluded. All this might call for
increased corrective measures by the Commission.

1.1.3. Option 3
(Formal body based on legal act of the co-legislators)

The
SEPA Council, renamed as “the European Retail Payments Council”, would see its
composition, accountability and mandate clearly defined in EU law. The SEPA
Council as a formal legalized body would de jure gain the legitimacy and
credibility that stakeholders are calling for. In the public consultation on
the Green Paper on payments market participants consistently asked for a more
active involvement of public authorities. Option 3 would allow both addressing
the market’s call for a co-operative model and contributing to clarifying the
role of the Commission and the European Central Bank as co-chairmen. The
European Retail Payments Council would have greater accountability vis-à-vis
the EU regulators.

Option
3 would contribute to defining the clear steer that all stakeholders are
looking for on the direction that the European retail payments market should
follow to ensure that tomorrow the EU has effective, efficient, innovative and
cheap means of payments available across all Member States. Failing this, the
emergence of such a market could take many more years to the detriment of
payment’s end-users and society at large.

Conclusion

A
European Retail Payments Council as a formal legalized body will provide the
necessary legal clarity as to the role and responsibilities of the different
actors (industry, end-users and European institutions).  By strengthening the
retail payments governance as requested by all market participants, Option 3
would allow the delivery of the necessary steer, notably but not only with
regard to standardisation of new means of payments, to ensure that tomorrow’s
integrated EU retail payments market becomes a reality for card, e- and
m-payments.

Table
47 -Summary of the impact for options 1 to 3

Policy option || Description || Effectiveness || Efficiency

Option 1 || Baseline scenario || 0 || 0

Option 2 || Self-regulatory body || (0) || (+)

Option 3 || Formal body || (+) || (+)

Table
48 - Summary of the impact for main stakeholder categories (options 1 to 3)

Policy option || Description || Consumers || Merchants || PSPs

Option 1 || Baseline scenario || 0 || 0 || 0

Option 2 || Self-regulatory body || (0) || (+) || (+)

Option 3 || Formal body || (+) || (+) || (+)

1.2. Standardisation
of card payments (operational objective 2)

1.2.1. Option 4 (No
policy change)

As
described earlier, genuine pan-European payment cards, in particular debit
cards, are not yet a reality. A number of market initiatives have been
established in the different domains of card transactions at European level to
address this problem. However, despite having been launched several years ago
in some cases[121], the
broad-scale adoption and uptake of these initiatives have yet to materialise.
This is mostly due to the limited scope of participation in the existing
initiatives and the non-binding nature of the underlying commitments for market
actors.

When
estimating the time scale for migration to existing standardisation initiatives
under a baseline scenario, the so-called EMV initiative can serve as a historic
yardstick. The EMV standard was established to replace signature-based payment
cards with magnetic stripes by "chip & PIN" cards. The first
version of this standard was established in 1995 and by 2012 migration to EMV
was nearly, but still not fully, completed in EU countries. It is therefore not
unreasonable to assume that European card standardisation initiatives could
take 20 years or more for full migration if they are entirely left to the
market.

The
possible benefits for a fully integrated European card market are substantial.
A study undertaken on behalf of the Commission in 2008 estimated that EUR 123
billion could be gained for the SEPA market as a whole if there was full
integration for credit transfers, direct debits and payment cards over a period
of six years[122]. These
benefits mostly apply to businesses and consumers. While integration for credit
transfers and direct debits will be accomplished in 2014 on the basis of
Regulation (EU) No 260/2012 establishing technical and business requirements
for credit transfers and direct debits in euro, integration in the card market
has not made substantial progress since the time when the abovementioned study
was published. While the study did not provide a break-down of the integration
benefits for each payment instrument, even if only 20% of the total benefits
were stemming from payment card integration, this would still constitute almost
EUR 25 billion over six years.

Hence,
a 'do nothing' approach on card standardisation could eventually lead to market
uptake for existing European standardisation initiatives but only over a
relatively long time span and possibly only by a limited group of market
actors, delaying or even partially eliminating the possible economic benefits
mentioned above.

1.2.2. Option 5
(Standardisation through governance framework for retail payments)

The
governance framework for retail payments, in particular the SEPA Council
established by the Commission and ECB, could serve as a platform to achieve
consensus and endorsement of existing market initiatives by the relevant
stakeholders at high level. In comparison to the baseline option, this would
address the concerns of market participants on the payment users’ side.
Corporates, SMEs, retailers and consumers consistently criticise a lack of
adequate involvement in the development and implementation of standards for
card payments in the current market setup.

The
option would entail a broadening of scope beyond SEPA to a European Retail
Payments Council (see previous section) to possibly include work related to
standardisation and the addition of an 'implementation layer' in which
stakeholder representatives at expert level would perform technical work, such
as developing common standard implementation guidelines.

By
lifting the stakeholder discussion from a purely technical to a strategic /
political level this option would facilitate consensus building across market
actors, thereby leading to a stronger degree of commitment by market actors and
additional momentum for the adoption and take-up of the different
standardisation initiatives.

In
conclusion, this option could create benefits versus the baseline option, in
particular an accelerated and more comprehensive adoption and implementation of
existing standards by market actors. The option could therefore facilitate the
realisation of the possible economic benefits mentioned under the baseline
option. Incremental cost would be marginal and limited to the expense of
organising additional stakeholder meetings in the context of the European
Retail Payments Council. The level of regulatory intervention is relatively low
and the option can be considered a "soft law" approach, given that
there is a certain degree of morale persuasion by the fact that the European
Retail Payments Council has been established by the Commission.

1.2.3. Option 6
(Mandate to European Standardisation Organisation)

Another
possible "soft law" approach entails the involvement of a European
Standardisation Organisation (ESO) officially recognised by the European
institutions. For payment card related standardisation, either CEN or ETSI
could play this role. Both organisations have a "facilitator"
approach, meaning that they do not develop standards themselves but provide an
inclusive and open platform for all interested market actors for the
development of (non-binding) standards, technical specifications or
implementation guidelines.

While
CEN covers standardisation in practically all areas of economic activities,
work on payment service related matters has been limited so far. For example,
CEN has set up a technical committee working on personal identification
standards, including for payment cards, but has previously not been active in
the standardisation of card payment messaging protocols or certification
procedures. ETSI is a more specialised body and covers standardisation work in
the area of telecommunications. In this context, ETSI has previously carried
out work related to m-commerce, including mobile payments, but not on card
payments in a more comprehensive sense.

Possible
work carried out through ESOs could be based on a specific mandate drawn up by
the European Commission. However, the fact that neither CEN nor ETSI have
previously been involved in card payment specific work may lead to a certain
degree of scepticism by stakeholders, especially on the supply side, and hence
less commitment. Such concerns were consistently expressed in stakeholder
consultations.

In
conclusion, this option could create benefits versus the baseline option. As in
option 5 market uptake of standards would remain voluntary. The main benefit of
this option versus option 5 (possibility for stronger steering role of the
Commission) is more than offset by the fact that stakeholder participation in
ESO work is always voluntary and at this stage, whilst some market-driven
initiatives are already on-going, could be subject to limited participation by
the supply side of the market based on stakeholder comments provided in the
context of the public consultation on the Green Paper on payments. This option
could therefore be less effective – at least under the current market situation
– in accelerating the materialisation of benefits from standardisation in
comparison with option 5. The costs for this option are marginal and comparable
to the ones of option 5. Overall, this option is therefore less favourable than
option 5. The possible involvement of ESOs could be revisited in the medium
term if sufficient progress through option 5 is not achieved.

1.2.4. Option 7
(Establish mandatory technical requirements through legislation)

This
approach would define binding requirements for all market actors for compliance
within a pre-determined migration period. Technical requirements for retail
payments have previously been established by the Commission in the area of
credit transfers and direct debits.

The key
benefit of this option versus all previous options is that it provides
certainty regarding the timeframe for convergence towards common standards by
all market actors. On the other hand, the possible basis for setting technical
requirements for card payments is by far not yet as developed as it was the
case for credit transfers and direct debits at the time when the Commission
made its proposal. In the latter case detailed standardisation requirements had
been established by the industry (represented in the EPC) in the form of
specific SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) rulebooks to
which banks voluntarily adhere. The technical requirements stipulated in the
Commission proposal were largely based on these rulebooks. In contrast, for
card payments such rulebooks have not been developed. The EPC has developed a
SEPA Cards Framework but it is doubtful that technical requirements could be
established by the Commission based solely on this framework. It should also be
noted that a card payment transaction is significantly more complex than a
credit transfer or direct debit and hence involves more market actors and
technical interfaces.

Therefore,
the main drawback of this option is that it removes the flexibility for market
participants to jointly develop specific technical requirements that best serve
the market as a whole. It could therefore entail significantly higher
adaptation costs for stakeholders than the previous options. In conclusion,
this option is therefore less favourable than option 5.

Table
49 - Summary of the impact for the standardisation of card payments (options
4 to 7)

Policy option || Description || Effectiveness || Efficiency

Option 4 || Baseline scenario || 0 || 0

Option 5 || Payments governance framework || (+) || (++)

Option 6 || European Standardisation Organisation || (+) || (+)

Option 7 || Mandatory technical requirements || (++) || (-)

Table
50 - Summary of the impact for main stakeholder categories (options 4 to 7)

Policy option || Description || Consumers || Merchants || PSPs

Option 4 || Baseline scenario || 0 || 0 || 0

Option 5 || Payments governance framework || (+) || (++) || 0

Option 6 || European Standardisation Organisation || (+) || (+) || (-)

Option 7 || Mandatory technical requirements || (+) || (+) || (--)

1.3. Standardisation
of mobile payments (operational objective 2)

1.3.1. Option 8 (No
policy change)

The
environment for proximity mobile payments in Europe is still fragmented with a
myriad of small local initiatives and a few national pilot projects. At this
stage, market participants seem to concentrate on proprietary and
non-interoperable solutions. To some degree this is not unusual in an emerging
market but it is hard to see how, in the absence of comprehensive and
cross-border standardisation / inter-operability initiatives, a Single Market
for m-payments can evolve reasonably fast.

While
it is not excluded that pan-European initiatives emerge solely through market
forces in the future, so far this has not happened and hence fragmentation is
likely to persist over the short and mid-term in the absence of any additional
impetus. As a consequence, the full economic potential related to proximity
m-payments will not be reached.

For
example, a recent study estimates that the annual volume of NFC-based
m-payments in 2016 will be 19.1 billion in a standardised European environment
versus 11.8 billion transactions if the environment remains fragmented.[123]
This means that almost 40% of the market potential could remain untapped in a
baseline scenario.

1.3.2. Option 9
(Standardisation through governance framework for retail payments)

Retail
payment innovation is a topic which could be addressed under the payments
governance framework and mobile payments have previously been discussed in the
context of the SEPA Council, even if not at the same level of depth and
frequency as 'traditional' payment instruments, such as credit transfers,
direct debits and card payments.

Following
the same rationale as for card payments, a new European Retail Payments Council
(see previous section) could serve as a platform for stakeholders to drive
standardisation and inter-operability of proximity m-payments across Europe.
However, m-payment related work would require the involvement of a number of
additional market participants who do not necessarily have vested interests in
payment issues outside the m-payment arena, for example Mobile Network Operators,
handset manufacturers, and operating system providers.

In
conclusion, the option could create possible benefits in comparison to the
baseline scenario in terms of addressing proximity m-payments standardisation
at European level under the participation of all relevant stakeholders. At the
same time, the required changes in the composition and tasks of the European
Retail Payments Council are substantial. Other costs related to this option are
marginal.

1.3.3. Option 10
(Mandate to European Standardisation Organisation)

ESOs
have carried out work in this field previously, for example a technical report
on requirements for payment methods for mobile commerce.[124]
ESOs have also developed technical specifications in relation to NFC, one of
the leading technologies for proximity m-payments.

Possible
work carried out through an ESO could be based on a mandate by the European
Commission. This approach has been frequently applied in the past, for example
in relation to the Directive on radio equipment and telecommunications terminal
equipment and the mutual recognition of their conformity (1999/5/EC).

In
conclusion, this option could create benefits versus the baseline option. The
main benefit of this option versus option 9 (payments governance framework)
lies in the considerable specific expertise of ESOs in running standardisation
initiatives in the field of telecommunication and mobile commerce. The costs
for this option are marginal and comparable to the ones of option 9. Overall,
this option is therefore more favourable than option 9.

1.3.4. Option 11
(Establish mandatory technical requirements through legislation)

The
definition of binding technical requirements for all market actors necessitates
a certain maturity of the market in order not to undermine flexibility and
innovation. For example, in the case of credit transfers and direct debits,
where a 'technical requirement' approach was chosen by the Commission, a
suitable basis for these requirements already existed in the form of technical
rulebooks that had been developed by the industry.

The
market for proximity m-payments is just emerging and pan-European
standardisation initiatives comprising all relevant market actors do not exist.
Most current pilot projects are based on proprietary solutions. Hence, there is
even less of a market-proven basis for the setting of technical requirements
available than it would be the case for payment cards. Under these
circumstances, this option would create the significant risk to stifle
innovation and is therefore discarded.

Table
51 - Summary of the impact for the standardisation of mobile payments (options
8 to 11)

Policy option || Description || Effectiveness || Efficiency

Option 8 || Baseline scenario || 0 || 0

Option 9 || Payments governance framework || (+) || (+)

Option 10 || European Standardisation Organisation || (+) || (++)

Option 11 || Mandatory technical requirements || (+) || (--)

Table
52 - Summary of the impact for main stakeholder categories (options 8 to 11)

Policy option || Description || Consumers || Merchants || PSPs incl. MNOs

Option 8 || Baseline scenario || 0 || 0 || 0

Option 9 || Payments governance framework || (+) || (+) || (0)

Option 10 || European Standardisation Organisation || (++) || (++) || (+)

Option 11 || Mandatory technical requirements || (0) || (-) || (-)

Ineffective competition
in certain areas of card and internet payments

2.1
Interchange Fees (IFs) for card payments (Operational objective 3)

In a
large number of countries, the problems surrounding Interchange Fees (IFs) have
already led to regulatory intervention or other measures from public
authorities.[125]
Regulatory caps have so far been introduced in the United States and Australia.
In Spain caps introduced through a settlement after 'moral suasion' were
subsequently made binding by public authorities. Other types of intervention
(e.g on the basis of the competition rules) have also led to significant
changes in the market for payment cards.

In the US,
Regulation II (Debit Card Interchange Fees and Routing) introduced a cap on
debit card interchange fees for large banks (holding more than $10bn in
assets)  in October 2011 at $0.21 + (0.05 \* value of transaction), plus an
additional 1-cent fraud adjustment if eligible.[126] In addition, the legislation introduced measures to prohibit network
exclusivity under which merchants must have the choice of at least 2
networks through which payments can be processed. Other measures include a
prohibition of circumvention and net compensation, reporting requirements and
administrative enforcement.

In Australia the Reserve Bank (RBA) initiated a payment
card reform in 2003 for credit and in 2006 for debit, introducing caps over a
period of time.[127] Before the reform, MC and Visa debit card IFs were around
0.95% of transaction value. This was reduced to a maximum of $0.12 per
transaction. The domestic EFTPOS debit system operating on a reversed IF
model (paid to the acquirer), was required to cap its bilateral IF
to $0.05 per transaction, and the multilateral IF to $0.12. Visa and MC credit
card IFs were reduced to 0.5% of the value of transactions. This
exemplifies the RBA's conclusion that MIFs, regardless of the direction
(issuer-acquirer or acquirer-issuer) are not (or no longer) necessary to
'promote' usage or acceptance in a mature market. Additional measures include a
ban on no-surcharge rules, HACR (un-tying debit and credit), and no-steering
rules.

In the US[128] and Australia however, it has been decided to cover only two legs
transactions, between a merchant from these countries and a cardholder from the
same country. This has resulted however in no cap applying to the interchange
fees for one-leg transactions, for instance with a US cardholder and a EU
merchant.

In Spain, between 1999 and 2005, four series of measures
were taken relating to IFs, aimed at progressively reducing them. All these
events resulted in agreements (under the threat of intervention by public
authorities). [129] On 24 September 1999 the Spanish NCA adopted a resolution to
decrease IFs (From a max of 3.5% in 1999 to 2.75% in 2002).[130] In 2002 and 2003 the Spanish NCA this time using moral suasion,
requested the payment card networks to provide information on the methodology
used in setting MIFs and later refused to accept several proposals on proposed
levels of interchange. In 2005 coordinated action between merchants, card
schemes and the Ministry of Industry, Tourism and Trade resulted in commitments
to further reduce credit and debit interchange fees on a 'cost based approach'
(effective in November 2006).[131] During the course of the commitments, MIFs were reduced in a
stepwise manner (credit card MIFs were reduced from 1.4% p.t. in 2006 to 0.35%
p.t. in 2009 and debit from €0.53 in 2006 to €0.35 in 2009).[132] Additionally a forum was created designed to monitor, analyse and
disclose information on the card payments system in Spain.[133] On 31 December 2010, the commitments expired and the parties were
free to set IFs as long as they respect the competition rules, which is the
default situation in Member States across the EEA in the absence of regulatory
intervention or other measures from public authorities.[134]

At EU
level in order to comply with competition rules the two international card
schemes Visa and MasterCard have accepted weighted average Multilateral
Interchange Fees of 0.20% and of 0.30%  for cross-border debit and credit card
transactions respectively.

The French
domestic payment card scheme Groupement des Cartes Bancaires has
accepted a weighted average fee of 0.30% for domestic debit and credit card
transactions.

Monitoring
is however very complex when weighted average caps are in place, as is the case
regarding the current Visa commitments and MasterCard undertakings for which
two trustees have been nominated. This is why under the regulatory options
considered in the present document per transaction caps, directly
visible to merchants, are favoured.

Duplication
of the MIF model (or its 'bilateral' variation with similar effects) in the
new, innovative payment services that are being rolled-out on the market or
could be launched in the future should be avoided. This includes in particular
any mobile payment applications and online payments (Internet) applications. A
clear and unambiguous regulatory approach in this area appears necessary. 
Therefore, the IF regulation should apply to e- and m-payments based on cards
(or MIF be banned as a business model in the new areas). This would mirror a
similar provision in the SEPA End Date regulation as regards payment
transactions based on the SEPA Direct Debit and Credit Transfer schemes.

2.2 Option 12
(No policy change)

This
option involves no legislative or non-legislative action from the Commission.
It would leave the issues raised by ineffective competition and lack of
transparency in the payment cards market to competition enforcement actions to
be undertaken by the Commission and/or National Competition Authorities, in
particular on the basis of the MasterCard judgement.

On 24
May 2012, the General Court rendered a judgment[135]
on MasterCard's appeal against the Commission's decision prohibiting
MasterCard's multilateral interchange fees (MIFs) that apply to cross-border
transactions with consumer cards (commercial cards out of scope). The ruling
rejected the appeal confirming that MasterCard's cross border MIFs restricted
competition in the cards payment market and were not justified for efficiency
reasons. It also gives a framework in which MIFs should be seen and assessed.
Competition enforcement is however unlikely to be an efficient and effective
instrument to achieve the objectives above.

First,
MasterCard has appealed the judgement, as a consequence of which legal
uncertainty regarding the assessment of MIFs will persist for some years to
come. Secondly, the judgement still leaves the question of the appropriate
level of MIFs open, even if it the General Court endorsed the Commission’s
assessment that debit cards generate important commercial benefits for banks
apart from interchange fees, and therefore questioned the necessity of a MIF
for debit cards[136]. 
Discussions with MasterCard and Visa will ensue on this, while the timing and
the scope of the respective proceedings differ[137].
Finally, the likelihood of getting long-term, comprehensive commitments from
both Visa and MasterCard in particular covering also domestic transactions and
practices applying with respect to commercial cards and would seem relatively
low, since neither of the schemes has an incentive to be a 'first mover'
introducing lower fees; this would mean enabling its competitor to take over
the market by continuing to offer higher fees to issuing banks.

Competition
commitments based on fragmented competition law enforcement may not ensure a
level-playing field, and may even lead to further legal uncertainties and
distortions on the card payments market. For example, already now the fact that
Visa committed to the weighted average MIF of 0.2% for debit transactions in
some countries, while MasterCard did not, causes Visa to be pushed out of these
markets since issuing banks prefer to issue MasterCard cards that can offer
higher MIFs than Visa's. This is the case in Hungary, where after the Visa
proposed commitments became public in 2010, Visa consumer card debit MIFs were
lowered to a level of 0.20%. This led to the migration of debit card
issuers from Visa to MasterCard, with Visa having lost 45% of its market share
(more than a million cards) in the first semester of 2012 as compared to 2009.

Table 53 - Hungary
- Number of consumer debit cards issued and corresponding market shares

|| 2008 || 2009 || 2010 || 2011 || 2012 1H

MasterCard Debit || 4,334,090.00 || 4,342,645.00 || 4,855,935.00 || 5,531,507.00 || 5,668,506.00

Visa Debit || 2,389,051.00 || 2,432,564.00 || 2,150,971.00 || 1,621,735.00 || 1,358,628.00

Total Visa + MC Debit || 6,723,141.00 || 6,775,209.00 || 7,006,906.00 || 7,153,242.00 || 7,027,134.00

|| || || || ||

MasterCard Debit Market Share || 64% || 64% || 69% || 77% || 81%

Visa Debit Market Share || 36% || 36% || 31% || 23% || 19%

Source: Hungarian National Bank

In
addition, the EU proceedings against MasterCard and Visa cover only
cross-border transactions in case of MasterCard and cross-border and domestic
transactions in 10 Member States where multilateral arrangement are of
relatively less importance in case of Visa. This leaves all the other domestic
MIFs to be addressed by National Competition Authorities, in close cooperation
with the Commission. While many of them are and have already been active in
addressing MIFs and the MasterCard judgement should help them in this work,
this would still be a very long and fragmented process, with no guarantees of
ensuring full consistency across the EU, particularly given that the General
Court's judgement still leaves the question of the specific appropriate level
of MIFs open.

Even in
the improbable case where all National Competition Authorities had the
necessary resources to address domestic MIFs, they would do so at different
speeds, depending on their specific priorities and competences and the
different jurisdictional structure and appeal procedures in place. A regulation
on MIFs would probably take less time to adopt and come into force than for the
competition proceedings to come to an end and for the full force of their
impact to be felt, considering for instance that the MasterCard decision was
taken more than 5 years ago, and that MasterCard has just appealed the Court
judgment.

Pure
competition enforcement would in particular not address a range of market
access issues that are currently blocking or disrupting the development of the
Single Market in the area of card, mobile and internet payments, such as
decentralisation of national acquiring silos and cross-border acquiring,
separation of card schemes and processing – although it could address some transparency
aspects, including the Honour All Cards Rule, unblending and the Non
Discrimination Rule.

General
conclusions for Option 12

Even with the
advent of the MasterCard judgement, the possibility for the Commission to work
only under competition rules with National Competition Authorities is unlikely
to deliver legal certainty and a level playing field in the markets for card,
internet and mobile payments.

2.3 Option 13
(Allow cross-border acquiring and regulate the level of cross-border
interchange fees)

This
option would make it easier for merchants to accept card payments through
acquirers located in other Member States i.e. instead of the fee applicable in
the country of the 'Point of Sale' a cap set for interchanges fee (IF) for
cross-border acquired transactions would apply in the event merchants choose to
make use of the services of an acquirer in another than their own Member State.

As
such, the option leaves room for competition enforcement as discussed above and
keeps untouched the domestic IF levels. It is also unlikely to require heavy
monitoring as interested merchants and/or acquirers would proactively request
or propose such possibilities and therefore contribute to the enforcement. It
is therefore likely to compare favourably with the setting of (some) domestic
IFs at a certain level, where the attempts for circumvention could flourish
through increases of other fees pertaining to the MScs or so-called
transparency measures imposed by schemes such as blending (cf. the discussion
of option 15 below).

In
terms of impact, banning or lowering IFs on cross-border acquired transactions
could put a strong downward pressure on national IF levels, as the threat of
merchants massively changing acquirer to one located in a 'cheaper' Member
State could incentivise card schemes and banks to lower their domestic IF
levels, It could then change the incentives of large acquirers' banks as
regards the maintenance of high IF levels[138].

On the
other hand, this option would not bring any immediate or medium term change in
many domestic markets and, therefore, its effect on the level and variability
of domestic MIFs would be limited.

First
of all, existing legal and technical obstacles to cross-border acquiring, in
the terminal to acquirer area (different technical hardware standards,
different certification procedures for terminals, different software
communication protocols) require at least a few years to be overcome[139].
This could slow down the rate of adoption of cross-border acquiring by most
merchants. Paradoxically, this option may also create incentives for banks not
to work constructively to remove barriers to cross border acquiring – as they
would stand to gain more in any case from the status quo in terms of technical
and otherwise obstacles.

Even
without technical or legal obstacles, cross-border acquiring would make a
significant difference only for big retailer networks, able to negotiate with
their acquirers or to seek a 'central', unique acquirer. Small, individual
merchants would most likely not see a compelling commercial reason or would not
have the necessary knowledge, skills, negotiating power and financial resources
to pursue such a solution. A reaction of card schemes and national acquirers
when cross-border acquiring becomes practical could be to offer better
conditions to large retail chains. Savings for big merchants would therefore
amount to 3 billion Euros[140].

However,
smaller merchants would probably not see a significant decrease in their costs.
They could potentially experience an adverse impact if acquirers try to recoup
lost revenues through relatively higher fees, although in view of the limited
revenues at stake this is likely to be limited. This will in any case not
improve the acceptance of cards and cards based payment instruments among small
merchants.

General
conclusions for Option 13

Although
modest in terms of likely impact in the short run, this option could be pursued
in combination with one of the options identified below, as a trigger for
market integration in particular when transition periods are considered for
wider-ranging policy options.

2.4 Option 14
(Mandate Member States to set domestic IFs on the basis of a common
methodology)

This
option would mean adopting legislation on the methodology for setting
interchange fees, and it would be up to each Member State to implement it. The
disparity between national measures could in theory be reduced by supplementary
use of caps or cap ranges, on top of the national solutions. Alternatively,
this option could be also used as a temporary, phase-in solution before the
common MIF is implemented, although the sheer complexity of setting up such a
system only for it to be temporary would be controversial.

This
option would address the issue of different maturity of card and payment markets
in the Member States where different levels of card usage and acceptance (see
table below) and different levels of cash usage prevail. It would allow
national solutions to be developed, giving more leeway for purely 'domestic'
card schemes or other payment solutions.

Table
54 – ECB Statistics on cards

Under
this option the issue of high MIFs resulting in high MSCs from the merchants'
perspective could be addressed and the acceptance of card payments by merchants
stimulated to some extent. It would however be addressed in a much more limited
scope than option 15 below, as the likely outcome in terms of level of IFs is
likely to be higher than a common cap. Depending on the methodology chosen the
outcome under 14 is also likely to depend on the specific situation in a given
Member State, including the current IF levels. As the levels of IFs vary
greatly from one Member State to the next, as shown in the Graph below, a
spectrum of national caps although based on a common methodology is likely to
lead to a European arithmetic/weighted average above the level of the common
European cap determined under option 15. In addition, the diversity of the
national situations would make the emergence of 'new' pan European players more
difficult, to the detriment of potential economies of scale and scope and their
resulting efficiencies if pan European actors charging low MSCs could emerge.
The latter would have to offer issuing banks as a minimum the highest level of
interchange fee prevailing in the market they want to enter, which has a
dramatic impact on the viability of their business model.

Figure
55 - Average domestic MIF levels in the Member States, 2012

In
fact, this option would not result in a truly integrated card market but in a
patchwork of national interchange fees across the EU. In addition to the
effects identified above, this could hinder merchants from making use of cross
border acquiring services, unless common rules are set on which IFs would apply
in case of cross-border acquired transactions.

In
addition, it would require a much more burdensome implementation than options
13 and 15, as there would be a complex system of various caps and a heavy
involvement of national regulators would be required. It would also be
difficult to set up a common methodology to a sufficient degree of details – to
promote consistency, to monitor and enforce it at EU and national level.

Finally,
there could be limited visible impact on consumer prices as a result of
merchants' savings, especially as those savings are likely to be small.
Whichever the level of pass-through of retailers' savings to consumers, the
impact on pricing is likely to be marginal.

General
conclusions for option 14

Although this
option would in principle keep a degree of flexibility in terms of implementation
at national level, its effects in particular in terms of interchange fees
variability and market integration are likely to be limited. Consumers and
retailers welfare gains are likely to be modest, and the heavy administrative
resources to be invested in defining a concrete methodology for national
regulators, in implementing it and in monitoring its implementation are likely
to raise issues, in terms of the efficiency of this policy option.

2.5 Option 15
(Set a common, EU-wide IF level, based on a maximum cap)

On a
global level, this option would promote the integration of the EU card market
for consumers and merchants. The full harmonisation of the IF throughout the
EU, together with an increased transparency of card rules in the EU, would achieve
full transparency of the main cost elements in card and related e- and
m-payments. Merchants would be charged for payments on the basis of one single
IF cap across the EU. The resulting level playing field in terms of payments
costs could help in increasing card acceptance - depending on the sub-option
considered. This could be reinforced by the full harmonisation of charging
practices for consumers on a national and cross-border basis, and – when fully
implemented- the absence of a need for specific rules for cross-border
payments.

This
option would also result in the highest level of legal certainty on business
models for existing card schemes and new entrants. A level playing field for
competition in issuing and acquiring of cards would be set, all other elements
being equal, the competition would be based on pricing, not other, non-price
factors. New entrants would benefit from a solution to the IFs obstacles they
face when trying to enter the market. In addition, the application of a common,
EU-wide IF level, maximum cap to online and mobile payments together with rules
on access to information on bank accounts by third parties (options 26 and 27)
would be likely to stimulate innovation in payments and a wider choice of
payment instruments. In turn, this would contribute to lower prices of goods
and services in the economy as the lack of readily available payment
instruments has been identified as one of the key obstacles to the development
of e-commerce in Europe.[141]

In
terms of possible drawbacks of this option, consumers might fail to see visible
retail price decreases resulting from action on IFs. In spite of merchants'
savings, isolating the impact of a specific cost element on the overall pricing
policy of a retailer is difficult: many other factors might play a role in the
evolution of prices. Besides, the level of competition in the relevant retail
market segment impacts the degree of pass-through of retail savings to
consumers. It can however be considered that the pass on of savings (decrease
in Interchange Fees) to consumers is more likely coming from retailers than the
pass on of interchange fees from banks to consumers, as competition is fiercer,
the retail sector is less concentrated[142],
pricing to consumers is more transparent, and there is no bundling. Customers'
switching to another retailer for a one-time or recurring purchase is more
common than the switch to another retail bank.

According to estimates by Massachusetts University Professor Nancy
Folbre, the 2012 median retail profit margin in the US was 7% for discretionary
consumer goods (8% for non-discretionary products), compared to a profit margin
of close to 16% for financial services. This indicates a highly competitive
retail market in which any reduction of costs would more likely lead to lower
consumer prices than the pass on of interchange fess to cardholders in the
retail banking sector[143] – although obviously a 100% pass through to consumers in the
retail sector through reduced prices, increased quality, etc. would assume a
very high level of competition, ceteris paribus.

In fact, a large US retailer (Home Depot) announced a reduction in
price of more than 3000 products since October 2011 making a direct link with
cost savings from the reduced interchange fees following Regulation II. 
According to the retailer, IFs are the third largest operating cost after real
estate and wages and the reduction of prices is necessary to offer a competing
edge against its nearest competitor (Lowe's).[144]

Measuring the precise effect of MIF reductions on retail
prices is however very difficult given all the possible factors in the economy
that contribute to pricing. The Reserve Bank of Australia (RBA) for example in
its preliminary assessment[145] could only isolate a CPI (consumer price index) savings of around
0.1 percentage point as a result of IF reductions over the long term.[146] It is very difficult nevertheless to measure the exact
impact of this specific MIF rule on final prices. Standard economic theory
however suggests that ultimately changes in costs of merchants are reflected in
retail prices (in a competitive market).[147]

There is widespread acknowledgement – in line with economic theory
and basic market mechanisms- that merchants pass on the cost of MIFs (and all
other costs) to consumers through increased retail prices. If historically
there would have been no MIF, retail prices would therefore, in effect, be
lower. Though not every reduction in costs would result in an identifiable
decrease in price and the magnitude of the pass-through would depend on the
level of competition in the retail sector considered, benefiting merchants
might use these saving to make investments, innovate or improve their services
in another way.[148]

As a
second possible negative impact, consumers might fear increased fees in other
banking services. Due to the widespread cross subsidisation in the banking
sector, reducing IFs revenues for banks could result in an adverse pricing
impact on other banking services. This (potential) negative impact may however
not outweigh the benefit in terms of retail pricing, resulting in overall
consumer welfare gains. Evidence from regulating MIFs in a number of countries
and its impact on both retail prices and retail banking fees is discussed
further in the Quantitative assessment section.

Finally,
the possible circumvention of the Regulation, for example by raising non-MIF
elements of fees, paid by merchants directly to the card schemes has to be
considered. In the US, the Federal Reserve Board included an
anti-circumvention rule to eliminate the possibility for a scheme or bank to
undermine the functioning of the MIF cap on debit card transactions, stating
that any attempts to circumvent the cap are illegal. At the same time the
provision also prohibits issuing banks from receiving 'net compensation' (e.g.
that it receives more payments or incentives than it pays to a payment card
network)[149].

The
coverage of inter-regional fees applying when the merchant is
located in the EU but the card has been issued outside this area- could also be
potentially considered to prevent circumvention of the Regulation, for instance
through possible cross border issuing of cards. Currently,
EU merchants would benefit more from the sole capping of inter-regional
interchange fees than from the capping of intra-EU cross-border interchange
fees (i.e. when the retailer and the cardholder are from different countries in
the EU, as discussed in option 13) as their levels
are considerably higher for both debit and credit card transactions than for
intra EU cross border debit and credit transactions. In spite of the limited
share of intra-regional transactions in the total of transactions, the annual
MIF amounts involved could be estimated at around 0.5 Bio €. Currently, these interregional interchange fees and the usage of
the definition of 'regions' in their 'rules' are already used by schemes to
minimise the impact of IFs reductions. A drafting of definitions that would
limit the risk of possible circumvention could therefore be considered.

Table
56 - Specific impact per sub-option

A
distinction can also be made between four possible sub-options, depending on
whether credit cards are covered or not, and on whether debit card IFs are
capped or banned:

Option || Domestic Debit cards || Domestic Credit cards || Cross border debit cards || Cross border credit cards

15.1 || 0,2% || Not covered || 0,2% || 0,3% or acquirer's country

15.2 || IFs forbidden || Not covered || IFs forbidden || 0,3% or acquirer's country

15.3 || 0,2% || 0,3% || 0,2% || 0,3%

15.4 || IFs forbidden || 0,3% || IFs forbidden || 0,3%

The caps indicated above (0.2% of the transaction value for
debit cards and 0.3% of the transaction value for credit cards) are set on the
basis of MasterCard/Visa commitments[150] and e.g. recently negotiated between French
competition authorities and Groupement des Cartes Bancaires.

The option of banning IFs for debit cards is considered as
it appears that a debit card without any IF would be viable from a commercial
perspective without necessarily raising the costs of current accounts. Denmark
for example has a zero-IF on its domestic debit scheme while an average account
holder pays well below the EU average for a current account[151].
Moreover, initially all the European debit card schemes were working without an
interchange, the practise was imported from the US later. The German card
scheme Ec-Karte only introduced interchange fees in 2000.

This would also be in line with the MasterCard judgement,
since the General Court endorsed the Commission’s assessment that debit cards
generate important commercial benefits for banks apart from interchange fees,
by enabling them to reduce the number of cash and cheque transactions and,
therefore, the costs that would otherwise arise in connection with the manual
handling of such forms of payment. The Court held that the existence of such revenues
and benefits made it unlikely that, without a MIF, an appreciable proportion of
banks would cease or significantly reduce their MasterCard card issuing
business[152].

Sub-option
15.1: caps on Ifs for debit cards, credit cards not covered

As
compared to sub-options 15.3 and 15.4, this approach would appear more flexible
as the effects of regulating debit card interchange fees could be examined and
monitored under sub-option 15.1, before a decision is taken on whether or not
to cover credit cards. It would however decrease the level of legal certainty
regarding an acceptable business model for market players, as the absence of
coverage of credit card transactions would only be re-assessed once evidence
has been gathered about the regulation of debit card interchange fees.

Besides,
the caps for interchange fees for credit cards would be in line with the ones
of the MasterCard undertakings, the Visa commitments (on debit cards), and the
Groupement Cartes Bancaires case in France. In spite of this, discussions may
be raised on the methodology used and on the final figures. Different maturity
of national card markets and national payment habits (based on historical
developments) may lead to difficulties in finding one IF level acceptable and
appropriate for most Member States. Banning certain business rules (i.e.
banning interchange fees) is more straightforward and easier to implement.
Also, it does not generate speculation on the future amount of the cap, which
in itself is conducive to legal uncertainty about the current or future
business models prevailing on the market

Such a
gradual approach could however be more attractive from the point of view of
implementation by Member States since it allows for a longer flexibility as to
the substantive result. However, capping IFs for debit cards instead of a ban
would be problematic in the Member States in which there are currently no
domestic IFs for debit cards in place or domestic IFs are below the envisaged
cap level. It would result in these Member States in increases in level of
MIFs, with negative consequences on merchants and consumers' welfare and on
market entry of 'cheaper' payment solutions – with IFs below the envisaged
domestic caps.

In
addition, under such a sub-option, banks and scheme revenues from interchange
fees for credit cards would be left untouched. Covering debit card IFs, without
covering IFs for credit cards would have a more limited impact on banks and
card schemes revenues. The Commission estimates that bank revenues from IFs in
the area of 2.5 billion Euros would be called into question, cf. the
quantitative assessment section below.

Obviously,
across the entire EU, the impact of this option would be more modest in terms
of decreased MSCs to merchants and of potential market entry and innovation
than if IFs for credit cards were to be covered, and/or IF for debit cards are
banned. Increased merchants acceptance and merchants/consumer welfare potential
gains through any or both of these two 'channels' would be more limited. This
is compounded by the fact that banks may well push for consumers to use more
expensive credit cards instead of cheap(er) debit cards. Of all the
sub-options, 15.1 is the one with the most limited impact.

In
addition, the impact on the variability/level of interchange fees for credit
cards would be even more dependent on the efficiency of transparency and
steering measures, when the IFs for credit cards are not covered, as it would
be the only venue through which they could be influenced.

Sub option
15.2: ban on Ifs for debit cards, credit cards not covered

Although
to a lesser extent than 15.1, this approach would be more flexible than 15.3
and 15.4 as the effects of regulating –banning- debit card interchange fees
would be examined and monitored before a decision is taken to cover credit
cards. The level of legal certainty regarding an acceptable business model for
market players on the credit card market would be less than under the more
'invasive' sub-options 15.3 and 15.4 though, as the absence of coverage of
credit card transactions would be re-assessed once evidence has been gathered
about the regulation of debit card interchange fees.

Regarding
the ban on IFs for debit cards, most EU citizens have a current account today,
which usually comes with a debit card (on average in the entire EU, there are
0.9 debit cards per capita, including children[153]).
There might not be a need any longer to incentivise the issuing of debit cards
by banks through an IF, as debit cards are already widespread. Also debit card
usage by cardholders is generally not incentivised – the use of more expensive
credit cards is incentivised rather through various bonuses and rewards.

Encouraging
cash avoidance is in line with many Member States' policy objectives. Several
Member States are promoting electronic payment to limit tax evasion and the
black market economy. Banning IFs for debit cards would also lead to increased
card acceptance by (small) retailers to the detriment of cash, resulting in
overall welfare gains for society[154].

Banning
IFs for debit cards would also allow fears that SEPA results in higher IFs and
costs structures to be defused, as some domestic debit schemes currently
function without a MIF or with a lower MIF than 0.2 (Belgium, the Netherlands,
Denmark, Finland, Ireland, Luxembourg, Sweden and the UK), and this would not
be called into question under such a 'SEPA optimum' of banning IFs for debit
cards.

Similarly
to 15.1, banks revenues from interchange fees for credit cards would be left
untouched. Banning debit card IFs, without covering IFs for credit cards would
have a more limited impact on banks and card schemes revenues. In the estimates
of the Commission, a ban on Interchange Fees on debit cards would result in
total interchange revenue losses of circa 4.6 billion Euros, with IF revenues
for credit cards amounting to circa 5.7 billion Euros[155].
In addition, it can be considered that higher card acceptance and usage at the
point of sale could result in (acquiring) banks and card schemes collecting
higher POS revenues which could compensate/overcompensate the revenues lost
from banned IFs whilst issuing banks would save on the IFs amounts normally due
to ATM acquiring banks as cash withdrawal would decrease and card use at POS
increases (see also 15.4 below). Such a compensation/overcompensation would be
more likely if IFs for debit cards are banned and credit card interchange fees
are not covered – as IFs revenues for credit cards would be maintained whilst
increased acceptance is likely to be high in the case of a ban on debit cards.

It has
to be noted that in Norway for instance, the absence of IFs for debit cards is
accompanied with very high level of usage and acceptance. The domestic debit
scheme BankAxept more than doubled its number of transactions over the past
decade (496.7mn in 2001 to 1207.7mn in 2011). In value this figure has grown
from 291.8 billion NOK in 2001 to 507.6billion NOK in 2011[156].
Per capita this figure translates to 240 transactions per person per year
completed with BankAxept (taking the entire population)[157].
Card acceptance has also been growing at a steady rate (from around 16
terminals per 1000 inhabitants in 2001 to over 27 in 2011)[158].

Denmark
also has one of the highest card usage rates in the EU at 216 transactions per
capita with a zero-MIF debit scheme. Debit card usage accounts for 80% of all
card transactions. In debit usage, Dankort accounted for 790 million
transactions in 2009, up from 691 million in 2008, which is a growth of 15 per
cent (even in a mature market)[159].
Dankort is accepted by close to 90,000 retailers[160].
According to ECB data, the total number of POS terminals per 1000 inhabitants
is at 22.5 (above the EU average of 17.58)[161].

In
Switzerland, despite having a zero-IF on Maestro debit, the scheme grew in
number of cards issued by 17.8% between 2006 and 2010.[162]
In this same period the volume and value of debit card transactions, in
general, grew by 36% and 42% respectively[163].

The Dutch PIN scheme has also traditionally operated without
a MIF, although at a later stage very low MIFs in terms of nominal value were
introduced (almost negligible compared to other countries). Despite this, PIN
has grown strongly even in recent years. In 2011 2,285 billion transactions
were made through the system, up 6.1% from the previous year. Also the number
of PIN transactions under €10 grew by 100 million in 2009 and now amount to 25%
of all transactions[164]. The
average value of transactions has been decreasing steadily, replacing cash.[165] 
According to the Dutch central bank, in 2007 there were 5.2 billion cash
transactions at retailers and 1.6 billion PIN payments. In 2010 there were 4.4
billion cash payments and 2.2 billion PIN payments.[166]
Additionally, an agreement was reached between the retail sector and banks on
substantially lowering fees on small ticket transaction to stimulate less cash
usage.[167] The
number of active POS terminals has also seen strong consistent growth over the
past years. In 2011 this number grew to 279,612 (up 8.1% from 2010).[168]
According to ECB data, the debit share in the market is at 80%.

The
setting of ban on debit card IFs with the regulation not covering credit card
IFs could also be considered attractive from the point of view of
implementation as the need for resources to be dedicated to this would be more
limited under such an option. There would be no need to decide on the
methodology to be used and on the final figures and their evolution for IFs for
debit cards. Banning certain business rules (i.e. banning interchange fees) is
more straightforward and easier to implement. Also, it does not generate
speculation on the future amount of the cap, which in itself is conducive to
legal uncertainty about the current or future business models prevailing on the
market. However, similarly to 15.1, the level of legal certainty regarding an
acceptable business model for market players as far as IFs for credit cards are
concerned would be limited, as the absence of coverage of credit card
transactions would be re-assessed once evidence has been gathered about the
regulation of debit card interchange fees.

Obviously,
the impact of this option would be more modest in terms of decreased MSCs to
merchants and of potential market entry than if IFs for credit cards were to be
covered, as under 15.3 and 15.4. There would however already be a sizeable
impact on these aspects and an increased merchants' acceptance and
merchants/consumer welfare potential gains through the ban on debit cards IFs.
As an example, the econometric analysis conducted by Chakravorti et.al,
following intervention on IFs in Spain finds strong evidence that a reduction
in MIFs (subsequently MSCs) results in increased merchant acceptance[169].
For credit cards a similar trend is observed, where a 1% decrease of the
average MSC results in 0.15% increased acceptance. The impact of each
intervention is different, but the measures taken in Spain in 2002, 2003 and
2005 were positive (suggesting merchant acceptance increased with further
reductions in MIFs).[170]
According to data from the ECB[171],
the number of POS terminals has grown from 802.698 in the year 2000 to 1.36
million in 2011. The empirical analysis carried out by Valverde et. al,
suggests that especially in markets where acceptance is lagging behind
reductions in IFs are beneficial to merchant acceptance (putting downward
pressure on MSCs) and increasing card usage.[172]

Also in
Australia when examining the longer term effects of regulation, the combined
MSC on Visa/MC has fallen by 59 basis points, which is even larger than the
decrease in MIF, increasing merchant acceptance[173].
However, banks may well try to incentivise consumers to use more expensive
credit cards instead of cheap(er) debit cards through bonuses and rewards.
(15.2 is an intermediary sub-option in terms of the highest impact).

Similarly
to option 15.1, the impact on the variability/level of interchange fees for
credit cards would be highly dependent on the efficiency of transparency and
steering measures, when the IFs for credit cards are not covered.

Sub option
15.3: caps on Ifs for debit cards and credit cards

If both
IFs for credit cards and for debit cards are covered under the Regulation, the
impact on the variability and level of interchange fees would be more direct,
resulting in a true Single Market. Flexibility in regulating would be less, as
both debit and credit cards would be covered but the level of legal certainty
regarding an acceptable business model for market players would be increased
accordingly.

As
indicated earlier, the caps for interchange fees for debit and credit cards
would be in line with the ones of the MasterCard undertakings the Visa
commitments (on debit cards), and the Groupement des Cartes Bancaires case in
France.

Different
maturity of national card markets and national payment habits (based on
historical developments) may lead however to discussions about one IF level
acceptable and appropriate for most Member States in particular when credit
cards are covered – as they are less widespread and since debit cards tend to
be part of current account packages. Banning certain business rules (i.e.
banning interchange fees for debit cards) is more straightforward and easier to
implement. Option 15.3 could therefore involve substantial (public)
implementation resources, as two different caps would have to be implemented
and monitored.

The
magnitude of the effects identified would be higher if IFs for debit cards are
banned (15.3 is an intermediary sub-option in terms of the highest impact) than
under this sub-option. The impact of option 15.3 would be more modest in terms
of decreased MSCs to merchants and of potential market entry and innovation
than if IFs for debit cards were banned, as under 15.4. There would still be a
sizeable impact in terms of these aspects, but the increased merchants'
acceptance and merchants/consumer welfare potential gains would be more limited
in the absence of the ban on debit cards – and might actually decrease in those
Member States where domestic card schemes with lower IFs than the caps
envisaged are in place.

Indeed,
capping IFs for debit cards instead of a ban could be problematic in the Member
States in which there are currently no domestic IFs for debit cards in place or
domestic IFs below the level of the MasterCard undertakings the Visa
commitments (on debit cards). It would result in these Member States in higher
level of MIFs, with negative consequences on merchants and consumers' welfare
and on market entry of 'cheaper' payment solutions.

Consumers, if credit card IFs
are covered, may fear more of an adverse pricing impact on other banking
services than if only debit cards IFs are covered, as these are subject to
higher IFs, and the revenues at stake for card schemes and banks would
therefore be higher. Due to the widespread cross subsidisation in the banking
sector, a cap on credit card IFs could also result in an adverse pricing impact
on other banking services. It has however to be considered that a mitigating
factor in this respect would be the maintenance of a level of IFs for debit
cards and credit cards, and hence of IF revenues for banks.

Sub option
15.4: ban on IFs for debit cards, caps on IFs for credit cards

The
magnitude of the effects identified would be higher if IFs for credit cards are
capped, and IF for debit cards are banned (15.4 is the sub-option with the
highest impact).

Similarly
to 15.3, If both IFs for credit cards and for debit cards are covered under the
Regulation, the impact on the variability and level of interchange fees would
be more direct, resulting in a true Single Market. Flexibility in regulating
would be less, as both debit and credit cards would be covered but the level of
legal certainty regarding an acceptable business model for market players would
be increased accordingly. Contrarily to 15.1, the level of legal certainty
regarding an acceptable business model for market players as far as IFs for
credit cards are concerned would be clarified from the entry into force of the
regulation – even if the cap applies only after a transition period. The
coverage of credit card transactions would not have to be re-assessed once evidence
has been gathered about the regulation of debit card interchange fees.

The
setting of a ban on debit card IFs will also be more attractive from the point
of view of implementation resources than setting a cap for interchange fees for
debit cards. There would be no need to decide on the methodology to be used and
on the final figures for IFs for debit cards.  Banning certain business rules
(i.e. banning interchange fees) is more straightforward and easier to
implement. A cap would apply to credit card IFs, which would still involve some
implementation resources and discussion on its evolution.

As
explained under 15.3, the caps for interchange fees for credit cards would be
in line with European and national proceedings. In spite of this, there could
be discussions arising on the methodology used and on the final figures, due in
particular to the different maturity of national card markets and national
payment habits.

The
impact on the variability/level of interchange fees for credit cards could be
to some extent less dependent on the efficiency of transparency and steering
measures, when the IFs for credit cards are covered. Besides, due to the cap on
IFs for credit cards, banks might be less incentivised to push for consumers to
use more expensive credit cards instead of cheap(er) debit cards – although
they could turn to cards not covered under the ban and caps, which would still
be covered under transparency measures. The resulting level playing field would
promote innovation and favour market entry to a greater extent than 15.3 - and
the other sub-options, especially if debit cards IFs are banned. In the
Netherlands where surcharging is a common practice in online shops, and credit
card usage is very low, consumers are reluctant to use credit cards for purchases
due to the additional (surcharging) costs (in essence created by the IF).
Currently 47% of online transactions are conducted through iDeal[174].
This new entrant was able to capture the market through offering low merchant
fees (0.5 Euros per transaction compared to 2.7%+0.25 Euros using credit cards[175]). Banning debit card IFs and capping credit
card IFs would allow for equally efficient payment systems to be developed in
other markets traditionally dominated by expensive credit card usage. This
would create further incentives for new entrants to expand on the European
online retail payment market, resulting in high cost savings to retailers and
consumers.

As
already discussed under 15.3, banning IFs for debit cards and capping the ones
for credit cards would result in higher acceptance at the point of sale –
although to a higher extent under 15.4. Such a sub-option could also result in
lower retail prices ceteris paribus – i.e. if it is assumed retailers have a
limited ability to absorb these savings/not pass them on to consumers due to
sufficient competitive pressure from other retailers in the same market segment[176].
This will obviously depend on the level of competition in the retail sector
considered, which will impact the degree to which effective pass-through of
savings to consumers occurs. This same line of argumentation has been used in
the US by the Federal Reserve Board as a justification for expected
pass-through in retail prices[177].
In an econometric analysis by Shampine (2012) it was concluded that MIF
reductions in Australia led to a 38 basis point reduction in the 'two-sided'
price (measuring both effects on consumers and merchants). This translates into
a 0.67 AUD reduction per purchase and a 77.19 AUD reduction per account per
year[178].

At the
same time, promoting card usage instead of cash would contribute to reducing
transaction costs for the whole society, resulting in overall welfare gains.
Costs of cash studies indicate that usually, above a certain threshold, debit
cards are a more efficient payment method than cash (lower total social costs).
The Portuguese Central Bank, for example, conducted a cost of retail payments
study in 2007 where they conclude that for transactions with a value above €8,
debit card usage would lead to gains in terms of the total costs of all payment
instruments.[179] The
Dutch Central Bank also comes to a similar conclusion and indicated that social
costs of retail payments can be much lower if debit card usage can be increased
(replacing cash and credit card transactions).[180]
The same study indicates that reducing debit card costs is a significant tool
in achieving this goal, as acceptance would increase at merchant POS.

Similarly
to 15.3, banning IFs for debit cards would also allow fears that SEPA results
in higher IFs and other costs to be defused, as some domestic debit schemes
currently function without a MIF or with a lower MIF than 0.2 , and this would
not be called into question under such a 'SEPA optimum'.

Also,
consumers, in particular if credit cards IFs are covered, may fear an adverse
pricing impact on other banking services. Due to the widespread cross
subsidisation in the banking sector, a cap on credit card IFs could also result
in an adverse pricing impact on other banking services. However, there might
also not be a need any longer to incentivise the issuing of debit cards by
banks through an IF, as debit cards are already widespread in the EU and
usually form part of the 'basics' of a current account package, and debit card
usage by cardholders is generally not incentivised. In fact, it can be
considered that higher card acceptance and usage at the point of sale could
result in banks and card schemes collecting higher revenues which could
compensate/overcompensate the revenues lost from decreased or banned IFs. This
would be more likely if IFs for debit cards are banned as acceptance would
increase more than under a cap. A report on the impact of the Australian Payment
Reform has highlighted that the growth rate of cardholder fees for credit cards
prior to the reforms was higher than after (between 1997 and 2002: +218% and
between 2003 and 2008: +122%)[181].

In
fact, issuing banks receive interchange fee revenue from card usage at POS. At
the same time these banks must pay fees to banks that 'acquire' ATM
withdrawals. As the amount of transactions at POS and ATM withdrawals are
interdependent, an increase in the use of cards at POS would reduce the number
of times and/or the amount of cash withdrawn from ATMs. As a consumer uses a
card for POS purchases and ATM transactions and has a cost constraint (e.g. a
finite amount of funds) logically the more he uses the card for POS
transactions, the less he will withdraw cash at an ATM. If all transactions
were completed at POS instead of using cash from the ATM, banks would no longer
incur any ATM costs. Issuing banks would also increase revenue through the
volume of transactions at POS when interchange fees. A zero-interchange fee for
debit cards and a cap on interchange fees for credit cards will significantly
increase the ability for merchants to accept cards (reducing the MIF and as a
result the MSC). Although the revenue from MIFs to issuing banks will decrease
overall, the increased acceptance at merchants will stimulate card usage at POS
by consumers. This would decrease the costs of issuing banks for completing ATM
transactions, and increase the volume and value of POS transactions[182].

General
conclusions for option 15

Option 15 is
the only option delivering market integration and legal certainty, achieving a
level playing field for merchants and for competition in issuing and acquiring
of cards. Whilst transparency measures are important to deliver the benefits
associated with every sub-option, banning interchange fees for debit cards,
whether or not credit cards interchange fees are capped appears to be the most
beneficial to all stakeholders. This would contribute to increased card
acceptance, to the likely benefits of retailer and consumers. The impact on
banks and card schemes revenues would have to be considered. Transparency and
steering measures are key in this context to prevent a heavy handed promotion
of credit cards by banks. The level playing field and legal certainty would
also be to the benefit of potential new entrants.

Sub-option
15.4 i.e. banning interchange fees for debit cards which would generate
potentially higher benefits to merchants and consumers deserves further
examination. This is to ensure that the maturity of markets in the
EEA, in particular as regards debit cards issuance and usage, is such that
there is no need for charging interchange fees to incentivise debit card
payments. A review to this effect could therefore be conducted shortly after a legislative
action on interchange fees has been taken. Amongst the sub-options, 15.3
would therefore be currently favoured.

2.6 Option 16
(Exemption of commercial cards and three party schemes)

It
could be considered that in order to create a level playing field for all
(card) payment providers, all types of cards and of card schemes should be
covered.

It has
however to be acknowledged that commercial cards (from all schemes) and (all
cards from) three party schemes have limited market shares in the EU. In terms
of card issuing in Europe in 2008, the market shares were as follows: Visa
41.6%; MC 48.9%; Amex 1.6%. Even in terms of commercial cards, where Amex is
most successful, it only has a market share of about 13%[183].

Based
on the experience in other constituencies (in particular Australia) we do not
expect that either commercial cards or three party schemes could take over the
debit and credit card markets in this situation by offering more advantages to
consumers. After the reforms, the Reserve Bank (RBA) indicated a limited
increased market share of three-party schemes from around 16% in 2003 to about
20% in 2011. In 2004, after the reforms, only a slight increase took place to
about 17.5% market share, which remained more or less stable until 2009.[184]
In 2009 American Express started to offer 'companion cards'
(co-branded with MasterCard or Visa products) issued by the four major banks in
Australia, resulting in a small bump in their market share. In total though,
this increase in market share is marginal.

Due to
downward pressure on Visa (and MC) IFs through caps and increased transparency
measures (a ban on the no-surcharge rule,
removing the HACR between debit and credit cards) both the MSCs on Visa/MC and
three-party schemes decreased.[185] 
Though surcharging was slow to develop among merchants, by
the end of 2010 almost 30 per cent of merchants imposed surcharges on credit
card products.[186]
The average surcharge on American Express was 2.9% and for
Diners club 4%, these surcharges being higher than the MSCs (1 percentage point
for AmEx and 1.8 for DC).[187] The
RBA however sees evidence (from surveys) that consumers respond to surcharges
by avoiding the use of (more) expensive cards where possible.

Besides,
from a market analysis perspective, three party schemes and commercial cards
cannot be regarded as substitutes for credit cards or debit cards. In fact,
they mostly issue credit cards both for corporate clients and for well off
consumers. They therefore cater for a specific clientele and their needs, not
the average consumer.

As
these cards are much used in some segments of the retail market, notably travel
and leisure which attract a large number of corporate clients, transparency
measures need to apply in their full force to them

Therefore,
three party schemes and commercial cards would not be subject to regulated
fees. It would also take out the need to resort to a complex methodology heavy
in public administration resources, which would also be necessary to verify
implementation. However, the main way that Amex could increase significantly
its market share would be to have its cards issued by banks to their customers.
This happens to a certain extent already. It is proposed that if three party
schemes use issuing banks, they would fall under the scope of the Regulation,
to avoid possible circumvention.

General
conclusions for option 16

Commercial
cards and three party schemes have very limited market shares. Based on the
experience in other countries such schemes would not be in a position to take
over the market of 'normal' debit and credit cards by offering more advantages
to the average consumer. It is therefore proposed to exempt them from the scope
of the Regulation, except for cards issued to customers by three-party schemes
through banks. In any case, transparency measures and card identification in
particular should apply.

2.7 Option 17
(Regulate Merchant Service Charges)

Regulating
interchange fees does not directly address the Merchant Service Charges (MSCs)
merchants are facing, although interchange fees make up the largest share of
these fees (60% in Czech Republic in 2003, 60% in Italy in 2003 and 73% in
Belgium in 2002)[188].
Regulating MSCs would also allow three party schemes to be regulated – beyond
transparency measures.

A
Merchant Service Charges (MSC) has three main components: the MIF, the scheme
(and processing) fee and the acquirer margin.

The
acquiring market is a market on which in most country there is competition at
least on the acquirer margin. As shown by the MasterCard decision, acquirers
are unable to negotiate on the MIF part of the MSC. It is therefore is more
logical to neutralize the interchange fees which are restriction of competition
than to freeze competition on the acquirer margin.

Regulating
MSCs would appear to give merchants full certainty about the costs they have to
face for accepting payments. As it would also allow schemes based on implicit
interchange fees, the three party schemes, to be covered it would allow for a
level playing field 'across the board'.

However,
capping MSCs would make it difficult for (big) merchants to negotiate with
their acquirers on the acquiring margin for instance. In the UK the acquirer
offers are usually divided in three bits: MIF+Scheme fee+ margin. This
presentation is known as a MIF++ (MIF plus plus) offer. It could imply the same
MSC level for merchants from all walks of life, and effectively 'freeze' the
market at this level. This raises also the issue of the level at which the MSC
should be fixed, under which methodology and how this would be monitored, at EU
and national level. This is likely to require heavy resources in terms of
public administration. Measures should however be considered to avoid
circumvention of the Interchange Fee Regulation, similarly to what has been
done in the US (cf below).

In
essence, regulating MSCs would appear very interventionist. There are nagging
question marks about the subsidiarity and proportionality of such measures,
especially as competition in payment services takes place on a Member State
level. If a specific issue arises, Member States could appear best placed to
intervene.

In
October 2011 the ministry of Finance of Norway and the FSA created a project
group to assess possible measures to be imposed on the international card
schemes (Visa/MC). There were plans on the table to regulate MSCs, however they
decided not to. According to the group, regulating MSCs would have adverse
effects on competition on the acquiring side, including possible deterrence of
innovation.[189]

Also,
if the ECJ decision in the case brought by Vodafone[190]
against roaming regulation is taken as precedent, regulating MSCs would amount
to regulate 'retail prices' which could only be accepted by the Court because
of the cross border dimension of roaming. By contrast, regulating interchange
fees, only amounts to regulating 'wholesale prices'. There are obviously a
number of differences between the roaming regulation and the envisaged
regulation of interchange fees, and most notably the fact that in contrast with
the roaming regulation, the envisaged regulation of interchange fees will cover
domestic ones.

Furthermore,
fixing MSCs means fixing prices and is a major step beyond limiting MIFs which
have been established to be restrictions of competition.

It is
also difficult to entrust the implementation of this to card schemes and it is
likely to have spill over effects to other payment instruments Paypal for
instance

Finally,
regulating MSCs could also be seen as not proportional to the goal of creating
a level playing field. An IF regulation would probably result in a higher
acceptance of cards by merchants. In the longer run these gains could become
even more substantial. Measures such as application of MIF regulation to online
and mobile payments and rules on access to information on bank accounts by
third parties would probably lead to a wider choice of payment instruments and
contribute to lower prices of goods and services in the economy.

General
conclusions for option 17

Option 17
would be the most intrusive of most options. Although attractive prima facie,
it would raise many issues in terms of subsidiarity, proportionality and
practicability. We would suggest that the Commission commits itself to
monitoring the situation regarding MSCs.

Table 57 - Summary of the
impact for regulating interchange fees (options 12 to 17)

Policy option || Description || Effectiveness || Efficiency

Option 12 || Baseline scenario || (0) || (0)

Option 13 || Allow cross-border acquiring and regulate the level of cross-border interchange fees || (0/+) || (+)

Option 14 || Mandate Member States to set domestic IFs on the basis of a common methodology || (-/0) || (--)

Option 15 || Set a common, EU-wide IF level, based on a maximum cap || From (+) to (++) || From (0) to (+)

Sub-option 15.3 || Capping IFs for debit and credit cards at maximum 0.2% and 0.3% of the transaction value respectively || (++) || (+)

Option 16 || Exemption of commercial cards and three party schemes || (0/+) || (+)

Option 17 || Regulate Merchant Service Charges || (-) || (--)

Table
58 - Summary of the impact for main stakeholder categories (options 12 to 17)

Policy option || Description || Consumers || Merchants || PSPs || New entrants

Option 12 || Baseline scenario || 0 || 0 || 0 || 0

Option 13 || Allow cross-border acquiring and regulate the level of cross-border interchange fees || (0) || (+) big retail (-/0) small retail || 0 || 0

Option 14 || Mandate Member States to set domestic IFs on the basis of a common methodology || (0/-) || (0/-) || (+) || (-)

Option 15 || Set a common, EU-wide IF level, based on a maximum cap || (0/+) || (+) || (-/0) || (+)

Sub-option 15.3 || Capping IFs for debit and credit cards at maximum 0.2% and 0.3% of the transaction value respectively || (0/++) || (++) || (-/0) || (++)

Option 16 || Exemption of commercial cards and three party schemes || (0/+) || (0/+) || (0) || (0/+)

Option 17 || Regulate Merchant Service Charges || (-/0) || (-) || (-) || (-)

Table 59 – Impact on Stakeholders,
effectiveness and Efficiency

|| Impact on stakeholders || Effectiveness || Efficiency

Option 12: Do nothing || (0) on consumers, merchants and potential new entrants : card schemes relying on high IFs maintain/expand their market shares/market power, likely closure of further (cheap) domestic card schemes, 'cheaper' operators not issued (0) card schemes and banks: continued segmentation of markets, high level IFs revenues largely preserved, market distortions || (0) legal certainty unlikely: MasterCard appeal, long and fragmented process of NCAs proceedings (0) level playing field: no guarantee full consistency proceedings, appropriate MIF level not defined by the Court (0) Market entry: (high) level and diversity of IFs persist, no pan-European player likely to emerge || (0) No Legal certainty (0) even if NCAs launch proceedings, would do so at different speeds (0) long and fragmented process

Option 13:  allowing cross border acquiring and  regulating the level of cross border interchange fees || (+) Promotes market integration (+) Benefits limited to big retailers, (0/-) for small retailers, (0) for consumers (0) Limited impact on interchange fee levels except (+) if merchants massively changing acquirers ; (0) Limited effects on card acceptance in (small) shops (0) for card schemes and banks except if changed incentives || (0) Does not address technical obstacles and national processing rules limiting cross border acquiring (0) No level playing field: patchwork of national MIFs (0) no impact on legal certainty of IF level (0) no impact on market entry except (+) if banks and card schemes decrease domestic IF to the cap as a reaction || (+) No heavy monitoring: merchants and acquirers involved, (+) possible  limited circumvention attempts (+) Need transparency measures to increase efficiency

Option 14: Mandate Member States to set domestic MIFs on the basis of a common methodology || (+/-) uncertain impact on merchants card acceptance and welfare (0) limited impact on consumers (0) banks and incumbent card schemes likely to benefit from continued segmentation of markets  || (0) much more limited impact on interchange fee levels than option 3.4, (-/+) could bring down some domestic IF levels, possible increases of others (0) no level playing field: patchwork of national MIFs and national payment markets (0) Limited market entry especially for  Pan European players || (-) Legal certainty (--) Heavy monitoring, implementation and coordination resources: practicability?

Option 15 (Set a common, EU-wide IF level, based on a maximum cap) || (+)  Substantial Impact on Merchants fees, increases significantly  acceptance (0/+) Consumers may not  'see' visible retail price decreases, may suffer from increase cardholder or current account fees but new services  (-/+) Uncertain impact on banks and card schemes (dependent on impact on revenues/possible increase cardholder or current account fees) (+) Market entry of new players – reinforced if options access to information on bank accounts || (+) Substantial impact on IFs (+) Creates a Single Market: Level playing field (+) Legal certainty for cards schemes and new entrants (+) Good for innovation and market entry || (0/+) Legal certainty depending on the sub-option chosen (0) Need strong steering,  transparency and structural measures to increase efficiency

15.1: caps on Ifs for debit cards, credit cards not covered || (0/+) limited Impact on Merchants fees and in  acceptance (0) Consumers may   suffer from increase cardholder/current account fees, limited new services  (0) limited market entry (-) 'cheap' domestic card schemes called into question (0) bank and card scheme revenues largely untouched || (0) Limited impact on IFs (+) Creates a Single Market: Level playing field for debit cards (0) Level playing field for credit cards doubtful, depends on transparency measures (-) No legal certainty for credit cards || (-/0) limited legal certainty (credit cards) (-) Need very strong steering,  transparency and structural measures to increase efficiency (-) risk of consumers pushed to use credit cards

15.2: ban on Ifs for debit cards, credit cards not covered || (+) Impact on Merchants fees and in  acceptance for debit cards but (0/+) limited for credit cards (0/+) Consumers may   suffer from increase cardholder/current account fees, some new services  (+) SEPA optimum: 'cheap' domestic card schemes not called into question (0/+) some market entry (0/-) limited impact on bank and card scheme revenues   || (0/+) Some impact on IFs (+) Creates a Single Market: Level playing field for debit cards (0) Level playing field for credit cards doubtful, depends on transparency measures (-) No legal certainty for credit cards || (-/0) Limited legal certainty (credit cards) (-) Need very strong steering,  transparency and structural measures to increase efficiency (-) risk of consumers pushed to use credit cards (+) Implementation of a ban on IFs for debit cards easier

15.3: caps on Ifs for debit cards and credit cards || (0/++) Strong Impact on Merchants fees and in acceptance of credit cards, (+) acceptance for debit cards (0/+) some market entry (-) 'cheap' domestic card schemes called into question  (0/++) Consumers may   suffer from increase cardholder or current account fees, some new services (0/-) some impact on bank and card scheme revenues   || (0/+) Some impact on IFs (+) Level playing field (+) legal certainty || (+) Legal certainty (0/-) Methodology and level of IFs for credit and debit cards (0) Need  strong steering,  transparency and structural measures to increase efficiency

15.4: ban on Ifs for debit cards, caps on Ifs for credit cards || (+ +) Strong Impact on Merchants fees and  acceptance  (0/++) Consumers may   suffer from increase in cardholder /current account fees, but new services (0/++) Consumers may not  'see' visible retail price decreases (+) SEPA optimum: 'cheap' domestic debit card schemes not called into question (+ +) Market entry of new players – reinforced if options access to information on bank accounts (+/-) impact on bank and card scheme revenues uncertain: increase in acceptance, decrease cash costs || (+ +) Impact on IFs (+) Level playing field (+ +) Legal certainty || Legal certainty (+ +) (+) Implementation of a ban on IFs for debit cards easier (-/0) Methodology and level of IFs for credit cards (0) Need  strong steering,  transparency and structural measures to increase efficiency

Option 16: Exemption of commercial cards and three party schemes  || (0) if transparency measures, no higher costs on retailers (0/+) if transparency measures, no adverse retail price impact on consumers (+) banks/card scheme revenues untouched (+) possible new entry || (+) Level playing field (0/+) impact on IFs if transparency measures (+ +) Legal certainty if anti-circumvention measures || (+) No need for complex methodology, implementation and monitoring caps

Option 17: Setting caps on Merchant Service Charges || (+) Certainty to merchants about their costs in accepting payments but (- -) (big) retailers cannot negotiate (-) banks, card schemes including three party || (+) Level playing field but freezes markets (- -) disproportionately regulates competitive conditions || (- -) Complex methodology,  implementation and monitoring (- - ) Question marks regarding proportionality, subsidiarity, practicality

Preferred
option

As
marked in the table above, a sequential combination of option 13 (regulating
the level of cross border interchange fees and allowing cross border acquiring)
and sub-option 15.3 (setting a common, EU-wide IF level, based on a maximum
cap) together with option 16 seems the most promising.  Sub-option 15.3 and
option 16 would become operational after a transition period, which would
already be enshrined in the Regulation, i.e. without any conditional review
clause, whilst option 13 would be of application as of the entry into force of
the Regulation.

Only setting
a common, EU-wide IF level, based on a maximum cap as proposed in option 15,
would deliver full harmonisation of the IF in the EU, thus creating conditions
for the establishment of a Single Market for card payments. Option 15 would
also create legal certainty and a level playing field for competition in
issuing and acquiring of cards. It would further much facilitate the market
entry for any new card schemes and new technology or other innovation. Finally,
it would also address the threat of 'exporting' the IF model to new, innovative
payment services that are being rolled-out on the market or could be launched
in the future. This includes in particular any mobile payment applications and
online payments (Internet) applications.

Quantitative
assessment for options 13 and 15

Modelling of the impact

On the basis of the public figures for the value of card
transactions, and the value of debit and credit card transactions respectively,
together with the public figures for average debit and credit MIFs, the
Commission has estimated the current MIF revenues at EU level, for credit and
debit cards. It has however to be noted that public figures for domestic debit
schemes were often not available. Since they are typically lower than the IFs
of Visa and MasterCard, the value of debit IFs might be overestimated for some
countries. Due to the limited reliability of the public figures available,
inter-regional and intra-regional interchange fees were not included in the
framework of this quantitative assessment. The resulting savings for
merchants could be estimated at around 0.4 billion € and 0.16 billion €
respectively,
and positive welfare gains to EU consumers could be reasonably expected.

The reductions in MIF amounts for debit and credit cards if
caps of 0.2 and 0.3 respectively were to apply can then be calculated. Assuming
ceteris paribus constant acquirers' margin prior to and after regulatory
intervention – which in the light of precedents seems to be an adequate
assumption as discussed below, these reductions in MIFs would correspond to the
reduction in MSCs – or savings to merchants and potential savings to consumers
through price retail depending on the level of pass through – and to potential
revenue losses to banks which might impact cardholder fees – although as
already discussed the impact on bank revenues is likely to be ambiguous.

Table 60 –
MIF estimates in the EEA

Under option 13 i.e. allowing cross
border acquiring and regulating the level of cross border interchange fees, it
is expected that most of the benefits of cross-border acquiring are limited to
big retailers, due to the costs inherent with cross border acquiring, at least
in the short to medium run, in the absence of common standards and/or their
implementation - and to the more limited negotiating power of small retailers.

Accordingly, only the retailers with a turnover above 50
Million Euros are considered as big retailers in the assessment. Turnovers for
big retailers in the total retailers' turnover per Member State are used as proxy
for estimating their share in the value of transactions. This may however
underestimate their share as their level of card acceptance tends to be higher
than the one of small retailers. Other factors would have to be considered
under a more differentiated approach such as the specific retail sector
considered – for instance the level of acceptance in the entertainment sector
tends to be higher than in other sectors including for small merchants and the
same applies for e-commerce as compared to brick-and-mortar trade. However, for
the purpose of the analysis, the share of big retailers in total retail
turnover is taken as an adequate proxy.

It can then be estimated that the savings for big retailers
would correspond for each Member State to the share of big retailers in
turnover multiplied by the reductions in MIF amounts for debit and credit cards
respectively.

Table 61 – Estimated effect of MIF reduction for
the cross-border acquiring option (EUR)

Source: Eurostat, Distributive trades by size
class of turnover (Last update 24.10.12, Extracted on 14.01.13), Retail trade,
except of motor vehicles and motorcycles, Turnover or gross premiums written.
2009 figures were used for Ireland, Italy, Lithuania and the Netherlands; the
share of large retailers has been estimated for Cyprus, Estonia, Greece, Latvia
and Slovakia.

Savings for big merchants across Europe would therefore
amount to 3 billion Euros.

Under option 15 i.e. setting a common,
EU-wide IF level, based on a maximum cap, several sub-options are considered,
depending on whether caps for debit or credit cards are set respectively.

On that account, the reductions in MIFs – savings to
merchants and potential savings to consumers - would correspond to respectively
the total amount of IFs for debit transactions in case of a ban of interchange
fees, or to the reductions in MIFs for debit and/or credit cards as already
estimated above.

Table
62 – Estimated effect of MIF reduction for various options (EUR)

As indicated in the assessment of the options above, the
likely impact of regulating IFs is further explored in the light of precedents.
The following impacts are considered:

- Impact on merchants in terms of card acceptance and MSCs

- Impact on incumbents and market entry

- Impact on consumers

Impact on merchants

In countries such as Hungary
where interchange fees are high, merchant acceptance is lagging far behind card
issuance. The
interchange fees (varying between 0.2-1%) are considered as a major hurdle for
merchants as this greatly increases the cost of facilitating/accepting card
payments at POS.[191] According to a joint study between the
MNB (central bank) and the NCA, growth in acceptance was lagging far behind the
growth in card issuing. According to ECB data[192], the number of POS terminals per one
thousand inhabitants is 17.58 in the EU, while in Hungary this figure is less
than half at 8.5. According to the national bank, the expansion of card
acceptance is of high importance as it is currently only possible to make
payments using cards in 30% of retail outlets. This indicates the need to stimulate the
merchant side as opposed to the current IF practice of subsidizing
issuers.

In Spain, merchant acceptance increased
following a reduction in MIFs. For debit cards a reduction in the average MSC
resulted in a statistically significant increase in merchant acceptance.[193] For credit cards a similar
trend is observed, where a 1% decrease of the average MSC results in 0.15%
increased acceptance. The impact of each intervention differed, but the measures
taken in Spain in 2002, 2003 and 2005 all led to increased merchant acceptance
with further reductions in MIFs.[194] According to data from the
ECB[195], the number of POS terminals
has grown from 802.698 in the year 2000 to 1.36 million in 2011. The empirical
analysis carried out by Valverde et. al, suggests that especially in markets
where acceptance is lagging behind that reductions in IFs are beneficial to
merchant acceptance (putting downward pressure on MSCs) and increasing card
usage.[196] It seems to be the case that in Spain,
in the period 2001 to 2008, both card payment volumes and the volumes of cash
withdrawals at ATMs grew continuously, and there is little evidence of higher
cash use and cash withdrawals at ATMs as the result of the interventions[197]. The reduction in the average
transaction value (ATV) for card payments from €52.1 to 44.3 from 2005 to 2010
can also be seen as an indicator of increased card use[198]. According to another study[199], over the period 2006-2010,
there was a 57.3% average reduction in Interchange and a 51.3% reduction of
merchant service charges (MSCs).

In Australia
when examining the longer term, the combined average MSC on Visa and MasterCard
has fallen by 59 basis points since September 2003 (just before the reforms) to
an average of 0.8% of transaction value in 2012. This is even larger than the
reduction in average IFs during that same period (45 basis points) indicating increased
competition in the

Figure 13 – Merchant Service
Fees and eftpos Merchant service fees

acquiring market. The margin between the
average MSC and average IF has narrowed from around 45 basis points in 2003 to
around 30 basis points in 2012. The average MSC for American Express also
declined substantially by 62 basis points following the reforms.[200]

Just as the domestic debit
scheme without a MIF in Norway has seen an increase in its usage,
acceptance has also been growing at a steady rate (from around 16
terminals per 1000 inhabitants in 2001 to over 27 in 2011).[201] The value of goods
purchased/value of transactions? at POS terminals with BankAxept has also seen
a healthy increase, almost tripling over the same time period (from 140bn NOK
to 387bn NOK).[202]

The NCA
decisions in Switzerland, reducing credit cards MIFs since 2005, led to
a considerable increase in merchants' acceptance.[203] Reductions
of the MIFs were fully passed on by the acquirers to merchants, resulting in
savings for merchants between 70 and 90mn CHF. In addition this led to
acceptance of credit cards by the two largest retailers for the first time.[204] The Maestro
debit scheme has also seen a steady increase of acceptance in the absence of a
MIF .[205]

Impact on incumbents and market entry

In Australia, regulatory caps were introduced for the domestic
scheme eftpos' bilaterally negotiated reversed IF, and the international scheme
(Visa/MC) MIF.

Eftpos, the
Australian debit card scheme traditionally operated through a (bilateral) low
cost reversed-IF model (paid to the acquirer). Prior to the interchange
fee reform for eftpos in 2006, this fee was set at AUD 0.20 (0.12€[206]). Since then this
fee has been capped at AUD 0.05 (0.03€ in 2006/ 0.04€ in 2011) per transaction
based on: "the cost to the acquirer of authorisation and processing of the
transactions".[207] The RBA also
capped MIF on Visa debit, however at a rate (AUD 0.12), more than double that
of eftpos. For completing a transaction, a cardholder would see no difference
between the cheaper eftpos and international debit transactions. However from
an issuer's perspective, the differential offered by international schemes
might provide an incentive to migrate.

In 2008 the
international scheme debit cards accounted for 16% of the market based on
number of transactions (vs 84% for eftpos). At the end of 2012 this figure
increased to 26% of total number of transactions in favour of the international
schemes. The increase in transactions over this period was 146% for
international scheme debit transactions, and 90% increase for eftpos.[208]

Capping MIFs may
still cause negative externalities for 'cheaper' or zero-MIF schemes. The
domestic scheme was forced to change its business model by reversing and
introducing a higher MIF to compete in the issuing business. The domestic
scheme eftpos however has not yet raised their MIF to the same level as the
international schemes in Australia. This may be due to the fact that they are
driving merchant acceptance also in the smaller merchant segments.

However, Visa has
been able to capture new cardholders through providing higher revenues to
issuing banks, thus incentivising the issuing of Visa debit to cardholders. In
general when a payment card is widely available, merchants may feel the need to
accept these cards in order not to lose business. As the MIF (and subsequently
the MSCs) is still relatively low in Australia, (large) merchants may not be
bothered by the slightly higher cost of acceptance for Visa as compared to
eftpos. Eventually though, it seems inevitable that the eftpos system will have
to raise its MIFs to the same capped level as the international schemes.

This impact of
regulating Ifs on schemes highlights the need to consider the dynamics of 
markets when fixing caps. In essence, not banning Ifs for debit cards in Europe
but fixing a cap would result, as shown by the Australian example, in current
domestic schemes or potential new entrants with lower IFs to increase these to
the level of the cap, resulting in a detrimental impact on retailers and
consumers.

Impact on consumers

The argument that
cardholder and account fees will increase to the detriment of consumers
following a reduction or elimination of IFs, needs to be evaluated in light of
precedents.

In Australia
it is clear that cardholder and account fees increased. However, according to
recent empirical studies, there is no evidence to suggest that this is a direct
consequence of the intervention. Shampine (2012) indicates that although
popular perception seems to be that RBA's intervention caused a rise in fees,
this is not clear from the data. Prior to the intervention fees were already
increasing steadily, and continued to do so afterwards until reaching a
plateau.[209] In any case the
intervention seems to have led to a 38 basis point reduction in the 'two-sided
price' (combined savings for consumers and merchants) as a percentage of
purchase value.[210] This is confirmed
in a report by TransAction (2011), where data shows that the growth rate of
cardholder fees for credit cards prior to the reforms was higher than
after (between 1997 and 2002: +218% and between 2003 and 2008: +122%).[211] Regarding reward
programs, a reduction in the level of rewards on regular credit cards took
place after the reforms, and credit card schemes have introduced a large range
of premium cards with very high MIFs. This way they still stay under the
weighted average cap overall but can retain MIF revenue by segmenting the
market.[212]

In the US,
following Regulation II, regulated banks have tried to raise cardholder fees
(by introducing new monthly fees). This strategy to recoup lost IF revenue
failed mainly due to the heavy uproar by consumers and politicians.[213] Other strategies by regulated banks included reducing the
magnitude of their reward programs, or tightening the requirements for free
checking accounts (this may not be a direct consequence of the MIF cap, as also
an overdraft fee regulation was introduced).[214] A previous study
by F.Hayashi from the Federal Reserve Bank of Kansas City concludes that
payment card reward programs are inefficient. Social welfare is lower with the
current reward programs than without them. This supports the idea that even if
banks decide to offset revenue losses from IFs by reducing rewards, this might
actually have a positive impact on social welfare.[215] Under another
study[216], it has been
estimated that merchant fees and reward are socially regressive since credit
card spending and rewards are positively correlated with household income. It
was estimated that on average, and after accounting for rewards paid to
households by banks, the lowest-income household ($20,000 or less annually)
pays $21 and the highest-income household ($150,000 or more annually) receives
$750 every year. In turn, reducing merchant fees and card rewards would likely
increase consumer welfare. It does not seem adequate to consider the alleged
benefits of the so-called rewards to consumers for using specific (expensive)
credit cards – or premium cards – as enhancing consumers' welfare in this
assessment.

In Switzerland the
decrease in credit card MIFs did not impact cardholder fees. Between 2005 and
2008, cardholder fees were actually reduced, leading to cumulated savings of
around 200-250 million CHF to cardholders.[217] This can be seen as evidence that in the Swiss
market, the 'balancing function' of the MIF was ineffective and that the price
level was still too high. This may also indicate a lack of competition in the
Swiss banking sector.

In
Spain average annual credit and debit card fees have risen after the
caps had been introduced. The change in average fee per card per year increased
by 6.18€ for debit cards, and 11.45€ for credit cards.[218] However data shows that the
growth in adoption has not been affected by an increase in annual fees. Over
the same period, the card portfolio increased by 6.5 million cards. As
highlighted earlier, the increase in credit card growth was significantly higher
than debit growth. This suggests that credit- cardholders are quite price
inelastic or are willing to pay more for the ability to use credit cards in
exchange for greater acceptance.[219] This may also be
an indication of a lack of competition in the banking sector. Overall bank
revenues seem to have increased, not remained constant with interventions on
interchange fees. In fact, from 2005 to 2010, revenues of card issuers in Spain
(interchange fees plus cardholder fees and interests income increased from € 2.9
billion (2005) to € 3.5 billion (2010), and per issued card (+ 5 € per year),
whilst at the same time on the acquiring side, revenue increased b around € 1
billion in the same period under consideration.

According to the
study by Valverde already quoted, a sector inquiry showed that increases in
MIFs by 1 euro would only lead to about 0.25 pass-through of benefits to
cardholders. Though the accuracy of this figure may be questioned, it does
support the argument that MIFs are not fully passed on to cardholders.
Therefore, a reduction in MIFs would not necessarily lead to higher cardholder
fees in the same proportion.

In conclusion, it
is often the case that pass-through of interchange is not identical on both
sides of the market. Therefore MIF reduction pass-through is likely to occur at
100% on the acquiring side (usually a more competitive market), reducing
merchant costs. On the issuing side however, as inter alia the
Australian experience shows, the cost increase in cardholder fees was only
between 30-40%. This leads to an overall reduction in the two-sided price (the
sum of fees paid by cardholders and merchants).[220]

In other words,
even if retail banking fees were to increase because of MIF reductions and
decreased banking revenues – whilst as discussed above the overall impact of IF decreases on
issuing and acquiring banks revenues is likely to be ambiguous, they would
increase less than the increase in merchants’ savings. Even if the pass
through of savings from retailers to consumers is not 100%, overall positive
welfare gains to consumers could be reasonably expected due to the higher
competition level on the retail side as compared to the banking side
overall, even if their magnitude may vary depending on the 'basket' of consumer
purchases and the related pass through from one retail sector to another. In
addition, consumers would also benefit from new entry in the payments
market.

Effectiveness
and transparency measures

The payment market is not
competitive due to a series of commercial practises and rules. Also, any price
regulation on MIFs can necessarily only cover a limited number of categories of
transactions. If regulation is put into force, behaviour that is harmful to
consumers and to market efficiency may continue in 'unregulated' areas and
there is a risk that the market will shift to such areas. Regulatory action on
interchange fees would cover all consumer debit card transactions and consumer
credit card transactions, and e-payments and m-payments based on those – but
not commercial cards and three party schemes. Transparency measures, including surcharging, shall be allowed on those transactions
outside the scope of the regulation (the 'unregulated' area). This would be necessary to
avoid that harmful practices persist there and to mitigate the risk that the
market will shift to such areas. Surcharging shall not be allowed in the
'regulated area' - but
only once the relevant provisions on interchange fees are implemented in full. Other steering measures
including rebating and
enabling measures including card identification and un-blending as further
detailed in Annex 10 have to apply in their full force to all transactions.

Restrictive
business rules (Operational objective 4)

3.1 Option 18
(No policy change)

This
option involves no action at EU level, but rather relies on action by the
market to achieve effective competition in the area of card payments. Because
of the dominant position of card schemes, this option will most likely result
in a continuation of the status quo. In this case, the following shortcomings
can be identified:

(1) Honour
All Cards Rule. Merchants will continue to incur higher
costs due to the obligation to accept expensive / premium cards. All consumers,
including the ones who do not hold payment cards, are therefore likely to
continue paying for the cost of expensive / premium cards as merchants fold
these costs into higher prices for their goods and services. Figures show that,
for example, in Belgium the lowest interchange fee applied by a certain card
scheme for a credit card payment is 0.55%, compared to the highest fee of 1.90%
for a credit card of the same brand.[221]
This results in a fee that is almost 3,5 times higher for the premium card than
the one for the basic card. The difference is even bigger when comparing debit
and credit card fees. In the United Kingdom we find that the lowest debit card
fee of a certain card scheme is a fixed amount of 0.08 GBP whereas the highest
fee for a credit card of the same brand is 1.90%. For a payment of £100, this
results in a fee that is almost 24 times higher. Under option 18, this
difference in fees would remain.

(2) Non-Discrimination
Rule. The possibilities for merchants to steer
consumers away from high cost payment instruments to cheaper electronic payment
instruments are limited. In combination with the HACR, the impact of option 18
will be that merchants continue to incur higher costs for premium cards as they
are unable to steer consumers towards the less expensive cards. As discussed
under (1), this can lead to a fee per transaction of up to 24 times the lowest
possible fee.

3.2 Option 19
(Voluntary removal of Honour All Cards Rule by card schemes)

A
voluntary removal of the Honour All Cards Rule by card schemes would lead to
the possibility for merchants to differentiate between the payment cards they
wish to accept based on cost, type of clientele, or other possible criteria. 
Merchants could for example limit the choice of payment cards they offer to low
cost payment cards only. If card schemes would then want to increase the
attractiveness of their more expensive range of payment cards for merchants,
they would have to do so by reducing the related cost for the merchant, for
example by charging the card holder for premium benefits, or by increasing the
benefits for the merchants. In either case, this will result in a more
competitive environment as merchants will have more negotiating power. Option
19 will thus resolve shortcoming 1, but not shortcoming 2. At the same time, it
is unlikely that card schemes would voluntarily decide to remove the Honour All
Cards Rule.

The
cost of removing the HACR by card schemes lies with the issuers, acquirers and
the card schemes themselves. As the removal of the HACR allows merchants to
choose which payment cards to accept, it can be assumed that in the majority of
cases, merchants will opt for the lower cost variants. Their total costs, in
the form of Merchant Service Charges (MSC) will then decrease. As the MSC is
divided between the issuer (MIF), acquirer (service fees) and card scheme (scheme
costs), all three stand to lose. Possibly this will be compensated by higher
fees in other areas, which might directly impact consumers (e.g. higher costs
for consumers related to payment accounts). It is uncertain whether lower costs
for merchants will be passed on to consumers. This mainly depends on the level
of competition in the relevant retail market segment. To determine the
potential cost savings for merchants (or costs for issuers, acquirers and card
schemes) is quite complex as it depends on the types of cards merchants will
wish to accept once the HACR has been removed, and what the related MIF is. It
can be assumed that larger retailers are more likely to continue to accept a
wide range of payment cards, whereas smaller merchants might only accept the
least costly ones. However this also depends on the sector the merchant is
working in.

Based
on ECB statistics (Cf. Table 54) the total value of card transactions in the EU
amounted to around €1,9 trillion, 62% of which is transacted through debit
cards (38% credit). On the basis of the Total EU MIF values (Table 54), one
could estimate an average EU MIF rate for debit cards at 0.39%, for credit
cards at 0.78%.Due to reverse competition, these average MIF rates are however
expected to increase over time in the absence of intervention on interchange
fees. The savings under such a status quo scenario are therefore to be taken
with caution, as they would decrease over time with higher average (and
possibly converging) MIF rates, and should be seen as maxima.

In a conservative
scenario, removal of the HACR could lead to a shift of 5% in the split
between debit and credit cards to 67% – 33%. Costs for merchants would then
decrease as 5% of all transactions would incur a lower MIF than before (and assuming
a perfect pass-through – MSCs would be lowered equally). The cost savings for
merchants would amount to 5%\*€1.9 trillion \*(0.78%-0.39%) = around €370
million.. If caps for debit cards and credit cards of respectively 0.2% and
0.3% were to materialize, and under a similar shift of 5% of the split between
debit and credit cards, this would result in cost savings of 5%\*€1.9
trillion\*(0.3%-0.2%)= around €95 million – although this is a static scenario
under which it is assumed that the number of transactions remains constant
whilst they are expected to increase with the caps in place. This conservative
scenario is however more likely under such caps in place since the shift from
credit to debit cards could be limited as the MIF differential is small.

In a
very optimistic scenario, one might assume a shift of 20% in the split
between debit and credit cards to 82% – 18%. The potential gain for merchants
would than amount to 20%\*€1.9 trillion \*(0.78%-0.39%) = around €1.5 billion.
Under caps for debit cards and credit cards of respectively 0.2% and 0.3% and
assuming the number of transactions remains constant, the potential gains to
merchant would be around €384 million. If a ban on MIFs for debit cards is in
place, a gain at least equivalent to between €370 million and €1.5 billion is
to be expected (with the latter figure being more likely), as transactions
including with debit cards are more likely to increase proportionately than
under a cap of 0.2% for debit cards, and a shift of 20% in the split between
debit and credit cards is more likely as the MIF differential is substantial.

It must
however be ensured that a voluntary removal of the HACR should not affect the
Honour All Issuer Rule but only the Honour All Products Rule. Removing the
Honour All Issuer Rule would give merchants the possibility to refuse payment
cards based on the issuer which could possibly lead to discrimination of
cardholders on the basis of the country in which their card was issued.

3.3 Option 20
(Prohibit (part of) the Honour All Cards Rule)

While
this option would have the same general effect as option 19, i.e. the
possibility for merchants to differentiate between the payment cards they wish
to accept, the main advantage of this option is that it ensures the certainty
and comprehensiveness of the measure as well as its timely execution. As under
option 19, prohibition should be limited to the Honour All Products Rule while
the Honour All Issuer Rule should stay in place in order to avoid
discrimination on the basis of the cardholder's provenance. Option 20 would
solve shortcoming 1 but not shortcoming 2. The costs related to this option are
similar to those described under option 19. Both the benefits and costs would
materialise quicker and more comprehensively than under option 19.

Table
63 - Summary of the impact for options 18 to 20

Policy option || Description || Effectiveness || Efficiency

Option 18 || Baseline scenario || 0 || 0

Option 19 || Voluntary removal HACR || (+) || (+)

Option 20 || Prohibition HACR || (+) || (++)

Table
64 - Summary of the impact for main stakeholder categories (options 18 to 20)

Policy option || Description || Consumers || Merchants || PSPs || Card Schemes

Option 18 || Baseline scenario || 0 || 0 || 0 || 0

Option 19 || Voluntary removal HACR || (+/-) || (+) || (-) || (-)

Option 20 || Prohibition HACR || (+/-) || (++) || (-) || (-)

Diverse charging
practices between Member States

4.1 Steering practices
(Operational objectives 4,5 and 9)

4.1.1 Option
28 (No policy change)

No
policy change regarding the diverse charging practices between Member States
implies that no changes would be made to the PSD in this regards. Consequently,
merchants will continue to have the possibility to use surcharging (as well as
rebating or other steering measures) for the use of a given payment instrument,
but only in those Member States that have not prohibited or limited surcharging
at national level. The shortcomings that can be identified following this
option are the following:

(1)        Divergence of charging practices will
remain. As the current situation allows for a national approach, this has
led to differences in charging practices between Member States. Option 28 will
not lead to harmonisation of these practices.

(2)        Steering will not be efficiently used. Without
any policy change, the current practices will remain and consumers will not be
efficiently steered to the most cost-efficient payment instruments, as is
generally the case today.

(3)        Incentive to use cash. In case merchants
use surcharging, consumers in an offline environment might be incentivised to
use cash. Since surcharging may also lead to increased card acceptance from
merchants, in particular for transaction amounts below a threshold under which
alternative payment instruments (e.g. cash) are less costly, in case merchants
are not allowed to use surcharging mechanisms, they themselves will have an
incentive to let their customers pay with cash or the most efficient payment
method (e.g. debit cards above a certain threshold).

(4)        Possibility for merchants to use surcharging
as a way to obtain extra revenue. If no action is taken, it is difficult to
prevent some merchants from charging more than what is needed to cover the
costs for using a certain payment instrument. This possibility may be
influenced by the degree of competition in the specific sector, and the costs
of alternative payment instruments i.e. high costs of cash above a certain
threshold.

4.1.2 Option
29 (Prohibit surcharging in all Member States)

Prohibition
of surcharging in all Member States would harmonise the current diverging
practices. If fees (MIFs) paid by merchants to their acquirers remain the same,
this option may create an incentive for merchants to promote the use of cash.
Also, as merchants will not have an appropriate steering mechanism, they might
choose not to accept certain payment methods they could otherwise accept. In
addition, merchants who previously did surcharge might be forced to include the
pricing of all payment instruments into their final retail prices. All
consumers would then pay more, even if they pay with cash or other more
efficient means of payment. A study by London Economics and iff emphasizes that
"it is important to note that the
surcharge cost does not reflect the savings that consumers may make in the
absence of surcharging as the merchants applying surcharges may increase their
price to recoup the costs they incur in accepting certain instruments.
Obviously, the precise response of merchants in such a situation will depend on
the state of competition of the sector in which they operate and whether the
surcharge reflected the costs faced by merchants when accepting a card payment
or was at least in part a source of profit for merchants"[222].
If surcharging is prohibited, some sectors will be impacted more than others.
The sectors that use surcharging the most are the travel, hotel and hospitality
industry, the recreation and entertainment and, to a much smaller extent, the
catering and restaurant business[223].
It is in these sectors that 'expensive' cards are being used most[224],
such as commercial cards, third party credit cards and premium credit cards.
These sectors will be impacted most if surcharging is banned. Although option
28 will solve shortcoming 1 and 4, it doesn't solve the other two shortcomings.

Based
on a study by London Economics-iff[225],
the total value of surcharge for these sectors where surcharging is most used,
adds up to over €731 million. This total aggregate value however does not
indicate how much relates to 'true' surcharging, when merchants recover the
costs of specific payment instruments and pass on these savings to consumers
through retail prices, and how much corresponds to extra revenues from
retailers surcharging over the costs of payment instruments and/or not passing
on the savings generated to consumers through retail prices. A prohibition on
surcharging would therefore initially lead to 'costs' of €731 million for those
merchants now using surcharging EU wide, although the costs corresponding to
'true' surcharging will then be recouped through relatively higher retail prices
ceteris paribus, and only the ones corresponding to extra revenues would
be 'lost'.

In
addition, a prohibition would also impact negatively all merchants' – including
those not surcharging - bargaining power vis-à-vis acquirers to get lower MSCs
and their ability to steer consumers towards more efficient means of payment.
This could result in a more costly overall payment instruments mix, as the use
of relatively more expensive payment instruments will not be discouraged
through surcharging, and their costs (MSCs) to retailers might increase due to
the latter's more limited negotiating power.

Table 65 - Total value of the surcharge (EUR millions), by country and sector

Country || Catering/ Restaurants || Entertainment / Recreation || Retail || Travel/Hotel/ Hospitality

Belgium || || || || 0.24

Denmark || 4.44 || || 0.31 || 0.79

Finland || || || || 0.10

France || 0.05 || 2.38 || 3.44 || 5.17

Germany || 2.46 || 17.70 || 5.92 || 49.45

Ireland || 2.19 || 0.14 || 1.53 || 42.69

Netherlands || 12.16 || 3.06 || 1.63 || 19.87

Spain || 4.16 || 21.24 || 9.80 || 60.07

UK || 5.53 || 11.64 || 22.70 || 398.59

Source: Study on the impact of the PSD and
Regulation 924/2009 for the European Commission[226]

4.1.3 Option
30 (Allow surcharging in all Member States)

By
allowing surcharging in all Member States, option 30 would also address
shortcoming 1. All merchants would then be able to use surcharging to steer
consumers to the most cost-efficient payment instruments. It should however be
noted that the existence of the Honour All Cards Rule and the blending of fees
creates difficulties for merchants to efficiently steer consumers. As the rule
obliges merchants to accept all cards within a brand and at the same time the
fees charged to them for the use of these cards are usually blended, it becomes
unclear for merchants what the actual fee for the use of each card is. Therefore
it is unsure whether option 30 would actually resolve shortcoming 2, unless the
Honour All Cards Rule is partly or completely prohibited and the fees for all
cards are priced transparently. In addition, the existence of surcharging might
create an incentive for consumers to use more cash in an offline environment–
but may also lead to increased card acceptance from merchants in particular for
transaction amounts below a threshold, and could also result in certain
merchants using surcharging as a way to obtain extra revenue (unless
surcharging is capped for instance at the MSC level by legislation).
Shortcomings 3 and 4 might therefore remain.

When
reflecting on the overall costs and benefits of this option, it appears that if
certain merchants were not surcharging before, it is likely that their payment
costs were then integrated in their retail prices – on condition that they
already accepted card payments. On account of steering consumers to less costly
means of payment, and to higher negotiating power towards acquirers, costs will
go down for these merchants. The extent of the pass-through of the cost-savings
into (lower) retail prices will determine the extent to which consumers will
benefit from these cost savings. In addition, consumers might continue to be
faced with excessive surcharging by some retailers.

4.1.4 Option
31 (Oblige merchants to always offer at least one "widely used payment
means" without any surcharge)

Option
31 should be seen in combination with options 28 or 30. As discussed under both
options, allowing surcharging might create an incentive for consumers to use
more cash – whilst surcharging might also lead to increased card acceptance
from merchants in particular for transaction amounts below a threshold. This
option would ensure that merchants offer at least one widely used payment means
to consumers, which cannot be surcharged. Consumers will then have an
alternative to cash, without being surcharged. This option would therefore
solve shortcoming 3 - subject to the conditions below.

The
cost for merchants depends on the fees they pay for the payment instrument they
cannot surcharge. Ideally there should be a low fee for this payment
instrument. If this is the case, this should allow consumers to use certain
payment cards without paying any additional charges. Allowing surcharging for
all other (more expensive) means of payment would make it possible for merchant
to accept other methods of payment without incurring high costs and passing
these on to all consumers including those using cheaper payment instruments in
the form of higher overall retail prices. In addition, it would steer consumers
towards using the 'free' payment method (resulting in cost savings for both
consumer and merchant). However, the main drawback of this option is that such
a pan-European widely available payment instrument currently does not exist.

4.1.5 Option
32 (Ban surcharging for some payment instruments and allow for others)

Banning
surcharging for only some payment instruments would lead to a situation where several
payment instruments, besides cash, are accepted by merchants without
surcharging. This would take away the incentive for consumers to choose cash in
an offline environment, as some payment cards will be good alternatives – but
could also result in a more limited acceptance of cards by (some) merchants.
Consequently, option 32 would solve shortcoming 3 to some extent. At the same
time merchants could surcharge the more expensive payment instruments in order
to steer consumers to the most cost-efficient alternatives. In order to avoid
the increase of prices by merchants for their goods and/or services to cover
the costs of payment instruments they cannot surcharge, this option should be
combined with an option that addresses the current level of the fees for these
payment instruments. In principle, to minimise market distortions which would
impact negatively card acceptance and to ensure a favourable payment
instruments mix conducive to lower costs for society, the payment instrument
for which surcharging is banned should bear a low interchange
fee.[227]
Surcharging should therefore only be banned on the payment instrument(s) for
which interchange fees are regulated, and only when the relevant provisions are
implemented in full. Other steering measures including
rebating should apply with their full force.

Merchants
would then incur only very low costs for some payment instruments and would be
able to cover their costs for the more expensive payment instruments by
surcharging them. In addition, merchants would benefit from lower costs
associated with a more favourable payment instruments mix, as acceptance and
usage of the specific instrument would increase, and cash usage decrease. As
this option would address surcharging in all Member States in the same way, it
solves shortcoming 1. At the same time it gives merchants the possibility to
efficiently steer consumers thus addressing shortcoming 2. As surcharging would
continue to be allowed, shortcoming 4 would only partly be addressed.

Costs
might be initially incurred because of the need to invest in the identification
of payment cards although these costs are expected to be limited. Without this,
it would be impossible for merchants to differentiate between cards. However,
as merchant costs in general will go down, and regulated payment instruments
will not be surcharged, costs for consumers are likely to go down as well. This
is only the case if current fees are addressed in combination with this option,
and if rebating is encouraged together with the ancillary measures detailed
under Annex 10. Option 32 combined with lower fees would imply a cost saving
for consumers of at least a portion of the EUR 700 million identified above as
there would be no more need for merchant to surcharge or increase prices to recover
their costs for the specific instrument(s) on which a surcharge is not allowed.
Surcharging will however remain possible for high cost payment cards. The total
cost saving for consumers and merchants is much higher as all merchants who
currently do not surcharge, will benefit from lower fees and part of this will
be passed on to the consumers to some extent (depending on the price
competition in the sector). In case current fees are not addressed, option 32
would lead to additional costs for merchants and will call into question this
virtuous circle. For option 32 to be operational, it has also to be ensured
that the Honour All Cards Rule is partly or
completely prohibited and the fees for all cards are priced transparently.

Table
66 - Summary of the impact for operational objectives 1 and 5 (options 28 to
32)

Policy option || Description || Effectiveness || Efficiency

Option 28 || Baseline scenario || 0 || 0

Option 29 || Prohibit surcharging || (+) || (+)

Option 30 || Allow surcharging || (+) || (+)

Option 31 || Widely used payment means without surcharge || (-) || (-)

Option 32 || Ban surcharging for some payment instruments || (++) || (++)

Table
67 - Summary of the impact for main stakeholder categories (options 28 to 32)

Policy option || Description || Consumers || Merchants || PSPs || Card Schemes

Option 28 || Baseline scenario || 0 || 0 || 0 || 0

Option 29 || Prohibit surcharging || (-) || (-) || 0 || (+)

Option 30 || Allow surcharging || (-) || (+) || (-) || (-)

Option 31 || Widely used payment means without surcharge || (+) || (+) || (-) || (-)

Option 32 || Ban surcharging for some payment instruments || (+) || (-) || 0 || 0

Legal vacuum for certain
payment service providers

5.1 Access to
information on the availability of funds for new card schemes and third party
providers (TPPs), including payment initiation services, account information
services and other equivalent services (operational objectives 3,4, 6 and 7)

5.1.1 Option
33 (No policy change)

Under
option 33, no action at EU level is envisaged.

As
regards access to the information on funds, third party providers not servicing
payment accounts themselves (such as new card schemes, payment initiation
services, account information services and others) need prior information on
the availability of funds on the consumer's payment account. They need to
receive information on payment accounts held by PSPs, both for the authorisation
and for the guarantee of a payment transaction. Option 33 would leave it to the
account servicing PSPs to decide whether third parties will receive information
on the availability of funds on a payment account, even if the holder of the
account would give its consent. As the restriction of this information could
seriously obstruct the business model of TPP, option 33 does not seem to
eliminate barriers for market access for card and internet payments in any way.

The
shortcomings that can be identified are:

(1) PSPs
will remain free to refuse access to information on the availability of funds
on payment accounts. This will essentially cause the existing barrier for
market entry to continue to exists and hamper the emergence and operations of
TPPs.

(2) Possible
lack of data protection measures in case third parties are allowed to access
information on the availability of funds on payment accounts in an unregulated
way.

(3) Unclear
liability in case third parties are allowed to access information on the
availability of funds on payment accounts in an unregulated way. If there is no
clear definition of the liability repartition, there is less incentive for both
parties (PSPs and third parties) to provide a sufficient level of security or
to solve cases of fraud.

If
third parties could access the necessary information, there will be a downward
pressure on transaction costs as the result of competition from new players,
which would vary depending on the extent of market entry and the relative
market share gained by these new entrants. The level of the potential savings
would also vary depending on the Member State(s) considered. For instance, if
we compare Belgium and France where the current average transaction costs are
about 2-3 times higher than in Belgium alternative solutions for French
retailers would imply a higher reduction in transaction costs in France than in
Belgium, benefiting both consumers and merchants. However, the exact impact is
difficult to quantify ex ante and other measures envisaged including the legislation
of Interchange Fees would also result in costs savings independently of whether
and to which extent market entry by third parties .

As
regards the issue of including the TPPs in the scope of PSD, no action at EU
level would mean in practice leaving the decision to Member States. For
instance, in some Member States, such as Spain and Sweden, competent
authorities consider that TPPs provide to a certain extent payment services,
although do not fall exactly under the scope of the PSD. Therefore, they granted
licenses to some TPPs. However, this approach is not shared by the vast
majority of competent authorities in other Member States.

At the
same time, new service providers would still exist and try to enter the new
markets, as they are able to offer to merchants a less expensive and more
integrated payment solution than a card payment. This approach has a number of
shortcomings:

(1) Legal
uncertainty for TPPs and entry on the market. The
TPPs would provide their services in a grey zone, regulated and supervised only
to some extent in a very limited number of Member States. This could lead to
different risks, e.g. as regards the security of transactions and data
protection. In some countries, the TPPs’ activity could even be considered as
illegal.

(2) High
prices for merchants. The competition on this
market would remain lower than if TPPs were registered as PSPs and, as a
consequence, the e-merchants would not benefit of decreased prices.

(3) Insufficient
protection for consumers. The consumers, who are direct
or indirect users of the TPPs' services, would not benefit of the protection
measures in the PSD.

The
only stakeholders that would benefit from this option would be the account
servicing banks, which would promote their own payment solutions, in particular
payment cards, offering them high IF income.

Hence,
a "no policy change" would not be effective in achieving the
objective of eliminating barriers for market access for new service providers
and regulating the functioning of actors already on the market.

5.1.2 Option 34 (Define
the conditions of access to the information on the availability of funds,
define rights and obligations of the TPPs, clarify the liability repartition)

Allowing
third parties to request and obtain real-time information on the availability
of funds on a payment account, assuming the consent of the account holder and
given that a defined set of data protection requirements is met, would
eliminate a key barrier for third parties' market access. It would ensure that
third parties are legally allowed to obtain the necessary information for
initiating the transaction or giving a payment guarantee to the merchant,
provided that they can ensure a necessary data protection level. The
establishment of a set of security recommendations to be applied by TPPs and
banks servicing the accounts will contribute to fraud reduction and will give
banks and consumers guarantees that their assets and sensitive data are
safeguarded. These security rules will notably take into account the security
recommendations on internet payments, established by the ECB[228].
As a result, consumer confidence in the payment system in general will increase
and the third parties will be able to access the market.

The
inclusion of the TPPs under the scope of the PSD would mean that the consumers
that use the services of a TPP would benefit from the same high degree of
security and protection provided for in the PSD.  The obligation for the TPPs
to explicitly inform consumers about the information they access would come on
top of the consumer protection provisions already existing in the PSD.
Furthermore, extending rights and obligations of the PSD to TPPs and defining a
balanced liability repartition between them, banks and consumers would provide
a legal certainty for all parties. Importantly, PSPs and TPPs would be obliged
to take full responsibility for the respective parts of the transaction that
are under their control (which is in line with the established PSP principle
and the existing, but informal arrangements in the TPP practice).

As a
result of this option, it is probable that a large majority of some 20 TPP
companies already operating on the market in 8 Member States will ask for a
license and commit to comply with the rights obligations under the PSD[229].
At the same time, new players that were waiting for more legal certainty would
be able to enter the market. As they will have a clear legal status it will be
easier for them to establish business plans and to convince investors of their
business potential. A clear benefit of this option would be the entry and the
development on the market of quality and responsible players and the increase
in the competition in the market.

This
option will clearly benefit the consumers, who will gain a new payment
solution, which is easy to use, secure and does not require the possession of a
credit card to do the online shopping. This will benefit some 60% of the
account owners in the EU who do not possess credit cards. All the legal
protection of the PSD that applies to other payment solutions would apply and
the data protection concerns will be addressed.

The
merchants, even the small ones, which have less negotiation power, would
clearly benefit from an additional payment solution, less expensive and more
tailor-made for their needs. The resulting decrease in their costs should be in
part transferred to the customers. As described below, transaction costs for
merchants would decrease, although the exact impact is difficult to quantify
since it would depend on the extent of market entry and the relative market
share gained by new entrants, as well as the current level of transaction costs
in the Member State considered. Both merchants and consumers stand to gain from
this.

On the
costs side, there would be an additional, though not significant,
administrative burden for competent authorities which will have to license and
supervise new service providers. A learning effort will be also necessary since
the functioning of these new service providers would be most of the time new
for the authorities.

Some
banks would possibly need, depending on their current infrastructures, to
invest in additional security measures. However, much of these investments
would have been anyway necessary, in order to comply with the recent security
recommendations of the ECB on the internet payments. Given that the information
accessed by TPPs is in most cases provided by the account servicing PSPs to the
existing card schemes (which are essentially third parties, too) it can be
assumed that the incremental cost related solely to the TPP access would be
limited.

Finally,
for the existing and new third party providers, a possible investment to comply
with data protection measures, security requirements and increased consumer
protection would be needed.

Estimation
of the merchant savings generated by using third party providers against
traditional credit cards for payments on the internet

Based
on the population of Member States and the percentage of the population making
purchases on the internet on each Member State, we calculated that in average
almost 165 mil. Europeans made purchases on the Internet in 2011 (this figure
does not include Czech Republic, as no data were available). Knowing the
figures of the average expenditure per internet user in 19 Member States and
the average amount of a transaction in a web shop of 110 EUR in the
Netherlands, used as an example, we estimated that in average an Internet user
makes around 8 purchases on the Internet per year.

EU
population making purchases on the Internet = 165 mil. / year

Average
number of transactions on the Internet =  8 / year / person

Annual
number of transactions on the internet in the EU = 165 mil. \* 8 = 1 320 mil. /
year.

This
estimation is rather conservative as information provided by TPP’s in the Netherlands
and Germany estimate the market size at around 100 mil / year in the
Netherlands and respectively 500 mil. / year in Germany.

We used
the fees applied for a transaction on the internet with a credit card or with a
TPP service provider in the Netherlands as a benchmark, as this market is quite
competitive for credit cards and the market for payment initiation services is
well developed. In the Netherlands, the fees for a transaction on the Internet
with a credit card range from 1.65 EUR to 3 EUR and the fees for a transaction
on the Internet with the TPP range from 0.35 to 1 EUR. By extrapolating these
fees to the number of Internet transactions in Europe (1 320 mil. / year), the
savings generated for merchants by the use of payment initiation services
instead of credit card would range from a minimum of 863 mil. EUR to a maximum
of 3 520 mil. EUR / year. These savings would clearly compensate the additional
supervision costs incurred by the competent authorities, generating net
societal benefits. The impact of regulating interchange fees to the level of
0.3% for credit cards cannot be accurately assessed, as it would depend inter
alia on the current level prevailing in the Member State considered, to the
growth potential of internet transactions and of TPPs in the respective
national markets. Under such a dynamic assessment, and considering the limited
development of TPPs in most Member States, it can be assumed that the savings
underlined above are at least sustained once caps on interchange fees for
credit cards are in place. For instance incentives for PSPs to 'block' TPPs
will decrease when interchange fees for credit cards are capped as more limited
revenue streams would be at stake.

Figure 9 – Total population (millions) for 2011

Source: The World Bank

Figure 10 – Internet Purchases
by Individuals (% of population) in 2011

Source: Eurostat

Figure
11 – Average Expenditure per Internet User in 2011

Source: IMRG International estimates and
analysis

5.1.3 Option
35 (Allow TPPs access to the information on the availability of funds under a
contractual agreement with the account servicing bank)

This
option should be seen as a possible complement to option 34. Under it,
information on the availability of funds on a payment account would become
available for TPPs under an additional condition of concluding a mandatory
contract (either a framework contract or an individual contract with a specific
bank) with the account servicing PSP and with the account holder's consent.

This
option, known also as the dual consent approach, is the one supported by many
stakeholders from the banking industry. Under it, the TPP should either sign an
individual contract with the bank servicing the account of the consumer or
accept the terms and conditions of a framework contract proposed by the banks.
The consumer would still have to give its explicit consent for the access. The
additional benefit of this solution, in comparison with option 34, could
possibly be a better technical and operational integration of services provided
by TPP with the account, which could provide a better consumer experience and
better resolution of any potential payment difficulties, if such arise.

Such
approach means that the account servicing PSPs will be able to impose
additional requirements on TPPs, leaving it to the PSPs to ultimately decide
whether a third party will be able to access the information on availability of
funds. Given the commercial interest for PSPs to promote the use of credit
cards for internet payments, unless remuneration comparable to MIF revenues is
offered by TPPs, this option might not have the intended effect of increasing
the competition and therefore lowering costs of the transactions for the users.
It would, on the other hand, give account servicing PSPs the possibility to
refuse cooperation with a third party based on requirements that they have set
themselves.

This
option could therefore undermine some potential benefits of option 34.

The
costs of applying this option are likely to be in line with the costs already
sustained under option 34, as they mainly concern the technical modifications
needed (if any) for sharing information on availability of funds. The costs for
stakeholders could however be much higher, notably for third parties as well as
merchants. These costs would depend on the requirements that PSPs would be able
to specify in the obligatory contracts, notably as regards remuneration for the
access rights. Accordingly, benefits for merchants (costs, convenience) and
consumers (alternative payment solution, no additional payment costs) following
this option would be most probably less important than if only option 34 is
applied.

Table 68 - Summary of the
impacts - Access to information on the availability of funds for new card
schemes and third party providers (options 33 to 35)

Policy option || Description || Effectiveness || Efficiency

Option 33 || Baseline scenario || 0 || 0

Option 34 || Define conditions of access to payment accounts, rights and obligations of the TPPs and the liabilities || (++) || (++)

Option 35 || Contractual agreements || (-/--) || (0/+)

Table
69 - Summary of the impact for main stakeholder categories (options 33 to 35)

Policy option || Description || Consumers || Merchants || TPP's || Banks

Option 33 || Baseline scenario || 0 || 0 || 0 || 0

Option 34 || Define conditions of access to payment accounts, rights and obligations of the TPPs and the liabilities || (++) || (+++) || (++) || (0)

Option 35 || Contractual agreements || (0) || (--) || (-/--) || (++)

Scope gaps
and inconsistent application of the PSD

6.1 Negative Scope of
the PSD (Operational objective 7 and 9)

6.1.1 Option
36 (No policy change)

Under
this baseline option, the four discussed exemptions in the PSD (commercial
agents, limited network, telecom and independent ATMs) would remain unchanged.
In consequence, as discussed in chapter 3.2.3, there will be limited PSU
protection in numerous cases (i.e. for consumer funds under commercial agent
exception, consumer rights under other exceptions) and a distinctly unlevel
playing field among PSPs, with possibly even much greater part of PSP services being
offered outside the scope of the directive. Moreover, technical and business
innovations (e.g. new forms of distribution based on commercial platforms and
limited network concepts, expansion of mobile and online payment wallets,
further expansion of ATM networks operating outside the scope of PSD) would be
further undermining any efforts of homogenous application of negative scope
exemptions based on current wording. This would lead to further regulatory
arbitrage and the phenomenon of shopping for least demanding regulatory
framework within the EU that could be observed among some categories of PSPs.

While
efforts aimed at a more comprehensive, EU wide approach and a common
interpretation of exemptions and of the regulatory difficulties could be undertaken
by Member States, including under auspices of an ad-hoc working group of the
Payments Committee, the possible results would be mitigated at best, due to the
wording of these exemptions in the law itself, which is too general, does not
address certain issues or is no longer up-to date. Consequently, any
recommendations would be not only non-binding, but also limited by the wording
used in the law. Moreover, as PSD allows much leeway for market operators,
including no need for even a cursory check with the authorities whether the
offer falls within the exception, the application of any consistent guidelines
would be also seriously hampered.

6.1.2 Option
37 (Update/clarify scope of exclusions)

Under
this scenario, the four exemptions would be subject (separately from each
other) to the comprehensive update, including clarification or introduction of
necessary definitions, explanations in recitals and, if found necessary,
through addition of an annex to the PSD with further guidance.

The
benefit of this approach is the possibility to define anew the scope of these
exemptions, taking into account the knowledge accumulated by the authorities,
developments in these fields and the market experience on their functioning.
The main rationale for the exclusions is to absolve from the full force of the
regulation those limited fragments of the market where the general rules would
be too onerous or too rigid, preventing the market from development or forcing
the existing niche products, important for some categories of PSUs, to
disappear. However, the exemptions are not intended to be used as an excuse to
avoid supervision, prudential requirements and ignore PSUs protection rules,
leaving whole areas of the payment market to be completely unregulated, subject
to possible abuses or unprotected insolvencies. Neither are the exemptions
intended to facilitate insufficient fund protection and other PSUs detriments.

Thus,
in case of commercial agents, the law would clarify that this exemption
is intended only for legal persons who use an agent as their representative. It
should not be used by agents working on behalf of consumers or to exempt
escrow-type services (a third party between a buyer and a seller – e.g. a
consumer and a company – who receives the funds from the buyer and keep them
until buyer receives the goods or services from the seller) from general PSD
framework. The main benefit of such approach would be to limit the risks and
increase the rights and protection of PSUs (in this case, consumers) – e.g. in
cases when the agent becomes insolvent and the consumer may face not only the
loss of funds but still the obligation to pay the seller for the contracted
products. Another obvious situation is the prevention of fraudulent activities
of agents.

The
impact of such refocused scope of this exemption would affect those commercial
agent activities that clearly focus on management of financial flows between
buyers (consumers) and sellers on a professional basis and should not have been
exempted from the PSD. In the great majority of cases, such agents are large
commercial platforms, handling millions of transactions every month and of
strong financial standings, able without difficulty to obtain a PI licence.
However, it is not possible to quantify the impact on them.

As
regards limited network exemption, an improved definition would comprise
a limitation to the specific volume of transactions or a maximum transaction
value, specify that a limited network should be strictly focused on a very
limited range of goods and services[230]
and exclude the possibility of creating virtual wallets that regroup offers of
limited network providers, thus creating a general purpose payment instrument
and circumventing the law. The benefit of this scenario consists in covering by
PSD protection a range of payment instruments and methods that go much beyond
strictly defined payment service in a limited network and are also offered to
consumers with various limitations on e.g. reimbursement, refund, validity,
restricted liability in case of unauthorised transaction and consequently,
offer reduced consumer protection. Examples of such products are store cards
linked with credit lines, reloadable instruments or instruments linked to a
periodical, automatic payment (e.g. to a direct debit). The difficulty would be
primarily in defining the border between a limited and a wide network, e.g.
whether a store credit card of a retail chain that could be used in hundreds of
shops in different countries, should be covered by an exemption.

The
main impact of a new, more focused definition would be on these service
providers who built extensive payment operations based on very broad
interpretation of the exemption or purposefully use it to avoid regulation. As
a result they gain competitive advantages over registered PSPs and lower their
business costs, also at the expense of consumer protection. As in the case of
other discussed exemptions, it is not possible to quantify the impact as
authorities lack any transactional details about such operators. However, their
assessment is that, in many cases, non-regulated entities managed to gain much
larger share of the market than their regulated competitors.

Telecom
exception would be reformulated to focus the exemption on
the services related purely to telecommunication services (calls, SMS, internet
access) or being in a very close relation to telecommunication business (such
as e-mailing, virus-protection, purchase of a phone through a package
subscription). A purchase of content to which the mobile network operator has
acquired service provision rights (i.e. sells them in its own name) and that
could be consumed through the use of a mobile phone could be also included. The
benefit of such scenario would be to limit the scope of the exclusion to the
typical telecom-related payment transactions. As a result, payment transactions
when a mobile network operators sells goods and services on behalf of other
companies or when the mobile phone is used as a device that only facilitates
payment and delivery, but is not needed for the consumption or where the phone
is used only as an interface between digital and real world would not be
covered by the exemption and subject to PSD.

The
main impact of such definition would be on mobile network operators. They would
no longer be able to sell gods and services as a simple store or provide
payment services linking digital and real world functions without possessing a
PI license and being subject to all obligations of a PSP. This would be in
favour of PSUs[231],
protecting their rights and would be also beneficial for the position of third
party providers of content.

Finally,
for independent ATM providers, the law would become much more specific
and indicate that the exemption only applies to stand-alone ATMs, not connected
in a network and not acting on behalf of other PSPs or providing them any other
payment services as a third party. This would allow for distinction between
truly stand-alone ATM providers and other providers that operate networks of
ATMs or enter into contractual agreements and provide payment services to other
PSPs, thus clearly circumventing the PSD rules. This would also significantly
limit the non-regulated part of the market and protect the consumer, in
particular as regards the fees for withdrawal, where consumers often face
charges by both their own PSP and the ATM owner (double charging).

6.1.3 Option
38 (Delete the exclusions)

Following
this scenario, the commercial agent, limited network, telecom and ATM
exemptions would be deleted from the text of the PSD. As a result, payment
transactions through commercial agents, telecom and IT devices, payment
activities in the context of a limited network as well as cash withdrawals
through stand-alone ATMs would become subject to the PSD rules.

In
comparison to the option 37 above, the deletion of the commercial agent exemption
would bring disproportional impact on businesses that rely on such agents to do
their payments. At the same time, it would not change the situation of other
stakeholders, in comparison with the clarification of scope scenario. As the
reason for the exemption did not disappear and is not put into question, the
exemption should therefore exist, with the more focused wording.

Similar
reasoning would apply if the limited network exemption would be deleted.
The rationale for the exemption, in its originally intended, limited scope,
remains valid. This exemption is very important for some categories of niche
payment providers (such as meal vouchers, petrol cards etc.) and they would be
disproportionally affected by its deletion. At the same time, the situation of
other stakeholders would not change in comparison to new definition option.
Even if it is difficult in practice to make easy criteria for differentiation
of limited network and general purpose payment services, the impact of a
deletion would be negative, in comparison with current situation and even more
so with a more focused and better definition.

As
regards the deletion of a telecom exemption, there appears indeed no
rationale for maintaining this provision - even in a more limited form provided
by a new, clearer definition. Thanks to advances in the technology, mobile
payments evolved from the original niche of paying for premium SMS, information
or music services delivered to the simple phone. They are now a fully-fledged
payment channel enabled through the arrival of a smartphone. Accordingly,
access to payments by mobile phone should no longer be subject to a special
exception reserved for a nascent and niche market. This is further reinforced by
the fact, that the telecom exception as reformulated in the option above is not
needed. Issues specific to the provision of payment services by mobile network
operators could be addressed more simply through the improved limited network
exemption, while normal payment services provided by mobile networks should be
subject to general rules. It would further allow for simplification of the
Annex to the PSD (list of payment services), as point 7 would lose its purpose.

Finally,
the deletion of the independent ATM provider exemption would appear
justified. Independent ATM providers need to enter into agreements with a card
scheme, in order to be able to accept payment cards and to send the information
on the transaction/verify card and account status with the PSP of the
cardholder. Alternatively, as it is increasingly possible to withdraw cash
without a card being present or necessary, such providers need to enter into
agreement directly with the PSPs holding accounts of the users. In both cases,
there is no direct and independent contractual relationship between the ATM
owner and the PSU withdrawing cash. The ATM owner acts only as an agent or
proxy of the PSP and provides access to the funds available on the bank account
of the PSU, in order to make the cash withdrawal possible. The charge for the
withdrawal is not paid directly to the ATM owner at the cash machine, but
communicated to the PSP holding the account and subsequently charged to the
consumer. There is no good explanation to the question why consumer protection
in such case should not apply. Neither is there a reason to exempt one,
specific model of provision of ATM services and surrounding payments-related
services from the general rules. As ATM owners need to enter into agreements
with PSPs holding accounts or card schemes, the matter of remuneration for
withdrawal could and should be negotiated between them and not dumped on
consumers, leading to the application of extra, often excessive charges for ATM
services.

6.1.4 Option
39 (Require payment service providers that make use of the exclusions to inform
the competent authorities and ask for their clearance (negative clearance
requirement)).

This
option is related to the discussion on the exemptions in the PSD scope and
could be, if needed, applied to all exemptions listed in Article 3 of the PSD,
not only to those discussed in the impact assessment. After its application,
any payment service provider that intends to benefit from the exemptions would
be obliged to consult the competent authorities on the applicability of these
exemptions and to receive their approval before starting any payment
activities.

Such a
measure would benefit the competent authorities, who currently have little, if
any, formal knowledge on the size of the exempted market. On the other hand,
the same authorities could easily become overburdened with all the additional
information they receive, which would delay the time needed for any
administrative decision and clearance and could create an unintended entry
barrier for the market. Therefore a more tailored solution would be to limit
the necessity of getting clearance from the authorities to larger providers
(full PIs or their exempted equivalent), while allow the small providers
(equivalent to waived PIs, with the same waiver conditions based on the value
of payments) only to inform authorities about their activity.

Such
scenario would first of all, give to the authorities a clear picture of the
payments market, which is not the case today. Secondly, it would also put the
authorised and exempted PIs on equal footing as regards the application of
exemption criteria, thus reinforcing the level playing field on the market, at
least on a national level. The necessity of scrutiny by competent authorities
would also, indirectly, contribute to the better and more coherent protection
of consumer rights in the Member State.

On the
other side, the necessity of getting the clearance would put an additional
administrative burden on the providers that currently enjoy the exemptions or
any future providers wishing to obtain such status. This burden would be,
however, marginal in comparison with the potential costs of getting and
maintaining a full PI license and fully justified in view of the potential
abuses and PSU detriments that could otherwise occur. In any case, the
intention of the legislator when the PSD was adopted was certainly not to give
to the potential payment service providers a completely free hand in deciding,
whether they are subject or not the directive.

6.1.5
Calculation of impacts

Commercial
agents exemption

For the
purpose of cost calculations, it is assumed that the impact of the
clarification of scope would be mainly on e-commerce platforms that offer
commercial agent payment services to individual consumers. It is further assumed
that the number of such large platforms in the Member States varies, but is in
between two and five per Member State. In addition, it is assumed that five big
cross-border platforms are active in all EU Member States.

This
leads to the figure of 54-140 e-commerce platforms that might be impacted by
PSD modification (which is most probably overestimated). However, we need to
assume that some of them may already possess a PI license.  For the calculation
purposes we will therefore assume that 50% of them are already licensed or
otherwise will change the scope of their payment services so as not to be
forced to acquire a PI license.

This
leads to the following calculation:

26-70
platforms, each needing a PI license (125.000 EUR) and the necessary own funds
(assumption: funds are calculated using method B of the PSD, the average
Payment Volume – PV- of the payment services provided in the framework of
commercial agent exemption is 120 million EUR, which would put the value of
commercial agent payment services to consumers at between 2 to 5% of the total
estimated value of the EU B2C e-commerce in 2012). For the administrative costs
calculation it is assumed that the preparation of the necessary documents will
take one employee 5 business days of 8 hours. 37.30 EUR is the average cost of
one hour of work of an employee in the financial services and financial
services sector (Eurostat data)[232].

Table
70 – Calculation of impact (commercial agents)

Cost position || Calculation (EUR) ||  Total Amount (EUR)

PSD License || 26-70 x 125.000 || 3.25 Million – 8.75 Million

PSD Own Funds || 26-70 x (200.000 + 125.000) || 8.45 Million – 22.75 Million

Administrative Costs (PSD application) || 26-70 x 5 days x 8 hours x 37.30 EUR/h || 0.04 Million – 0.10 Million

Total || X || 11.74 Million – 31.60 Million

Limited
network exemption

For the
purpose of cost calculations, it is assumed that the number of entities that
are using this exemption is the same as the number of currently licensed PI.
Furthermore, it is assumed that 50 to 70% of these entities will be still
exempted from the PSD, either as limited network providers in accordance with
the new wording of the exemption or as entities too small to require a full PI
license (waived providers).

As of
September 2012 there were 568 licensed PIs in the EU. Accordingly some 156-284
new entities, for the time being exempted from this obligation, might require a
license. The calculation below is based, as previously, on method B for own
funds. It is further assumed that 80% of new entities will have relatively
small payment volumes (PV), averaging 60 million EUR annually and the remaining
20% would have much higher volumes, averaging 240 million EUR annually. As
above, 37.30 EUR is the average cost of one hour of work of an employee in the
financial services sector (Eurostat labour cost survey 2007).

Table
71 – Calculation of impact (Limited Network)

Cost position || Calculation (EUR) ||  Total Amount (EUR)

PSD License || 156-284 x 125.000 || 19.50-33.50 Million

PSD Own Funds || 0.8 x 156-284 x 200.000 + 0.2 x 156-284 x (200.000 + 125.000 + 100.000) || 38.22-69.58 Million

Administrative Costs (PSD application) || 156-284 x 5 days x 8 hours x 37.30 EUR/h || 0.23-0.42 Million

Total || X || 57.95-103.50 Million

Telecom
exemption

It is
assumed that as a result of the deletion of this exemption most of the Mobile
Network Operators (MNOs) would be interested in acquiring a PI license, as
mobile payments are bound to be a part of the market strategy of these
companies. There are 102 Mobile Network Operators in the EU Member States[233].
For the purpose of this calculation, it is assumed that roughly 60 PI licenses
will be issued and used EU-wide.

As
previously the calculation of own funds is based on method B. It is assumed
that some 30 MNOs, mostly smaller, national only companies, will have relatively
small payment operations, with PV averaging 120 million EUR annually (as
explained in the IA this does not include payment operations closely linked to
the typical telecom payments, which would be still exempted on the basis of
limited network exemption). Some 20 MNOs will have somewhat larger operations,
PV averaging 360 million EUR annually and the last group of 10 MNOs – leading
players in Europe - would have payment volumes averaging 1 billion EUR. As
above, 37.30 EUR is the average cost of one hour of work of an employee in the
financial services and financial intermediaries sector (Eurostat labour cost
survey 2007).

Table
72 – Calculation of impact (Telecom)

Cost position || Calculation (EUR) ||  Total Amount (EUR)

PSD License || 60x 125.000 || 7.50 Million

PSD Own Funds || 30x(200.000 +125.000) + 20x (200.000 + 125.000 + 200.000) + 10x (200.000 + 125.000 + 733.000) || 30.83 Million

Administrative Costs (PSD application) || 60 x 5 days x 8 hours x 37.30 EUR || 0.09 Million

Total || X || 38.42 Million

ATM
exemption

The
calculations below are based on the estimated number of independent ATM
providers, which is some 10-20 in the UK and around 10 in other EU Member
States[234].
Furthermore, the value of withdrawals from independent ATMs in the UK is
estimated at 3% of all withdrawals in the UK or around 6.6 billion EUR in 2011.[235]
It is assumed that the value of withdrawals in other Member States reaches
roughly half of the UK value or 3.4 billion EUR. On this basis, an average
payment volume for an independent ATM provider is estimated at 333 million EUR,
which probably overestimates the amount of own capital needed by ATM deployers,
as the main player on the EU-wide is market is Euronet. As above, 37.30 EUR is
the average cost of one hour of work of an employee in the financial services
and financial intermediaries sector (Eurostat data).

Table
73 – Calculation of impact (ATM)

Cost position || Calculation (EUR) ||  Total Amount (EUR)

PSD License || 30x 125.000 ||  3.75 Million

PSD Own Funds || 30x(200.000+125.000+178.000) || 15.09 Million

Administrative Costs (PSD application) || 30 x 5 days x 8 hours x 37.30 EUR || 0.05 Million

Total || X || 18.89 Million

Negative
clearance costs and administrative costs for the Member States

The
cost of receiving a negative clearance for PSPs using the newly defined
exemptions of commercial agents and limited networks as well as subject to the
waiver could be calculated under the assumption that the total number of
exempted and waived entities subject to scrutiny would be roughly in the range
of already waived entities, so in range of 1800-2200 entities (including some
310-484 companies exempted on the basis of previous calculations regarding
commercial agents and limited networks).

The
cost of submitting the information to the authorities is calculated under the
assumption that it would take one employee one day of 8 working hours to
prepare the necessary information for the authorities (which contrasts with
five 8-hour working days necessary to submit full information necessary to
issue the license). As before, 37.30 EUR is the average cost of one hour of
work of an employee in the financial services sector (Eurostat labour cost
survey 2007).

This
leads to the figure of:

1800-2200
x 1 day x 8h x 37,30 EUR = 0.54 Million-0.66 Million

We
should further assume that in some cases, on the basis of information provided,
the authorities may further demand to provide all additional information, as in
the full license application, for clarification purposes. The assumption is
that the authorities will do it in some 20% of cases. Therefore, it would
require another 5 days of 8 working hours for one employee to prepare the
required documentation:

0.2 x
1800-2200 x 5 days x 8h x 37.30 EUR =0.54 Million -0.66 Million

Thus,
the total cost for entities subject to negative clearance would be 1.08-1.32
Million euro (one-off). We could further assume that repeating annual costs of
changes in the information on the profile of the exempted/waived entity and
related to applications of new entities would reach 25% of this amount, or 0.27
to 0.33 Million annually.

For
Member States, there would be the costs of assessing all this information.
First, they would need to assess all the new submissions for full licenses
under the changes in negative scope: 272-444 applications. Then, they would need
to assess the information from 1800-2200 waived and exempted entities and
re-examine them in an estimated 20% of less clear cases. The cost of 1 working
hour of the public administration employee is estimated at some 20 EUR (as
there are no sufficient Eurostat data on the hourly wage costs in the public
administration, the sample of existing data cannot be reliably extrapolated).
It is further assumed that it would take one employee 2 to 4 hours to assess
the information provided by the exempted and waived entities and 3-5 days of 8
working hours to check and assess the PSD licence submission. This calculation
also assumes that the additional work will be done by the existing staff or
through the internal redeployments rather than by hiring new staff or outsourcing
the assessment.

The
calculation:

1800
-2200 x 1day x 2-4h x 20 EUR = 72.000 EUR – 176.000 EUR

0.2 x
1800 -2200 x 3-5 days x 8h x 20 EUR= 172.800 EUR – 352.000 EUR

272-444
x 3-5 days x 8h x 20 EUR= 130.560 EUR – 355.200 EUR

In
total, one off costs for the competent authorities would reach 0.38 – 0.88
Million euro.

The
repeated annual cost could be assumed to reach 25% of this amount or 0.1-0.22
Million Euro.

Conclusion

Clarification
of scope is recommended for commercial agent and limited network exemption. The
deletion of exemption is recommended for telecom and ATM exemption.

Estimated
costs of these legislative changes for all PSPs are between 128 and 193 million
euros, related mostly to the necessity of maintaining adequate own funds and to
the costs of acquiring the PI licence. Estimated costs for supervisory
authorities of all Member States are between 0.38-0.88 million euros. The
benefits of changes are non-quantifiable and encompass better consumer
protection, increased security of payments and level playing field for
competition.

Table
74 - Summary of the impact for options 36 to 39

Policy option || Description || Effectiveness || Efficiency

Option 36 || Baseline scenario || 0 || 0

Option 37 commercial agents limited network Telecom ATM || New definition/clarification of scope || (+++) (+) (++) (+) || (++) (++) (++) (++)

Option 38 commercial agents limited network Telecom ATM || Deletion || (--) (---) (+++) (+++) || (+++) (+++) (+++) (+++)

Option 39 || Negative clearance || (++) || (++)

Table
75 - Summary of the impact for main stakeholder categories (options 36 to 39)

Policy option || Description || Consumers || Merchants || PSPs (exempted/ authorised)

Option 36 || Baseline scenario || 0 || 0 || 0

Option 37 commercial agents limited network Telecom ATM || New definition/clarification of scope || (+++) (+++) (++) (++) || (+) (+) (+) (0) || (-/0) (--/0) (-/0) (-/0)

Option 38 commercial agents limited network Telecom ATM || Deletion || (+) (+) (+++) (+++) || (--) (+) (++) (0) || (-/0) (---/0) (-/0) (-/0)

Option 39 || Negative clearance || (+) || (+++) for authorities || (-)

6.2 "One-leg"
transactions and payments in non-EU currencies (Operational objectives 7 and 9)

6.2.1 Option
40 (No policy change)

Under
this baseline scenario one-leg transactions and payments in non-EU currencies
would remain outside the scope of the PSD and non-harmonised across the Member
States. Consequently, there would be limited protection of PSUs in many Member
States (some 50% of them) that did not introduce the national rules on such
transactions. As a result, different national solutions in this area will
continue to exist. Notably, differences in geographical scope of application
(EU-only, EEA and all other countries), in currencies covered (EU, EEA, all
currencies) and in the extent to which the PSUs are protected by the PSD
provisions in particular Member States (not at all, partially, widely but with
specific exceptions, fully) will remain. This will have detrimental effects for
EU consumers and, to a lesser extent, companies, as it would maintain
inconsistencies in protection of PSUs (consumers and businesses) and contribute
to unlevel playing field across Member States for companies (that engage in
one-leg transactions and payments in non-EEA currencies).

Even
considering that some Member States (with no rules on one-leg payments and
currencies in place) might decide to address these issues in the future,
without EU intervention, no individual action of Member States will result in
market integration and harmonised approach. Instead, individual actions will
contribute to further fragmentation of the market along national borders. For
this reason, taking no action would not lead to the desired policy effects at
the EU level.

6.2.2 Option
41 (Full extension to all one-leg transactions and all currencies)

Full
application of the PSD to one-leg transactions and payments in non-EU
currencies would bring the protection of PSUs, in terms of transparency,
information requirements and their rights and obligations to the same, high
level as for the intra-EU, two-leg transactions. This would also result in full
harmonisation of rules across the EU, thus contributing to the level playing
field for businesses and to uniform, comprehensive protection of consumers. In
practical terms, extension of the geographical scope to one-leg payments and
payments in non-EEA currencies would benefit, first of all, consumers sending
remittances to non-EEA countries. The Eurostat estimates the outflow of such
remittances at some 32 billion EUR annually (2010 data) for 27 EU Member States[236].
Another group of better protected consumers would be those involved in
cross-border online shopping (e.g. consumers buying goods in USA). The
implications for EU businesses are potentially more important. The EU trade
turnover with the rest of the world reached in 2010 over 4 trillion EUR in goods
and services. However, large parts of the PSD rules on rights and obligations
and all rules on transparency and information are negotiable for businesses and
therefore it is difficult to establish the extent of their application in the
business world. As a minimum, the extension to one leg transactions and all
currencies could benefit microenterprises, which under the PSD may enjoy the
same rights as consumers.

A
significant drawback of a full application could consist of the fact, that some
rules included in the directive may be too complex to implement in practice or
simply unreasonable in a one-leg or non-EEA currency context. First, it would
be not realistic to expect that PSP located in third countries would implement
the rules of PSD on their side of the transaction (however, there would be no
good reason to absolve PSP located within the EU/EEA from the PSD rules for the
part of the transaction that is under their control and conducted within the
EU/EEA). In particular, rules concerning execution times, division of charges
and charging requirements and the use of unique identifier appear not practical
in one-leg, all-currencies context. The implementation of this option would
therefore risk putting a non-proportional burden on PSPs and possibly see them
restricting their payment services or rising charges for transactions in
question.

6.2.1 Option
42 (Selective extension of certain PSD rules to one-leg transactions and to all
currencies)

This
would allow for application of only certain rules of the PSD to one-leg payment
transactions and payments in non-EU currencies. In particular, rules on
information requirements and transparency (Title III of PSD) could be easily
extended to the transactions in question. As regards rights and obligations
(Title IV of PSD), a selective approach could be followed, keeping the high
protection of consumer rights in place, with rules on liability in case of
unauthorised and not correctly executed payments and refund rights covered by
the extension. As a general rule, those obligations that could be fulfilled by
the PSP should be applicable, to the extent that the transaction remains under
control of the PSP located in the EU/EEA. At the same time, obligations out of
control of EU-based PSPs or not realistic from the technical perspective in
case of discussed transactions, i.e. concerning execution times, division of
charges and charging requirements, or the use of unique identifier would not
apply.

The
benefits of such approach would be, in terms of PSU protection, almost the same
as of the previous option 41 (full application). The difference – in favour of
this solution – is that the possible negative impact of the extension on PSPs
is neutralised through the exclusion of certain obligations out of control of
PSPs or those that could prove too complex technically if applied to non-EU
currencies or one-leg transactions. The cost of its implementation would be
marginal (as PSPs already have the necessary technical solutions and procedures
in place and would be able to use them) and limited mostly to the clear and
easy to understand information on consumer rights and consumer protection upon
the extension.

6.2.2
Calculation of impacts

In
terms of costs, the selective extension of the PSD to one-leg and all
currencies would impact only to a very low degree on PSPs. As PSPs would not
bear the responsibility for this part of the transaction that remains outside
their control, there would be no necessity to change the solutions and
procedures that are already in place for such transactions. In effect, the only
perceptible change would be in preparing and changing the information for
consumers on their new rights and better protection in case of transactions
under consideration.

The
cost of changing terms and conditions of PSPs could be roughly estimated on the
basis that it would require one employee 2 hours to prepare the necessary
documents and under the assumption that this would involve all credit
institutions and licensed PIs, roughly 9400 PSPs (which is an overestimation). The
cost of 1 working hour in the financial sector is, as in the previous
calculations 37.30 EUR

2 x
37.30 EUR x 9400 = 0.70 million euro

In
addition, the information would need to be delivered to the consumers. It is
assumed that the distribution costs would be zero, as the information would
normally accompany the account statements sent to PSUs or would be delivered
electronically. This leaves the costs of printing the information. It is
assumed that the information would require one sheet of A4 paper for each
consumer account and that for 30% to 70% of the account owners the information
will be delivered on paper.

According
to Flash Eurobarometer 182, 93% of consumers in Europe have a bank account,
assuming that some of them will own more than one account the rough estimate of
the number of consumer accounts in Europe is 500 million. In addition the cost
of 1 ream of paper (500 pages) is estimated at 2 to 3 euros, this cost is
assumed to cover also the printing costs.

03.-0.7
x 1 sheet x 1 million reams x 2-3 = 0.6-2.1 million EUR

The
total cost would therefore reach 1.3-2.8 million euros for all PSPs in the EU.

The
benefits of increased consumer rights and protection are not easily calculable.
Nonetheless, the value of affected transactions could be roughly estimated at
33 billion EUR for remittances plus roughly a similar amount for consumer
transactions in other popular currencies (mainly USD and CHF) and in
cross-border online shopping, thus giving the figure of some 60 billion EUR.
This represents around 0.5% of the value of all transactions in the EU, but a
roughly estimated 5% of all consumer transactions. At least 32 million PSUs
(the official number of legal migrants from third countries in the EU) would
potentially benefit from the extension.

Conclusion

The
preferred option is a selective extension of PSD rules to one-leg and all
currencies. The cost of its implementation would be marginal (as PSPs already
have the necessary technical solutions and procedures in place and would be
able to use them) and limited mostly to the clear and easy to understand
information on consumer rights and consumer protection upon the extension. They
are estimated at 1.3 to 2.8 million euros for all PSPs in the EU. In terms of
benefits, the value of transactions covered by the extension is estimated at
some 60 billion EUR or roughly 5% of consumer transactions. Some 32 million
PSUs could potentially be positively affected.

Table
76 - Summary of the impact for operational objective 5 (options 40 to 42)

Policy option || Description || Effectiveness || Efficiency

Option 40 || Baseline scenario || 0 || 0

Option 41 || Full extension || (+++) || (--)

Option 42 || Selective extension || (++) || (++)

Table
77 - Summary of the impact for main stakeholder categories (options 40 to 42)

Policy option || Description || Consumers || Businesses || PSPs

Option 40 || Baseline scenario || 0 || 0 || 0

Option 41 || Full extension || (+++) || (+) || (--)

Option 42 || Selective extension || (++) || (+) || (0)

Annex 10: Ancillary measures addressing competition issues

Partial
prohibition of the HACR: Need for Card identification

Today
it is difficult for a retailer to  know which MSC will apply to a given card as
often he cannot identify whether it is a debit card, a basic consumer credit
card, a commercial card, or a premium card as all of them are presented to him
under the same brand. Without this information, the retailer would not benefit
from the freedom he would gain through the intended partial prohibition of the
HACR.

For the
retailer to obtain this information it is necessary to mandate a visual and/or
electronic identification of the various cards, and to prescribe that this
information is provided to retailers 'in real time'. The details of such
provision should be left to standardisation. Nevertheless it is appropriate
that the legislation states that this identification is mandatory, also because
it is necessary that all retailers' terminals include this capability.

The
visual and electronic identification is not something new, as similar
provisions have been included in the agreements of the Commission with card
schemes (Undertakings for MasterCard[237],
Commitments for Visa[238]) as
regard commercial cards.

Partial
prohibition of the HACR:  Need for Unblending

Retailers
are often offered a single price for the acquisition of card transactions by
their acquirer – this is called a 'blended' price. Many retailers are therefore
not aware of the differences in costs for the various payment instruments they
accept as acquirers offer the same price for all transactions from the simple
debit card to the very expensive business card. Consequently, competition
between the various brands is ineffective at the level of the retailer. The
lack of transparency also prevents the effectiveness of the intended partial
prohibition of the HACR.

As the
practice of blending is an important obstacle to effective competition, it was
also addressed in the unilateral undertakings and commitments entered into by
the international card schemes in the framework of competition enforcement
proceedings (MasterCard's Undertakings[239]
and Visa Europe's Commitments[240]). 
However, these engagements only oblige the schemes to impose 'unblending' on
the acquiring banks and do not bind the banks directly. In practice, they
therefore do not always have the desired effect and many acquirers continue to
impose a single price for all cards.

Imposing
a single price would also be a way for card schemes to circumvent the effect of
the intended partial abolishment of the HACR. Unblending is therefore an
indispensable complementary measure to the partial prohibition of the HACR.

Partial
prohibition of the HACR: Need for invoices

For the
time being most retailers do not receive any invoice regarding the costs
applying to them for the various card payments. They only receive bank
statements with the number of transactions and the total amount paid, but no
information on the individual fees

In the
UK large retailers have been able to negotiate with acquirers a merchant
service charge called "MIF +", which means that within the MSC a
distinction is made between the MIF and the acquiring banks' 'mark up'. In some
cases ("MIF + +") there is even a distinction of three tiers: MIF,
scheme fees, and acquirer margin.

It is
proposed that the a rule would be introduced obliging acquiring banks to
indicate separately to retailers, for each category of cards, the amount of the
MSC but also the amount of the MIF. This will give retailers the means to check
that the rules on the amount of MIF have been correctly applied to
transactions.

Another
reason why retailers find it difficult to compare and choose/steer between
payment instruments are the many different categories of MIFs/MSCs applying.
For cross-border transactions alone, MasterCard[241]
has 77 categories of MIFs whilst Visa[242]
has 34 categories. Transparency about MIF/MSCs to merchants would be to set a
limit to the number of MIF categories allowed (in technical terms, the coding
of transactions) through legislation.

Steering:
Confidentiality rules

Card
schemes and acquirers currently prohibit merchants from communicating any
information regarding the costs of the various payment instruments to third
parties, including consumers. Therefore a retailer cannot inform consumers of
the costs he incurs in relation to individual payment instruments nor provide
this information to branch associations or display the costs of the various
cards in a general way in his (web-) shop.

Preventing
card schemes and acquirers from imposing such a prohibitions would allow
merchants to inform consumers of the true costs for the various payment
instruments and remove the general assumption that the use of the various
payment instruments is free of costs or costs are the same for all instruments.
This could make steering and rebating more palatable to consumers or at least
easier to understand.

Co-badging:
Choice of application

In case
a payment device includes several payment brands, the choice of the brand used
for each transaction should be a decision taken by the payer in agreement with
the retailer, once the retailer's device has indicated which brands are
available. This would prevent that an automatic selection mechanism has imposed
a given brand without the possibility for the consumer to choose.  For the time
being, in case of co-badged cards issuing banks often insert an automatic
mechanism in the chip through which the most expensive brand is chosen. This
'automatic' choice on behalf of the consumer will become even more pertinent
with mobile wallets containing several payment applications. Freedom of choice
should be left, transaction per transaction to the consumer, in agreement with
the retailer.

The
Commission had discussions with the European Payment Council ('EPC') concerning
the provision in the SEPA Card Framework, designed by the EPC that addressed
this issue. The Q&A published by the EPC to clarify the SEPA Card Framework[243] indicate:

"A
card with multiple brands must work for the cardholder in the same way as a
wallet with several cards. The cardholder chooses which brand or application
he/she wants to use at the point of sale, provided of course that the merchant
accepts it and their POS equipment allows it5.
The merchant always retains the choice not to accept some brands or to
surcharge".

Unfortunately
this provision has been implemented in such a way that it is in fact the
issuing bank, in theory in accordance with the consumer, which includes a
mechanism in the card that determines an automatic selection. When in the
future mobile wallets will contain multiple payment applications, it is
essential that the consumer retains the possibility to choose, in agreement
with the retailer, which payment instrument he wants to use and no
pre-programmed options by issuing banks apply.

Details
of this measure (adaptation to certain of payment types like on motorways)
could be defined through standardisation but the principle should be laid down
in a legislative provision.

Cross-border
acquiring: Authorisation

Cross-border
acquiring (retailers making use of the services of an acquiring bank
established in another Member State against the fees applied by the acquiring
bank) faces three categories of obstacles. One category consists of the
technical hurdles created by the diversity of standards. A second consists of
scheme rules generally applied by the international schemes stipulating that
the MIF applicable to a certain transaction is the MIF of the location of the
point-of-sale. As a consequence of these rules it is not profitable for
merchants to make use of acquiring services of banks established in 'low MIF'
countries. The third category of obstacles consists of scheme rules applied by
the international schemes determining that the right for the acquirers to act
on a cross-border basis is only given on a case by case basis, after a specific
authorization process sometimes also involving additional fees.

Once an
acquirer has obtained a licence of a given scheme, it should not be prevented
from acting on a cross-border basis. The third category of obstacles could
therefore simply be removed by prohibiting card scheme from restricting
cross-border acquiring through licensing limitations, except for clear security
reasons.

Charging
practises: Acceptance above a minimum amount

Card
schemes and acquirers often impose a so-called Non Discrimination Rule ('NDR')
on retailers, preventing retailers from applying any discriminatory treatment
regarding their card transactions vis-à-vis transactions with cards
belong to other card schemes. According to Article 52.3[244]
of the PSD (2007/64/EC), card schemes and issuers cannot prevent retailers from
offering a rebate or requesting a surcharge, therefore the NDR rule has lost
most of its effects.

Nevertheless
an important effect of the NDR has remained: the prohibition on behalf of the
retailer to set a floor for the acceptance of certain payment cards, if and to
the extent that such a floor is not applied with respect to all cards accepted
by the retailer.  This prohibition is important for countries were the amount
of interchange is calculated as a full or partial fixed amount, as a
consequence of which the cost for the retailer become proportionally high. In
addition, acceptance thresholds allow retailers to only accept a given payment
instrument above the amount at which the marginal acceptance costs (e.g. for
debit cards) are equal to the ones of alternatives (e.g. cash), resulting in
increased acceptance overall, instead of only alternatives being accepted.

It is
proposed to indicate that card schemes and acquirers cannot impose a
prohibition on a minimum amount being set by the merchant for the acceptance of
cards.

Addressing
the possible circumvention of MIF regulation

A
possible consequence of the regulation of MIFs is that banks would try to raise
fees for issuing cards, introduce per transaction fees to consumers or increase
the bank account fees. Competition enforcement if there are indications of
collusion or concerted practices and/or overall transparency and switching
measures would be the best instruments to address this issue. Contrary to MIFs,
issuance fees for debit cards or credit cards are known to the consumers and
market competition can play a role. The Commission will review the situation
regarding cardholder fees once legislation has been in force sufficiently long
to observe first effects.

Another
possible circumvention could be the increase of fees from card schemes to
merchants, i.e. the raising of non-MIF elements of fees, paid by merchants
directly to the card schemes. Here, a 'prohibition on net compensation' in line
with the Durbin amendment (Regulation II) in the US could be introduced. This prohibition
considers all 'net revenues' accrued by issuing banks from the payment card
scheme as an interchange fee falling under the Regulation. This would prohibit
card schemes from applying higher (scheme) fees or implement other measures to
compensate for a reduction or removal of interchange fees.

Annex 11: PSD ‘fine-tuning’ measures (operational
objective 8)

1.
Information
requirements and consumer rights

Product
information on charges and conditions of payment services is a constant and
repeated concern for PSUs, in particular consumers. Despite the PSD rules, and
notably those on framework contracts, consumers still complain about
unsatisfactory access to exhaustive, clear and comprehensible information[245].
Some of these concerns, in particular as regards the availability of
information on pricing presented in the transparent way, which is easy to
understand and to compare between PSPs, should be addressed through the
upcoming bank account package initiative of the Commission.

However,
other issues, such as easy to understand and clearly formulated information
about the consumer rights, e.g. in case of refunds for both authorised and
unauthorised payment transactions or rights in case of non-execution or
defective execution of the transactions remain as yet unresolved. While PSD
provides for such information obligation, the practice of PSPs is rather
different from clear and easy language, requested by the law. With typical
terms and conditions of a payment service going easily into tens of pages,
written in the formal, legal language consumers are often at loss and unaware
of their rights.

Moreover,
while PSPs are obliged to provide information on external redress mechanisms
and competent authorities, the PSD did not introduce any obligations to address
and answer the complaints directly by the PSP and within a reasonable time
limit. This may lead to the detriment of consumers and limits their rights in
the single payments market.

Case Study : Information requirements in the PSD

General
availability of the information on prices

The PSD specifies that
information on terms and conditions, including pricing, should be delivered in
easily understandable words and in a clear and comprehensible form, on paper or
on another durable medium. Accompanying recitals explain in addition, that this
comprises both Internet sites of the banks and online content that could be
downloaded by the PSU. Consumers should not be charged for the provision of
such obligatory information. However, despite precise regulatory provisions on
consumer information, consumers continue to struggle to obtain the necessary
price information or even when this information is available, to make sense of
it.

First, consumers still have,
despite the rules established in the Directive, limited access to key
information, including pricing. The survey on pricing of most popular payment
services (credit transfers, direct debits, card payments) done in the context
of the study revealed that out of 243 banks from all Member States covered by
the survey, almost 50% did not show sufficient information on pricing of the
offered payment services on the internet and close to 20% did not show any
prices. This message was repeated through contacts with the consumer
association. For example, German consumer association vzbv reported that a
comprehensive study conducted in all banks in the Hessen region in Germany
showed that 58% of the banks, in particular savings banks and credit unions did
not display prices on their websites.  Furthermore, in many cases even if the
price list was available, it was hidden under many layers of other, less
relevant information.

Furthermore, even the general
information provided by PSPs to consumers often does not enable them to shop
around for a better deal. For example, the UK consumer association 'Which?'
found out that based on the information on bank charges average consumer was
not able to make any useful comparisons between PSPs[246]. The information could be all
too easily manipulated by the PSP and made available in a way that almost
preclude useful analysis.

Besides that, the price lists,
if available, are often very lengthy, with hundreds of positions listed, and
written in a technical language. Often even the first contact employees in the
banks are not able to correctly explain the less common charges.

Persistence
of excessive charges for information

In accordance with PSD,
additional charges can be levied by the PSP in cases where the information goes
beyond the legal requirements or is provided more frequently, on consumer request.
When it is the case, the PSD requires that the charge be appropriate and in
line with actual cost. However, according to consumer associations those
charges are in some cases certainly not in line with actual costs and clearly
excessive.

For example, Bulgarian Post
Bank was reported to charge 500 BGN (around 250 EUR) for information concerning
the debit and payment account of the consumer. German consumer association
indicated, that it challenged in the courts Deutsche Bank (charges to consumers
for mailing statements of accounts when consumers had not collected them within
30 days from the day they were issued) and  Commerzbank (which charges 15 EUR
for each reprint of a bank account statement, e.g. for tax purposes). Spanish
and Bulgarian consumer associations reported that non-negotiable legal clauses
in the framework contracts often contained only vague statements about
additional charges for information and that the consumer has no possibility to
know them before agreeing to the contract.

Impact
of the rules on information concerning framework contracts

Within the study framework,
two main issues were raised concerning information in framework contracts.
First, the information delivered on framework contracts lacks clarity. It is
often complex, very long, written in legal language and with key elements
dispersed all over the document, going in tens of pages. Some consumer
associations reported contracts of over 60 pages (without annexes with prices)
being offered to the consumer. Even more strikingly, not a single consumer
association believed that consumers receive indeed clear and easily
comprehensible information.

Complexity is an inherent
issue in payment services. But, if consumers are to make well-informed
decisions and shop around, the application of the existing legislative
framework should have facilitated the provision of information that is
meaningful to consumers. This appears to be not the case in very many instances
across most Member States. Part of the issue concerning the lack of clarity and
the complexity of the information resides clearly in the ability of the
provider to decide how they can present the information in the contract. The
PSD had not prescribed any particular way to deliver the information (other
than requiring that the information be given in easily, understandable words
and in a clear and comprehensible form). It is a very subjective criterion. As
a result, the information delivered is often written in both legal and
technical terms, not understood by an average consumer. As the Belgian consumer
association Test-Achats observes: "The manner in which the information
is provided (presentation, terms, footnotes, etc.) vary from one provider to
the other, are too long, seldom clear and sometimes voluntarily confusing. It is
very difficult for a consumer to understand the tariffs in his own bank and it
is impossible for consumers to compare"[247].

For example, a common approach
of many banks is to announce on its web pages that the prices and conditions
may vary depending on branches where an account is held.  In other
cases terms and conditions mix conditions specific for payment services with
other categories of financial information (e.g. information on savings
accounts, deposits, securities) and cover a wide range of topics, thus adding
to the complexity for the consumer.

Option 50 (No policy
change)

Under
this baseline scenario, no action would be undertaken. The information
requirements in the PSD would remain unchanged and the PSPs will not be obliged
to reply to consumer complaints.

As a
result, the difficulties encountered by consumers in finding an easy to
understand and clear information on refunds for both authorised and
unauthorised payment transactions or on their rights in case of non-executed or
defectively executed payments would remain. It would be also up to the PSPs to
decide if, how and when to respond to consumer complaints. This would lead, in
some cases, to the detriment of consumers and limits their rights in the single
payments market.

Suboptions
2 and 3 discussed below are independent from each other.

Option 51 (Require PSPs
to reply within fixed time limits to consumer complaints)

While
many PSPs, in particular credit institutions, appear to have some form of a
consumer complaint resolution procedures in place (and the obligation to
provide for such mechanism has been even introduced by some few Member States
in the past), the practice is not universal and the standards of treatment of
such consumer complaints may vary significantly. From the consumer perspective,
the most important issue is to receive a reply addressing all points he has
raised and to get it in a timely manner. In case of a reply that does not
satisfy the consumer, a comprehensive reply of the PSP is a prerequisite before
the services of out-of-court complaint bodies could be used or before the
complaint could be accepted by competent authorities. Consequently, a timely
and, if requested by consumer, written reply to the complaint appears a
justified demand.

Following
this option, payment service providers would be required to answer to all
consumer complaints within fixed time limits (e.g. within 15 business days) and
in a written form, if it was requested by the consumer. Only once a complaint
is answered by the PSP, the consumer may be further directed to the external
out-of-court redress or competent authority, if he believes the issue was not
solved satisfactorily.

Main
impact of this provision would be on these PSPs that did not introduce any
procedures on dealing with consumer complaints and that take a long time to
treat consumer complaints or do not answer them at all. They would need to
appoint persons responsible to deal with such issues or, if necessary, to
devote more resources (mainly personnel) to deal with complaints on time.
However, there should be no measurable administrative burden for most of PSPs
who already possess the necessary resolution mechanisms.  The positive
difference would be made for consumers and microenterprises (if treated as
consumers).

Option 52 (Require PSPs
to inform customers about their rights and obligations in a standardised, easy
to understand and clear summary form)

If this
option is implemented, payment service providers would be required to inform
consumers about their rights and obligations in a standardised form, in an easy
to understand language. A summary sheet with the relevant information would
become available to consumers. The specimen of the information form contents
could be attached to the PSD as an Annex or issued at a later stage by the
Commission, on a basis of a delegated act.

As the
PSPs are already obliged to provide the discussed information to consumers, the
provision of standardised summary information sheet in simple, easy to
understand language will not increase the administrative burden on them or the
amount of information they need to provide. The difference and a positive
impact is therefore mainly on consumers and microenterprises (if treated as
consumers).

Calculation
of impacts

In
terms of costs, the impact of introducing a standardised information sheet on
consumer rights and obligations could be assumed to have the same financial
consequences as in the case of information provided as a result of one-leg, all
currencies PSD extension, i.e. 1.3 to 2.8 million euro.

The additional
costs incurred by dealing with consumer complaints in a timely manner are
assumed to be largely non-existent, as the huge majority of PSPs already
possess the internal capabilities and resources to deal with complaints. On
occasion, this may require a new division of tasks and internal redeployment,
but without generating additional costs. In very limited cases, possibly within
the PSPs with very large consumer basis and centralised complaint management,
the necessity of dealing with complaints in timely manner may require some
additional human resources. Assuming that such necessity may arise in 1% of
PSPs the calculation would be based on basis of roughly 9500 PSPs in Europe and
1 to 2 additional employees, working 40 hours a week, 52 weeks a year. The cost
of 1 working hour in the financial sector is, as in the previous calculations
37.30 EUR

0.01 x
9500 x  52 x 40 x 37.30 EUR x 1-2 = 7.37 million – 14.74 million

The
benefits of this solution are not quantifiable and are related to the better
protection of consumer rights.

Conclusion:

Both
timely reply to consumer complaints and standardised information sheet on
rights and obligations are preferred options. Their impact on PSPs is marginal
and estimated at 8.7 to 17.5 million EUR. The benefits of this solution are not
quantifiable and are related to the better protection of consumer rights.

Table
78 - Summary of the impact – Information requirements and consumer rights
(options 50 – 52)

Policy option || Description || Effectiveness || Efficiency

Option 50 || Baseline scenario || 0 || 0

Option 51 || Timely reply to consumer complaints || (++) || (+++)

Option 52 || Standardised information sheet || (++) || (+++)

Table
79 - Summary of the impact for main stakeholder categories (options 50 – 52)

Policy option || Description || Consumers || Businesses || PSPs

Option 50 || Baseline scenario || 0 || 0 || 0

Option 51 || Timely reply to consumer complaints || (++) || (+) || (-/0)

Option 52 || Standardised information sheet || (++) || (+) || (0)

2.
Safeguarding
requirements

According
to the PSD, payment service providers engaged also in other business activities
have to safeguard funds which have been received from users for the execution
of payments. This is done either by 1) holding such funds in an account
separate from the operational account(s) of the payment service provider and insulate
such funds from claims of the other creditors in case of bankruptcy or 2)
having an insurance policy or a guarantee in place. The most common form of
safeguarding used by payment institutions is the first one, known also as “ring
fencing”. Firms generally place funds on deposit in a credit institution rather
than opting to invest in secure low risk asset. However, it is not clear at
what point in time safeguarding should begin and whether or not this creates a
window of risk.

According
to the study conducted by London Economics and iff, the most popular approach
used across Member States is funds segregation[248],
as noted by 81% of regulators. 4 out of 5 PI respondents adopted this method of
ring-fencing.[249]
Reasons given for its popularity include clarity, convenience,
cost-effectiveness and conformity with national laws and customs. Moreover, it
is considered the most conservative in protecting customer interests. The least
used approach is the insurance method: only two authorities claim it is the most
commonly applied by payment institutions in their home countries. This is
mainly due to unavailability of insurance policy products or better suitability
of segregation/insulation of funds[250].

Experience
has shown that PI's have problems to fulfil the safeguarding requirements due
to the fact that credit institutions and insurance companies are not interested
to open accounts or to offer insurance policies. It is argued that AMLTF
provisions for such accounts require that the data of all customers have to be
revealed to the credit institutions and reviewed by them. As a consequence,
this could become a hurdle in obtaining a license.

Option 53 (No policy
change)

The
option involves no action at EU level but rather relies on action at Member
States' or industry level. The Member States have the possibility to implement
or not options provided in the Directive. There are three options possible
which have been implemented by 23, 22 and respectively 10 Member States. This
situation should remain unchained, which would prevent a harmonized application
of the safeguarding requirements in the Directive.

Under
this option, the payment institutions would continue having the possibility to
choose the safeguarding method from three different methods, although only one
of the methods is used today by the majority of the service providers.

If this
provision remains unchanged in the PSD, the shortcoming of lack of
harmonization of the safeguarding provisions will still affect the PIs and
the competent authorities in charge of their supervision.

Option 54 (Full
harmonisation of the safeguarding requirements)

The
three options in the article 9 of the PSD would be either generalized or
eliminated, which would make possible the harmonization of the safeguarding
requirements. This would facilitate the compliance with the safeguarding
requirements for payment institutions which provide services in several Member
States and increase the market integration. Furthermore it will insure a level
playing field for PIs across Europe which will incur comparable safeguarding
costs. The benefits of this full harmonization will compensate at an European
level the potential costs incurred for PIs in countries which will no longer
apply the three options. This policy option will benefit also to competent
authorities which will cooperate easier for the supervision of PIs operating in
several Member States.

At the
same time, it will be clarified the point in time where safeguarding should
begin. As explained above, this additional harmonization effort will benefit to
both PIs and competent authorities. Furthermore, consumer's funds will be
"protected" at the same extent across Europe.

Option 55 (Reduce the
number of safeguarding methods)

The
three methods for the safeguarding of the funds will be reduced as a general
rule to only one, the method known as the "ring fencing". This method
is already now and by far the most used by PIs. Exceptionally and based on
valid reasons for not applying the first method, the competent authorities could
still be accept the second method of safeguarding. The third method which is
anyway very marginally used will be deleted. This option will benefit mainly to
competent authorities which will be able to asses easier the compliance with
the safeguarding provision in the PSD.

Conclusion

This
option applied in conjunction with the option 54 will solve the shortcoming
identified in relation to the safeguarding provisions.

Table
80 - Summary of the impact – reduction of the number of available options and
waivers for safeguarding (options 53 to 55)

Policy option || Description || Effectiveness || Efficiency

Option 53 || Baseline scenario || 0 || 0

Option 54 || Full harmonization of safeguarding requirements || (++) || (++)

Option 55 || Reduction of the number of safeguarding methods || (+) || (+)

Table
81 - Summary of the impact for main stakeholder categories (options 53 to 55)

Policy option || Description || Consumers || Merchants || PSPs || Competent authorities

Option 53 || Baseline scenario || 0 || 0 || 0 || 0

Option 54 || Full harmonization of safeguarding requirements || (+) || n.a || (+) || (++)

Option 55 || Reduction of the number of safeguarding methods || (+) || n.a. || (++) || (++)

3.
Passporting

Under
the PSD, a payment institution authorised in one Member State can offer its
services throughout the EU, after having informed the competent authorities in
his home country (the country where the payment institution was granted its
initial authorisation) which then cooperates with those in the host country
(the country where a payment institution provides services under the
passporting regime) concerned. The payment institution does not need to go
through another authorisation process. These passporting rules were established
with a view to increase competition and enable providers, following
authorisation in one MS, to provide services in other Member States.

Passporting
by PIs for activities in other Member States is still a niche in relation to
the whole market of payment services. It is dominated by providers from some
Member States with a focus on money remittance (for instance Western Union,
registered in Ireland and providing services by passporting in all Member
States). Stakeholder experiences, both payment institutions and authorities,
point to a need for better communication among the competent home and host
authorities, both during and after the notification process. Informal
guidelines on passporting meant to harmonize especially the notification rules
have been issued by Member States since 2011 but they have not been endorsed
and applied by all Member States.

The
rules on the use of agents, branches and other entities appear difficult to
apply in practice, notably the application of the passporting regime to agents
providing cross-border services. Furthermore, the definition of an agent
appears to be unclear and the PSD is silent in whether the use of agents in
another MS is to be qualified as establishment or provision of services. This
issue is extremely important as it determines which authority is competent to
supervise an agent.

According
to the study carried out by London Economics-iff, in the view of PIs the PSD’s
passporting regime has not reached its full potential both due to concerns
about the passporting process and an insufficient level of harmonisation of
information, transparency of conditions and conduct of business rules due to
non-harmonised AML, consumer protection and data protection rules. The issue
most frequently raised relates to an apparent resistance by some host
authorities against providing services without a physical presence in a host
Member State and prolonging the passporting procedure by conducting robust
checks of anti-money laundering and checking compliance with the host country’s
consumer protection requirements[251].

All
these factors result in uncertainty about how long it takes to complete the
required passporting procedures. In particular, the process for registering a
foreign agent is viewed as slow and resulting in an unlevel playing field
between domestic and foreign PIs[252].
This is because a domestic PI wishing to register a domestic agent can do so
much more quickly than a foreign agent.

Competent
authorities apply very divergent approaches to the general passporting
framework. The most important structural issue raised by competent authorities
in the study conducted by London Economics and iff is the disagreement between
competent authorities whether cross-border provision of payment services takes
place (which requires notification) or the customer only makes use of local
payment service at distance (i.e. of the home Member State)[253].
This disagreement concerns especially services provided via internet. This
problem is not limited to payment institutions but may also arise regarding
credit or e-money institutions which can provide also payment services. As a
consequence of the conflicting interpretations, some home competent authorities
do not notify a service provider, leaving the host authority unaware of its
activities. Another key issue is a lack of agreement among competent
authorities over the interpretation of what constitutes a payment service.

Evidence
about the market situation

The
study conducted by London Economics and iff on the impact of the Payment
Services Directive shows that passporting is used in the majority of EEA States
but to a different degree.

Table  82  - Total number and proportion of passporting payment institutions by Member State

Member State || Number of APIs || Number of passporting APIs || Percentage of passporting APIs in total number of APIs

AT || 4 || 3 || 75.0%

BE || 9 || 3 || 33.3%

BG || 9 || 3 || 33.3%

CY || 10 || 1 || 10.0%

CZ || 13 || 1 || 7.7%

DE || 37 || 11 || 29.7%

DK || 6 || 1 || 16.7%

EE || 8 || 1 || 12.5%

EL || 11 || 0 || 0.0%

ES || 46 || 2 || 4.3%

FI || 5 || 1 || 20.0%

FR || 12 || 4 || 33.3%

HU || 2 || 0 || 0.0%

IE || 10 || 1 || 10.0%

IT || 45 || 0 || 0.0%

LT || 20 || 0 || 0.0%

LU || 4 || 1 || 25.0%

MT || 14 || 2 || 14.3%

NL || 28 || 10 || 35.7%

NO || 2 || 1 || 50.0%

PT || 9 || 0 || 0.0%

RO || 7 || 1 || 14.3%

SE || 23 || 4 || 17.4%

SI || 4 || 0 || 0.0%

SK || 6 || 1 || 16.7%

UK || 224 || 123 || 54.9%

EEA || 568 || 175 || 30.8%

Source: Registers on the web sites of the competent
authorities and complementary information provided by the authorities[254]

Note:
Latvia and Poland are not included, since there are no authorised payment
institutions in these two countries.

Throughout
the EU, a fraction of the PIs have sought passporting rights so far. In Greece,
Hungary, Portugal and Slovenia, no passports at all were sought by PIs[255].
On the other hand, seeking passports is a much more spread phenomenon among PIs
in other countries such as in Austria where 75% of PIs have sought to obtain
passports, Norway (50%) and the UK (55%)[256].
The United Kingdom is the country in which 70% of passporting PIs all over the
European Union are actually based[257].
It should also be highlighted that some categories of payment services tend to
passport more than others. Money remittances for instance account for 60% of
the PIs passporting in Europe[258].

These
figures show that passporting is still in its early days but could potentially
develop quite substantially in the future. This is especially probable
considering the substantial increase from 2010 to 2011 of the number of PIs
having obtained a passport to provide payment services[259].

A
detailed analysis of the bilateral passporting activities of PIs in various EEA
States shows the stronger bilateral activities tend to involve neighbouring
countries[260], as
for instance the following pairs of countries:

Austria –
Germany

Czech
Republic – Hungary

Czech
Republic – Slovakia

Belgium –
Netherlands.

Figure 83 - Geographic repartition of Passporting APIs in the EEA

Source:
Registers on the web sites of the competent authorities and complementary
information provided by the authorities[261]

As far
as the passport regime is concerned, a differentiation should be made between
the passports sought by PIs and the number of EEA states in which PIs actually
provide payment services. Indeed, it was shown by London Economics and iff that
although many PIs sought a large number of passports, it does not necessarily
mean that they do actually passport in all these countries[262]. Indeed, considering that
there is no or little difference in cost in applying for one or several
passports and that applying for a high number of passports provides more flexibility
for PIs to adjust quickly to changing market demands in the different EEA
countries, PIs tend to apply for a high number of passports although they may
not actually passport their activities in these countries as a result[263].

Option 56 (No policy change)

The
option involves no action at EU level but rather relies on action at Member
States' level. A competent authority in a home country will notify a
passporting request to the competent authority in a host country using its own
notification form and communicating information that it deems useful and
necessary. Sometimes this notification procedure is negotiated and agreed by
competent authorities on a bilateral or multilateral basis but an agreement on
a harmonized procedure at European level seems difficult under this policy
option. This will prevent the realization of a fully integrated market.

This
will continue generating important administrative costs for competent
authorities in home countries and payment institutions which will have to
provide different information depending on the various queries of competent
authorities in host countries. Therefore, the payment institutions benefit only
partially of the cost savings generated by the possibility provided in the
Directive to use a unique license across Europe.

At the
same time host authorities will have to assess notifications received under
different formats. Some passporting guidelines issued by an ad-hoc group made
up of representative of different Member States are under updating. But their
previous version was endorsed and applied only by a limited number of competent
authorities. This was mainly because the Member States could not agree on the
different notification requirements in case of free provision of services and
establishment. A major disagreement between authorities concerns also the
provision of services via internet and the need to notify under the passporting
regime the provision of services on the internet.

Therefore,
the shortcomings of the current situation are:

(1)        Lack
of harmonisation of the passporting procedures

(2)        Lack of clarity on the different
passporting situations: free provision of services, establishment and provision
of services on the internet.

Option 57 (Ask European
Supervisory Authorities (ESA) to issue guidelines on passporting, in particular
the notification procedures in case of free provision of services or
establishment)

Under
this option ESA will be asked to issue and to maintain the passporting
guidelines. The existence of guidelines agreed and approved by all Member
States will have a positive impact on the timeframe for the passporting,
avoiding time-consuming subsequent correspondence from host authorities asking
for additional information. Therefore the competent authorities will be able to
cope better with the timeframe fixed at one month in the PSD. The guidelines
will make a clear distinction between the different notification procedures in
cases of free provision of services, establishment and provision of services on
the internet.

ESA
will be asked to establish and maintain a register with payments institutions
and competent institutions in EU as a useful tool for all competent
authorities.

On the
benefits side, once agreed these guidelines will facilitate the work of the
competent authorities, establishing the concrete terms of the cooperation
between home and host authorities. The guidelines will be public and will
contribute to the transparency of the passporting regime. The payment
institutions will be therefore aware of the steps they need to undertake in
order to operate in different countries.

Although
the establishment of the guidelines and of the European register will mean an
additional administrative burden for ESA, this will be clearly compensated by
the costs savings for the different competent authorities.

Under
this option, both shortcomings identified will be addressed.

Option 58 (Clarify the
distinction between free provision of services and right of establishment)

Concrete
criteria will be provided to facilitate the distinction between free provision
of services, right of establishment and provision of cross-border services on
the internet. These criteria will feed in the drafting work to be done by ESA
under the policy option 57. Therefore the main benefit of this option would be
to serve as input and policy framework for the passporting guidelines to be
drafted by ESA.

But
this option will have positive spill overs also for all the policy options
under the Supervision section as it will clarify what authority is competent and
what law is applicable in the case of companies providing cross-border
services.

This
option will benefit mainly to competent authorities which will have concrete
criteria to decide on the legal status of a payment institution. This option
would limit also the interpretation possibilities and insure a harmonized
application of the passporting provisions in the PSD. The payment institutions
will benefit also of increased legal certainty, avoiding situations in which
the same activity is considered as free provision of services in a country and
establishment in another country.

This
option will solve mainly the shortcoming 2. But as the results achieved in this
option will serve as input for the policy option 57, it will indirectly
contribute to solving also shortcoming 1. Therefore option 57 and 58 should be
applied together.

Option 59 (Introduce the
possibility to passport a "negative clearance")

Under
this option, companies considered by competent authorities in home countries as
being outside the scope of the Directive could oppose this assessment to
competent authorities in host countries and operate without seeking a licence
in host countries. The option will benefit therefore mainly to these companies,
which will not be subject anymore to divergent interpretations of the Directive
by authorities in different countries. Furthermore, companies will save time
and money, as this "negative clearance" will be valid in all Member
States. The number of companies which would possibly benefit of this option is very
difficult to estimate since under the current PSD, companies which deem
themselves as being outside the scope of the PSD do not need to inform the
competent authorities. The positive spill-over of this option is that competent
authorities would have a better visibility on the number and type of services
provided by non-supervised companies.

The
drawback of this option is that companies which want to benefit of an exemption
would address their request to authorities sought to be more “permissive” and use
this decision in other countries. This could lead to unwanted situations where
some companies provide services without a licence in host countries where other
licensed payments institutions provide the same services while complying with
all the obligations in the PSD. So these companies will have a comparative
advantage on the licensed payment institutions, which will lead to a disturbing
effect on the market.

As a
conclusion, this option would solve partially shortcoming 1, but would generate
also negative side effects.

Table
84 - Summary of the impact - options 56 to 59

Policy option || Description || Effectiveness || Efficiency

Option 56 || Baseline scenario || 0 || 0

Option 57 || Guidelines issued by ESA || (++) || (++)

Option 58 || Distinction between free provision of services and right of establishment || (+) || (++)

Option 59 || Negative clearance || (-) || (+)

Table
85 - Summary of the impact for main stakeholder categories (options 56 to 59)

Policy option || Description || Consumers || PSPs || Competent authorities

Option 56 || Baseline scenario || 0 || 0 || 0

Option 57 || Guidelines issued by ESA || 0 || (++) || (++)

Option 58 || Distinction between free provision of services and right of establishment || 0 || (++) || (++)

Option 59 || Negative clearance || 0 || ++ || -

4.
Supervision

PIs
exercising passporting rights are subject to supervision. This may take the
form of providing relevant information on request or of on-site inspections.
Supervision of PIs providing services through passporting in several Member
States (thus without the need for additional authorisation in the host Member State)
has proven complex, especially in the case of specific services such
remittances. This sometimes raises concerns for competent authorities in the
home country of the PI regarding the effective supervision of the PI's
operations in host countries. In general, competent authorities exercise their
supervisory capacity only in relation to PIs established and operating in their
territory. The only exception is represented by Slovenian legislation that
provides the national authority with competence in other Member States or third
countries.

Other
issues are more of an operational nature. Notification of intent to provide
services in another EU Member State including registration of agent is the
stage of passporting that causes least issues. The greatest negative impact on
the efficiency of the notification process arises at the level of cooperation
between competent authorities of home and host Member State[264].

The key
issue raised by competent authorities with regards to the due diligence of
payment institutions in the passporting process are: incomplete AML procedures
and process and internal control framework that have to be exercised by the
agent through whom the payment services are provided. For instance some host
authorities would like that a payment institution designate a central contact
point for AML compliance purposes in the host Member State. However, this issue
will be also addressed in the context of the revision of the Anti-Money
Laundering directive foreseen for the beginning of 2013.

Another
issue reported by competent authorities as impacting negatively the supervision
of payments market is the time frame for passporting, one month being
considered as insufficient to properly assess the all the notifications. This
timeframe could be sufficient for the review effort required in relation to the
exercise in the freedom of services, whether the effort of a thorough review in
relation to the exercise of the right of establishment requires more time.

From a
consumers perspective, the main problem reported relates to identifying the
competent authority (home versus host authorities) in case of a complaint
against a PI licensed in one Member State, but providing services over the
internet in another Member State[265].
This appears as a recurrent complaint and query in letters and petitions
addressed by payment service users to the Commission services. Another concern
reported by consumers' association in the study conducted by London Economic
and iff relates to the fact the competent authorities in the host country
cannot stop from operating a deficient payment institution authorised in
another Member Sate[266].

Option 60 (No policy
change)

The
option involves no action at EU level but rather relies on action at Member
States' level.

The
competent authorities will be responsible for the supervision of payment
institutions in their respective countries, but the cooperation terms between
home and host authorities will remain vague. As a consequence some payment
institutions, especially the ones working under the free provision of services
or provided cross border services only on the internet would escape
supervision. On the contrary, some other payment institutions would be
supervised extensively by the home and several host competent authorities. The
costs triggered for payment institutions by this extensive supervision would be
even higher if all these competent authorities interpret in a different way the
Directive and have different requests.

The
efficiency of the competent authorities would not be optimal as it would not be
clear for them what is the extent of their powers and their concrete tasks in
relation to payment institutions operating in several countries. Activities
involving the collaboration of authorities in two Member States, such as
conducting in-situ inspections in another country would be difficult to
organise because of the insufficient definition of tasks repartition. Similarly
this could lead to potential conflict situations and reduce the mutual trust
between competent authorities. This task repartition is very important also
from an AML perspective, but this aspect will be also addressed in the context
of the review of the Anti-Money Laundering Directive at the beginning of 2013.

At the
same time, consumers will have the impression that some payment institutions
are not of all supervised as their complaints are transferred from one
competent authority to another. This would clearly deteriorate the consumers'
confidence in the benefits of the internal market and would discourage them
from using cross-border payment services especially on the internet.

Therefore
the shortcomings of the current situation are:

(1)        Unclear
repartition of powers and tasks between home and host authorities

(2)        Insufficient
or inconsistent supervision of some payment institutions.

Option 61 (Ask ESA to
issue guidelines on passporting with a clear separation of tasks between home
and host authorities)

The
passporting guidelines foreseen in the policy option 57 would have a second
component on the tasks repartition between home and host authorities and the
concrete terms of their cooperation. This policy option will clearly benefit to
competent authorities which by knowing what payment institutions they have to
supervise will be able to plan their time and people resources. An increased
cooperation between competent authorities will allow them to better supervise
the payment institutions and will insure a harmonized application of the PSD.
Based on these guidelines, ESA could act also a mediator in case of divergences
between home and host authorities.

Under
this option, payment institutions will have a better visibility on the
competent authority to which they need to report and the consumers will have a
better visibility on the authority to which they can address their complaints.

As
stated in the evaluation of the policy option 57, although it will generate
additional costs for the ESA, it will be a source of cost savings for the
different competent authorities.

This
policy option will solve both shortcomings identified above for the existing
situation.

Option 62 (Clarify
whether the home or the host authority is competent in relation to consumers
complaints in case of cross border provision of services)

This
policy option will clarify that a consumer's complaint should be received and
solved by the competent authority in the consumer's country (host country), if
necessary in cooperation with the home authority. This provision will apply
also in the case of cross-border services provided only on the internet, to a large
part of the consumer's complaint.

A new
provision would be included to clarify that as a general rule a consumer's
complaint should be dealt with by the competent authority in the consumer's
country (host country). These should apply also in case of cross-border
services provided only on the internet. The host authorities will need to
cooperate closely with home authorities in solving the consumer's complaint.

On the
benefits side, the consumers will have as a main interlocutor the competent
authority in his/her own country and will be able to file the complaint in
his/her own language. This will have a positive impact on the consumer's
confidence in the internal market and will increase his appetite for using
cross-border services provided only on the internet.

The
drawback of this option is that will increase the workload and costs for host
authorities, but with the trade-off that will reduce the workload of the home
authorities. The main benefiters would be the authorities in United Kingdom,
where 70% of the passporting payment institutions are primarily licensed and
Luxembourg where some major payment institutions providing services only on the
internet are licensed. At the same time, this option will help host authorities
to be aware of possible problems with payment institutions operating in the
country and therefore to better supervise them.

As a conclusion, this option will solve
shortcoming 1 and partially shortcoming 2.

Table
86 - Summary of the impact - options 60 to 62

Policy option || Description || Effectiveness || Efficiency

Option 60 || Baseline scenario || 0 || 0

Option 61 || Guidelines issued by ESA || (++) || (++)

Option 62 || Competent authorities for consumers' complaints || (+) || (++)

Table
87 - Summary of the impact for main stakeholder categories (options 60 to 62)

Policy option || Description || Consumers || PSPs || Competent authorities

Option 60 || Baseline scenario || 0 || 0 || 0

Option 61 || Guidelines issued by ESA || + || (++) || (++)

Option 62 || Competent authorities for consumers' complaints || ++ || 0 || (+)

5.
Access
to Payment Systems

Option 25 (No
policy change)

Due to
the exemption of payment systems designated under the Settlement Finality
Directive from the general PSD provisions on access to payment systems, PIs are
often not allowed under the Settlement Finality Directive to participate ‘directly’
in designated payment systems. They need to rely on direct participants (large
banks) to ‘indirectly’ access the payment systems. However, no objective and
general rules govern the indirect access by PIs, which results in significant
competitive disadvantages for PIs and has an impact on final prices for PSUs
(consumers). Option 25 would not address this restriction and they would
continue to exist.

Option 26
(Establish objective and transparent rules for PIs to access indirectly
designated payment systems)

Establishing
objective and transparent rules, including on costs, for PIs to access
(indirectly) designated payment systems would lead to easier access for PIs in
the same way small banks currently do. This would eliminate the competitive
disadvantage PIs can suffer from, by putting them on equal footing with other
parties accessing payment systems indirectly. Although there might be costs for
PIs (technical investments) and small banks (increased competition), consumers
can benefit from option 26 as increased competition will put a downward
pressure on the price for service of PIs and small banks.

Option 27
(Allow PIs to participate ‘directly’ in designated payment systems)

Option
27 would allow payment institutions to participate directly in payment systems.
Legal and credit risk would then be transferred to the PIs but it would also
increase their competitiveness. It must be noted however that this option
possibly leads to higher security risks as PIs do not fulfil all security
criteria required from direct participants. PIs might incur much higher costs
due to technical investments and a need for increased security measures. They
will, on the other hand, become more competitive. Benefits for consumers will
be similar as under option 26.

Conclusion

Currently
PIs are unable to access payment systems on fair and objectively defined
conditions. This creates a competitive disadvantage for them and could lead to
higher prices for PSUs. To address this issue, option 26 is recommended.

Table
88 - Summary of the impact for operational objective 2 (options 25 to 27)

Policy option || Description || Effectiveness || Efficiency

Option 25 || Baseline scenario || 0 || 0

Option 26 || Rules for indirect access by PIs || (++) || (+)

Option 27 || Direct access by PIs || (+) || (+)

Table
89 - Summary of the impact for main stakeholder categories (options 25 to 27)

Policy option || Description || Consumers || PIs || TPs || PSPs

Option 25 || Baseline scenario || 0 || 0 || 0 || 0

Option 26 || Rules for indirect access by PIs || (+) || (++) || N/A || (-)

Option 27 || Direct access by PIs || (+) || (++) || N/A || (-)

6.
Liability
for unauthorised transactions

Option 43 (No
policy change)

Under
this baseline scenario, no action would be undertaken. The liability rules in
the PSD would remain unchanged. As a result, differences in treatment of PSUs
(mainly consumers) between Member States and very different interpretations (by
PSPs and national authorities) of gross negligence and other liabilities
imposed on the consumer would persist. This would further result in very
different levels of protection of consumers in different Member States and
between the PSPs in the same country.

Option 44
(Fix an unique threshold for limited liability in case of a lost, stolen or
misappropriated payment instrument)

As a
result of this option, one pan-European limit for the liability of PSUs would
be introduced. Current Member State option, allowing for the introduction of
different national thresholds, up to a maximum of 150 EUR, would be deleted.
The liability would no longer be different between Member States and PSPs for
cases where the payment instrument (e.g. a card or a mobile phone with stored
payment credentials, authentication data for online banking) was stolen or
misappropriated by third persons. Accordingly, the liability limit would become
fully harmonised across the EU and no longer depend on the location of the
payment account or on the classification of the incident on the basis of an
arbitrary decision of the PSP or authorities.

The
main benefit of this approach is better, more comprehensive and all-around
protection of the consumer. Practice has shown that consumers are often unable
to prove that a theft, loss or misappropriation of a payment instrument was not
caused by their own failure to keep the instrument or its safety features (i.e.
PIN codes) safe. In many Member States (where the liability limit was not
reduced to zero euro) PSPs automatically assume that consumer acted by
definition negligently, as otherwise the incident would not have happened.
Vaguely drafted law provisions, national interpretations and contractual
provisions are in such cases often used to the consumer detriment and the
amount of 150 EUR treated as a penalty, independently of the circumstances and
the true amount of a financial loss. In some instances, the law is even
interpreted by PSPs to the extent that consumers need to prove that the
incident was not a result of gross negligence or fraudulent behaviour, implying
full consumer responsibility for potential losses. This is made possible by a
too widely drafted reference in Article 61(2) of PSD, obliging consumers to
respect the contractual terms and conditions of the issuer PSPs, which allows
in turn the PSP to define on its own, what gross negligence and fraudulent
behaviour is.

The
principal difficulty of a harmonised solution is related to the fact that any
fixed amount (unless, that is, the PSU liability is reduced to zero) would be
quite arbitrary and have different impact on different consumers, depending
first, on the level of average income in the Member States and second, on the
individual situation of the consumer. However, the same arguments could be used
against the solution in force, as the limit of 150 EUR was originally taken up
as an average amount imposed on the payment card users in typical contracts[267].
While there is a rationale in attributing some limited liability for potential
losses to the consumer (as it certainly has a preventive effect on consumer
behaviour), there is also much true in saying that the simple risk of losing a
payment instrument, thus losing a convenient access to own funds, devoting time
and effort to get a new instrument and paying for a replacement instrument,
acts as a very good deterrent against simple or gross negligence. Moreover, as
the main reason for liability imposed on consumer is the fraud prevention and
more and more fraud takes place as a result of security breaches at the
merchant and even PSP level (when, as a result of e.g. a cyber-attack, card
data and personal details are compromised and used in card-not-present
transactions) the rationale for hitting hard against consumer is simply not
reflecting the todays' reality anymore.

As the
liability threshold is closely linked to fraud, mainly the card fraud level, it
is interesting to see it also in that context. The current, indicative threshold
of 150 EUR in the PSD appears to be far too high in this perspective, in the
view of a first, comprehensive data on the card fraud, published by the ECB in
July 2012[268] and
taking into account the important security progress in recent years, with the
implementation of EMV standard and more secure card authentication, 3D Secure.
The total value of card fraud in the SEPA countries amounted to 1.26 billion
EUR in 2010, which amounts to 1.73 EUR per card issued in the EU and to 12
fraudulent payments for every 1000 card transactions. On a card basis, 1.2% of
physically issued cards were affected by fraud.

These
figures lead to a very interesting rough estimate – if we assume that each
fraudulent use of a card is connected with the application of limited liability
of 150 EUR per consumer (so that there are no cases of reduced or no financial
liability, but also no cases of gross negligence and proved PSU fraud), the
amount of liability penalties paid by PSUs would cover the entire amount lost
by PSPs because of card fraud in the EU. This would mean that consumers alone
cover all financial consequences of fraud and are de facto made responsible
also for security deficiencies in the system. This is even without taking into
account merchants fraud contributions, paid in card fees. While this
calculation does not take into account the costs of fraud prevention, it is
safe to assume that the liability threshold of 150 EUR imposed on users appears
disproportionate.

A
harmonised threshold of e.g. 50 EUR (which would also be linked to average
amount of a card transaction in the EU, at 52 EUR) would appear therefore much
more balanced, lowering the risks for consumers, strengthening the trust in
payment instruments and incentivising PSUs to prudent behaviour, without punishing
them excessively. Such reduced threshold is already in place in a number of
Member States. It would be also closer to the payment instrument fraud figures.
A much lower, even zero euro liability could be also a solution. This would in
turn incentivise PSPs efforts to develop more secure solutions for payment
channels of the future, in particular for online and mobile payments.

Option 45
(Fix thresholds for limited liability depending on the degree of security of
the payment transaction)

Under
this option, the limitation of liability would also become fully harmonised
across the EU. In contrast to previous option, instead of one harmonised
threshold, different thresholds would apply depending on the payment means used
and the degree of security of the payment transaction. First, that could
encompass a different treatment of transactions with debit and credit cards.
According to the ECB statistics, fraud levels are four times higher for credit
and differed debit cards than for simple debit cards (however, this appears to
be the result of predominance of credit cards in the e-commerce payments, the
difference is not significant for mortar and brick context). Second, different
thresholds could instead apply for point-of-sale transactions (when the owner
of the card is physically present in the shop and needs to enter PIN into the
terminal, in accordance with EMV standards), for ATM withdrawals and for
card-non-present payments (where the card is used in a remote transaction,
including online and mobile payments).

Such a
scenario would have the merit of reflecting the level of fraud in different
payment situations, thus linking the risk of fraud and the liability to a
concrete payment. However, important considerations question the effectiveness
and rationale for such approach. First, the PSU would be de facto made partly
responsible for deficiencies in the security of certain payment solutions,
covering the costs of fraud for such solutions and providing negative
incentives for their improvement. Secondly, another layer of differences in
liability would be introduced on top of the existing differences between
payment means (credit transfers, direct debits on one side and cards on other
side). Third, this approach would have a negative impact on these payment channels
that experience the highest growth and have the highest potential for the
future – mobile and online payments. It could be even argued that in order to
promote the development of secure, pan-European solutions for these channels
the legislator should on purpose limit or abolish PSU liability.

Option 46
(Add precision and clarify the concept of gross negligence in the PSD)

If this
option is implemented, the gross negligence concept would be clarified in the
law and better harmonised across Member States. As a result, there will be less
scope for discretionary decisions by the PSPs in case of payment incidents
involving liability of the PSUs.

The
implementation of this option would in practice go a long way toward rectifing
the discussed, current misuses of the existing PSD provisions and clearly limit
the number of situations, in which consumers are fully liable in case of so
called gross negligence. Up to know, what constitutes a gross negligence is in
practice left to the discretion of PSPs, with a consequence that even clearly
non-negligent cases, such as theft of a payment card from a coat pocket in a
shop or restaurant was sometimes treated as gross negligence. This is made
possible by Article 61(2) of PSD, obliging consumers to respect the contractual
terms and conditions of the issuer PSPs, which allows in turn the PSP to define
on its own, the concepts of gross negligence and fraudulent behaviour.

The
main difficulty of this approach is that in practice it is clearly not possible
to define a list of cases of gross negligence, taking into account all possible
situations that could happen in life. Any such list would need, out of
necessity, allow for some flexibility, thus leaving room for arbitrary
decisions by PSPs. As a result, the legislator could possibly precise and
clarify the circumstances under which gross negligence could be assumed and
take the decision on such cases from the hands of PSPs, leaving up to the more
precise guidance of the national competent authorities.

Calculation of impacts

The
impact of introducing a unique, lower threshold of liability for consumers in
case of a lost, stolen or misappropriated payment instrument could be roughly
calculated on the basis of the number of fraudulent card transactions in
Europe. According to the ECB report on card fraud[269],
there were 6,70 million fraudulent transactions involving cards issued in the
EU in 2010. If a limited liability of 50 EURO is introduced in the EU, the
costs for consumers of such decision would be 335 million euro.

However,
in comparison to the present situation, where the liability amounts to 150 EUR,
the benefits for consumers would be significant. Assuming that only 50% of
fraudulent transactions involves the consumer liability of 150 EUR (as in some
cases the liability was reduced by national implementation of the PSD and in
other cases the consumer is able to report the theft, loss or misappropriation
before the financial losses occur and block the instrument) the EU consumers
are estimated to gain some 295 million euro annually in financial terms, in
addition to more intangible but psychologically very important guarantee of
only limited losses if the situation of the theft or other loss of instrument
or its security features occurs..

The
same amount of 295 million euro would need to be absorbed by PSPs. However, as
discussed earlier in this impact assessment, the fraud costs in the EU appear
to be currently financed entirely by consumer and merchants contributions,
potentially weakening the incentives for PSPs to develop more secure payment
solutions, in particular in online and mobile payments context. Such
distribution of fraud costs does not appear justified, as the data show that
most of the card fraud exploits weaknesses inherent in the card payment system
design and vulnerabilities of the modern communication systems (data theft) and
is not related to PSU behaviour or errors.

Conclusion

The
preferred option is to introduce a unique, lower threshold for PSU liability
and to clarify the gross negligence concept in the PSD. The quantitative impact
of this option EU-wide is estimated at some 295 million EUR on a yearly basis.
More important are the intangible benefits of consumer confidence and better
protection with guarantee of only limited losses in case of theft, loss or
misappropriation. The same amount would need to be absorbed by PSPs in the EU
as a result of non-application of higher responsibility threshold. However,
such shared responsibility for card fraud appears fully justified.

Table
90 - Summary of the impact for options 43 to 46

Policy option || Description || Effectiveness || Efficiency

Option 43 || Baseline scenario || 0 || 0

Option 44 || Unique, lower threshold for liability || (+++) || (+++)

Option 45 || Liability thresholds depending on transaction security || (+) || (+++)

Option 46 || Clarify gross negligence || (+) || (+++)

Table
91 - Summary of the impact for main stakeholder categories (options 43 to 46)

Policy option || Description || Consumers || Businesses (microenterprises) || PSPs

Option 43 || Baseline scenario || 0 || 0 || 0

Option 44 || Unique, lower threshold for liability || (+++) || (++) || (-/0)

Option 45 || Liability thresholds depending on transaction security || (+) || (+) || (-/0)

Option 46 || Clarify gross negligence || (+) || (+) || (-/0)

7.
Small
payment institutions

Option 47 (No
policy change)

No
legislative or non-legislative action from the Commission is envisaged.

The
option involves no action at EU level but rather relies on action at Member
States level, as the Member States would decide or not to apply a waiver
regime. Under this option, the current situation would remain unchanged, with
only one third of the Member State applying a waiver regime, but with the total
of the number waived payment institutions (small payment institutions)
overpassing more than 3 times the number of authorised payment institutions.

The main
benefiters of this situation will be of course the small payment institutions
which do not need to comply with the obligations on initial capital, own funds
and funds safeguarding. Furthermore, they will still not need to apply for a
license and they will have only to be listed in the register of payment
institutions. This will give them a comparative advantage over authorised
providers, as their costs will be significantly inferior. However this
advantage remains limited to their home country.

The
consumers would benefit at a certain extent from this situation as small
institutions offer mainly niche services. But the trade-off is that consumers'
funds are less safeguarded. Therefore the shortcomings of the current situation
are:

(1)        Abusive use of the legislation by some
small payment institutions

(2)        Limited
safeguarding of consumers' funds

(3)        Insufficient
supervision of the small payment institutions

Option 48
(Provide for mandatory rules on small payment institutions)

The
option for the Member States to waive the application of all or some of the
Directive's provision to small payment institutions (called waived payment
institutions in the PSD) would be eliminated. Mandatory rules applicable to all
small payment institutions and in all Member States would be drafted. The
safeguarding requirements would apply also to small payment institutions.

Under
this option, mandatory rules would be drafted for small payment institutions,
which will mean the cancelation of the existing waiving regime. This way the
three shortcomings identified above will be addressed. The comparative
advantage of the small payment institutions will cease and consumer's funds
will be safeguarded according to the general safeguarding rules provided in the
Directive. On the benefits side, it will be also a harmonized treatment of the
payment institutions across Member States.

But as
a drawback, some payment institutions too small to be able to fulfil all the
obligations will either cease their activity or continue operating without an
authorisation. Even with the provision of a transition period, we estimate that
only a reduced portion of the existing waived institutions will apply for a
license as regular payment institutions (a rough estimation would be less than
40% of the existing waived institution – equivalent to less than 900 payment
institutions of a total of currently more than 2.000 small institutions. This
could be also considered as going against general Commission's approach of
supporting SMEs.

On the
costs side, it should be also counted the additional administrative burden
generated for the competent authorities who will have to supervise more closely
these new regular payment institutions.

As a
conclusion, this option would solve the three identified shortcomings but would
trigger other serious negative side effects.

Option 49
(Decrease the threshold for small payment institutions)

The
threshold for small payment institutions would be decreased from an amount of
monthly payment transactions of 3.000.000 EUR to 1.000.000 EUR, which would
mean stricter conditions for small payment institutions. In addition the
threshold could be applied cumulative to the parent company, should one legal
entity be the majority stakeholder in more than one waived payment
institutions.

Compared
to the option 48, the present option would generate roughly the same benefits
and drawbacks but with a different intensity. The waiver regime will be applied
only for payment institutions managing each month an average amount of 1 000
000 EUR of payment transactions, instead of the current threshold of 3 000 000
EUR. The number of the impacted small payment institutions that will not
benefit any longer of the waiver could be estimated at a conservative figure of
50% of the existing small institutions, representing slightly more than 1 000
payment institutions. The comparative advantage will therefore cease for these
impacted payment institutions. The waiver regime will be maintained only for
the smallest payment institutions which are in the up-taking phase of their
activity.

Compared
to the option 2, the present option will therefore ensure that a larger
proportion of payments institutions will remain in the supervised area, either
as regular payment institutions or as small payment institutions. This will
decrease the intensity of the drawback identified for option 48. The additional
administrative burden for competent authorities would be also limited.

As a
conclusion, this option will solve only partially the shortcomings identified,
but would be more cost-efficient than the option 1 and would generate less
serious drawbacks.

Estimation
of the decreased threshold costs for payment institutions and of administrative
costs for the Member States

The
cost for the payment institutions which will no longer benefit of the waiver
could be calculated under the assumption that the total number of waived
entities subject to scrutiny would be roughly in the range of half of the
already waived entities, so around 1 000 payment institutions.

The
cost of submitting the information to the authorities is calculated under the
assumption that it would take one employee five 8-hour working days necessary
to submit full information necessary to issue the license.

For the
administrative costs calculation it is assumed that the preparation of the
necessary documents will take one employee 5 business days of 8 hours. 37.30
EUR is the average cost of one hour of work of an employee in the financial
intermediaries sector (Eurostat data).

This
leads to the figure of:

1 000 x
5 day x 8h x 37,30 EUR = 1 492 000 EUR, with a cost of 1 492 EUR / small
payment institution.

We
could further assume that repeating annual costs of changes in the information
on the profile of the waived entity and related to applications of new entities
would reach 25% of this amount, or 373 000 EUR annually.

For
Member States, there would be the costs of assessing all the new submissions
for full licenses for no longer waived small payment institutions: 1 000
applications. The cost of 1 working hour of the public administration employee
is estimated at some 20 EUR (as there are no sufficient Eurostat data on the
costs the sample of existing data cannot be reliably extrapolated). It is
further assumed that it would take one employee 3-5 days of 8 working hours to
check and assess the PSD licence submission. This calculation also assumes that
the additional work will be done by the existing staff or through the internal
redeployments rather than by hiring new staff or outsourcing the assessment.

The
calculation:

1 000 x
3-5 days x 8h x 20 EUR= 480 000 EUR – 800 000 EUR

In
total, one off costs for the competent authorities would reach 0.48 – 0.8
Million EUR.

The
repeated annual cost could be assumed to reach 25% of this amount or 0.12 - 0.2
Million EUR.

The
benefits of the changes are non-quantifiable and encompass better consumer
protection and increased security of payments.

Table
92 - Summary of the impact for small payment institutions (options 47 to 49)

Policy option || Description || Effectiveness || Efficiency

Option 47 || Baseline scenario || 0 || 0

Option 48 || Mandatory rules for small payment institutions || (++) || (+)

Option 49 || Decreased threshold for small payment institutions || (++) || (++)

Table
93 - Summary of the impact for main stakeholder categories (options 47 to 49)

Policy option || Description || Consumers || Small payment institutions || Regular PSPs || Competent authorities

Option 47 || Baseline scenario || 0 || 0 || 0 || 0

Option 48 || Mandatory rules for small payment institutions || (+) || -- || (+) || (+)

Option 49 || Decreased threshold for small payment institutions || (+) || - || (++) || (+)

[1]               http://ec.europa.eu/internal\_market/payments/docs/cim/gp\_feedback\_statement\_en.pdf

[2]               http://ec.europa.eu/internal\_market/payments/advisory\_groups/index\_en.htm

[3]               The two international schemes apply the HACR cards
for the acceptance of cards with the same brands (such as 'MasterCard credit/
debit cards'); both of them do not apply an HACR between debit and credit cards
belonging to their scheme but issued with different brands (such as MasterCard
credit cards and Maestro debit cards).

[4]               Figures internally gathered by the Commission
Services of DG Competition.

[5]               The source for these figures, the RBR report
classifies co-branded domestic debit cards as either Visa debit or Maestro
cards; hence the market share of Visa and MasterCard is overestimated.

[6]               Figures in this paragraph are Commission estimates
based on partly confidential information.

[7]               See also Annex 9.2.

[8]               Excludes e-money card transactions.

[9]               Point-of-sale transactions; includes transactions at
terminals located in the Member State and outside it.

[10]             A review of the economic literature had also be
conducted under for instance the 'Interim Report I Payment Cards Sector
Inquiry under Article 17 Regulation 1/2003 on retail banking' of 12 April
2006, p.6 to 12

[11]              Julian
Wright, "The Determinants of Optimal
Interchange Fees in Payment Systems," Journal of Industrial Economics, vol. 52, no.
1, 2004, pp. 1-26. It should however be noted that the conclusions on the
optimality of intervention reached in the economic literature often rest on a
different welfare test than the legal test applied under competition rules and
Article 101 (3) TFEU. Therefore the lessons to be drawn from the analysis of
economic litterature cannot be readily transposed to a more holistic analysis
under competition rules.

[12]             William F. Baxter, "Bank Interchange of
Transactional Paper: Legal and Economic Perspectives", Journal of Law and
Economics , vol. 26, no. 3, 1983, pp. 541-588

[13]             Jean-Charles Rochet and Jean Tirole, "Cooperation
among Competitors: Some Economics of Payment Card Associations", RAND
Journal of Economics, vol. 33, no. 4, 2002, pp. 549-570

[14]             Julian Wright, "Determinants of Optimal
Interchange Fees in Payment Systems", Journal of Industrial Economics,
vol. 52, 2004, pp. 1-26 (ID 7620)

[15]             Jean-Charles Rochet and Jean Tirole ,"Must Take Cards: Merchant Discounts and Avoided
Costs", Journal of the European Economic
Association, vol. 9, n. 3, 2011, pp. 462-495

[16]             Graeme Guthrie and Julian Wright, "Competing
Payment Schemes", Journal of Industrial Economics, vol. 55, no. 1,
2007, pp. 37-67

[17]             John Vickers, "Public Policy and the Invisible
Price: Competition Law, Regulation, and the Interchange Fee", p. 234,
Interchange Fees in Credit and Debit Card Industries: What Role for Public
Authorities? (2005).

[18]             Jean-Charles Rochet and Jean Tirole, "Platform
competition in two- sided markets", Journal of the European Economic
Association, vol. 1(4), 2003, pp. 990–1029

[19]          Julian Wright, “Why payment card
fees are biased against retailers”, RAND Journal of Economics, Vol. 43 n°4
Winter 2012

[20]              Marc
Rysman and Julian Wright, "The Economics of Payment Cards",  29
November 2012

[21]             Case
COMP/34.579, MasterCard, Commission Decision of 19 December 2007. http://ec.europa.eu/competition/antitrust/cases/dec\_docs/34579/34579\_1889\_2.pdf

[22]             Case COMP/39.398, Visa MIF, Commission Decision
of 8 December 2010.

[23]             After the 2007 Decision concerning MasterCard's MIFs
and following discussions with the Commission, the Merchant Indifference Test
("MIT") formed the basis for the MasterCard Undertakings of 2009 and
the Visa Commitment Decision of 2010.  Under the MIT, the cost incurred by the
merchant when a customer uses its card should not exceed the cost for receiving
a cash payment. This requires detailed estimates for the costs to merchants of
handling cash and card payments, of the average size of these payments and the
fees charged to merchants for both cash and card handling by third parties
(principally banks but also others such as cash handling companies). Finally,
it is also necessary to estimate the average level of the acquirer margin and
scheme fees to estimate the maximum level of the MIF. These calculations are
explained in more detail in the Commission Decision of 8 December 2010 on Visa
Europe's commitments, paragraphs 57-68.

[24]             http://europa.eu/rapid/press-release\_MEMO-09-143\_en.htm?locale=en

[25]             In the Visa I Decision, the Commission found that a
number of the Visa scheme rules (excluding the MIF rules) did not appear to restrict
competition under Article 101(1) at that time. In 2002 in the Visa II Decision,
the Commission found that the Visa cross-border MIFs were a restriction of
competition by effect but exempted the MIFs provided they were reduced to 0.70%
for credit transactions and €0.28 per debit transaction until the end of 2007.

[26]             Case COMP/39.398, Visa MIF, Commission Decision
of 8 December 2010

[27]             General Court 24 May 2012, Case T 111/08, MasterCard
and others vs Commission, nyr.

[28]             OJ C 319 from 20.10.2012, p.4.

[29]             http://europa.eu/rapid/press-release\_IP-12-871\_en.htm?locale=en

[30]             http://europa.eu/rapid/press-release\_IP-13-314\_en.htm?locale=en

[31]              For
a more detailed overview see for instance the - Information paper on competition
enforcement in the payments sector of the banking and payments
subgroup of the European Competition Network
(ECN) of 20.03.2012 at
http://ec.europa.eu/competition/sectors/financial\_services/information\_paper\_payments\_en.pdf

[32]             L. Isaacs, C. Vargas-Silva and S. Hugo EU
Remittances for Developing Countries, Remaining Barriers, Challenges and
Recommendations (July 2012) p27 and London Economics and iff in association
with PaySys Study on the impact of Directive 2007/64/EC on payment services
in the internal market and on the application of Regulation (EC) NO 924/2009 on
cross-border payments in the Community (February 2013) p ix

[33]             Between 2007 and 2009.

[34]             After 2009.

[35]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p192

[36]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p194

[37]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p29

[38]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p38

[39]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p38

[40]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p176

[41]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p x

[42]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p173

[43]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p31

[44]             L. Isaacs, C. Vargas-Silva and S. Hugo EU
Remittances for Developing Countries, Remaining Barriers, Challenges and
Recommendations (July 2012) p27

[45]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p264

[46]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) Annex – p8

[47]             Civic Consulting - Consumer market study on the
functioning of e-commerce and Internet marketing and selling techniques in the
retail of goods, p. 25 (September 2011)

[48]             2011 Eurobarometer on Retail Financial Services, p. 9

[49]             http://thenextweb.com/mobile/2011/11/29/report-smartphones-account-for-just-27-of-all-mobile-phones-worldwide/

[50]             Innopay: Mobile Payments 2010, p.74

[51]             Examples include: M-Pesa, a mobile money transfer initiative
which was launched in Kenya and Tanzania and is now rolled-out to several other
countries. Osaifu-Keitai, an m-payment solution launched in Japan which is now
entering into inter-operability agreements with providers in South Korea. The
Isis joint venture, established by AT&T, T-Mobile and Verizon Wireless in
the US.

[52]             Journal of Payments Strategy & Systems Volume 5
Number 3: The increasing adoption of mobile payments in Europe — and remaining
challenges to growth: "The large number of interested parties to the
ecosystem, the lengthy discussions about standards and security, but also
negotiations about revenue sharing for the provision of NFC services have been
the main bottlenecks." and "A further obstacle is the lack of standards.[…]
So far, the industry has come up with a large number of mostly standalone and
competing mobile payments trials to enable consumers to transact with their
mobile devices. This fragmentation process, however, has led to a tangled web
of hardware and software certification standards.[…] For mass market adoption
of mobile payments in Europe, there is a need to develop and adopt standards
and controls that would allow interoperability between mobile payment players
to develop revenue models and revenue sharing opportunities.

[53]             e-Service Journal Volume 6 Issue 2: Exploring Merchant
Adoption of Mobile Payment Systems: An Empirical Study: "High costs, lack
of standards, and lack of wide enough acceptance are among the most significant
barriers to merchant adoption. These factors are evident in the results of both
the qualitative and quantitative studies. […]Different providers, such as
mobile operators and financial institutions, also need closer cooperation and
joint standardization efforts to overcome the barriers of low acceptance rates
and lack of standards.

[54]             Consulting firm Booz and Company estimates that a
standardised environment would lead to 62% more proximity m-payment
transactions in Western Europe in 2016 (versus a fragmented environment).
http://www.gsma.com/publicpolicy/wp-content/uploads/2012/03/mp12simbasednfc.pdf

[55]             Innopay paper – Mobile Payments 2012: "NFC-powered
mobile payments still face significant challenges when it comes to mass-market
deployment and adoption. While many market players –phone manufacturers, banks
and MNOs - are enthusiastic about its undeniable potential, mobile NFC adoption
has been lagging behind expectations. Some of the main causes for this are the
lack of a supporting infrastructure, the existence of a complex ecosystem of
stakeholders and the lack of unified standards."

[56]             The two international schemes apply the HACR cards for
the acceptance of cards with the same brands (such as 'MasterCard credit/ debit
cards'); both of them do not apply an HACR between debit and credit cards
belonging to their scheme but issued with different brands (such as MasterCard
credit cards and Maestro debit cards).

[57]             http://www.mastercard.com/us/company/en/whatwedo/interchange/Country.html

[58]             http://www.mastercard.com/us/company/en/newsroom/honor\_cards.html

[59]             Figures in this paragraph are Commission estimates
based on partly confidential information.

[60]             See: Case COMP/34.579 MasterCard, COMP/36.518
EuroCommerce and COMP/38.580 Commercial Cards, section 7.3.2.1.3. (paras
426-439).

[61]             Under the MasterCard case, so-called multi-lateral
interchange fees (MIFs) between the bank of the card holder (issuing bank) and
the bank of the merchant (acquiring bank) have been found to restrict
competition by object and/or effect and this has been confirmed by the General
Court. In the Commission's view, MIFs restrict competition by object as they
reduce the level of uncertainty on the market for acquiring banks and they have
an impact on MSCs. They also restrict competition by effect between acquiring
banks by artificially inflating the basis on which these banks set their
charges to merchants and effectively determine a floor for the merchant service
charge below which merchants are unable to negotiate a price. The restrictive
effect in the acquiring markets is further reinforced by the effect of the MIFs
on the network and issuing markets as well as by other network rules and
practices, namely the Honour All Cards Rule (the 'HACR'), the No Discrimination
Rule (the 'NDR') and blending.

[62]             This includes households’ costs.

[63]             Gertrude Tumpel-Gugerell,
Member of the Executive Board of the ECB, at the conference “The future of
retail payments: opportunities and challenges” Vienna, 12 May 2011.

[64]             http://www.eurocommerce.be/content.aspx?PageId=41803

[65]             French international retail group present in 12
countries (8 in EU).

[66]             Numbers for 2011, with the hypothesis that European
acquiring is possible (= European MSC (Merchant Service Charges) based on the
European MIF + an estimated acquirer cost for all transactions).

[67]             Judgment of the General Court
(Seventh Chamber) of 24 May 2012, case T-111/08 - MasterCard and Others v
Commission.

[68]             Cf. The analysis for option 15 under 9.2.1.4 below

[69]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p108

[70]             Directive 2007/64/EC Of The European Parliament And Of
The Council of 13 November 2007 on payment services in the internal market
amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and
repealing Directive 97/5/EC – Article 28(2)

[71]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p213

[72]             See London Economics and iff in association with PaySys
Study on the impact of Directive 2007/64/EC on payment services in the
internal market and on the application of Regulation (EC) NO 924/2009 on
cross-border payments in the Community (February 2013) p70

[73]             See OFT (2012), Press Release - Airlines to scrap debit
card surcharges following OFT enforcement action, 58/12, 5 July 2012.

[74]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p70-92

[75]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p73
Note: Surcharging is not allowed in France
Source: Analysis of surcharge survey

[76]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p74
Source: Analysis of surcharge survey

[77]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p74
Source: Analysis of surcharge survey

[78]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p75
Source: Analysis of surcharge survey

[79]             For example, Sveriges Riksbank (2012). note the
following in its ‘Response by Sveriges Riksbank to consultation regarding the
European Commission’ Green Paper on card, internet and mobile payments’,
Financial Stability Department, Dnr 2012-141-STA, March’: The Riksbanks
favours the approval of surcharges and these should as far as possible reflect
the actual costs of a certain payment instrument. At present, the merchant pay
fees to the banks for cash and for card payments, but are not able to price
these services directly to their own customers. This results instead in a
general surcharge on goods and services. Such a situation does not give the
consumers any indication of the costs of different payment instruments and thus
risks counteracting the efficient use of these instruments. The differences in
the costs of different instruments should instead be as transparent as possible.
It should be up to the merchants to determine whether a fee should be charged
for a certain payment instruments, and if so the level of the fee.  However,
the Riksbank would like to make it clear that it should be possible to charge
fees for all types of payment instruments’ p.2.

[80]             See: http://www.dnb.nl/en/binaries/working%20paper%20300\_tcm47-254378.pdf

[81]             In 2010 the Bundeskartellamt received a complaint by
Payment Network AG (today: Sofort AG), a company offering an online credit
transfer service called Sofortüberweisung.de. The company complained that it
was being barred by the German banks from offering its online credit transfer
services to merchants and payers. Among other measures, this included a lawsuit
by Giropay GmbH (a joint venture of Postbank and companies from the savings
bank group and the cooperative bank group) against Payment Network AG. Giropay
claimed that Payment Network AG was inducing bank account customers to use
their online-banking credentials on websites that had not been authorized by
their banks. The clauses on using credentials are part of the general terms and
conditions that are developed by Deutsche Kreditwirtschaft and are generally
adopted by the banks. Banks only allow using these credentials on their own
website or on websites of Giropay as a bank-owned online service.

After a
preliminary assessment, the Bundeskartellamt came to the conclusion that the
general terms and conditions for online banking most likely constitute an
infringement of Article 101 TFEU and Section 1 of the German Competition Law
(Act against Restraints of Competition – ARC) because the exclusion of online
credit transfer services from all but specific (bank-owned) service providers
was not deemed indispensable for guaranteeing a secure online banking system –
as had been claimed by the plaintiff in a civil case and by Deutsche
Kreditwirtschaft in the administrative proceedings initiated by the
Bundeskartellamt. The Bundeskartellamt was of the opinion that other measures
could be taken in order to safeguard the online banking system, such as the
development of a certification procedure comparable to existing certification
procedures in other areas of banking services. It submitted a corresponding
amicus curiae statement to the competent court. The court decided in March 2011
to stay its procedure until the administrative proceeding was concluded.

In August
2011 Deutsche Kreditwirtschaft issued a first model for a certification
procedure for non-bank online banking service providers. While the
certification requirements proposed seemed to be acceptable, discussions are
still ongoing regarding the need of bilateral contracts with each customer
bank, as well as issues of liability. The case is still pending.

[82]             http://www.ecb.int/press/pr/date/2012/html/pr120420.en.html

[83]             See section 3.2.3 Effects and corresponding part in
Annex 8

[84]             Feedback from the Member States authorities as well as London
Economics and iff in association with PaySys Study on the impact of
Directive 2007/64/EC on payment services in the internal market and on the
application of Regulation (EC) NO 924/2009 on cross-border payments in the
Community (February 2013) p123

[85]             E -commerce platform is basically an online retail
solution that enables transaction via the internet and gives to a retailer a
set of tools, allowing to identify, engage and retain customers. It includes
often not only the traditional web store, but also offline, mobile and social
media channels capabilities. Examples of large, international e-commerce
platforms are e.g. Groupon, E-bay (through a subsidiary, Magento), Amazon
(Amazon Marketplace) or Yahoo (Yahoo Store).

[86]             The stand-alone ATM is exempted from the PSD rules and
therefore is outside any contractual agreement on fees between the PSP (card
issuer) and PSU (cardholder). Consequently, a fee of any value can be imposed
by the ATM owner on the PSU, creating an incentive to install ATMs in places,
where it would not be commercially viable otherwise (so the theory), within the
PSD framework. Technically, the fee could be qualified as a surcharge on a
withdrawal, added to the normal charge applied by the PSP that issued the card.

[87]             For example, Euronet Worldwide operates a network of
thousands of ATMs in 9 EU Member States.

[88]             Direct charging is further possible in Sweden and the
UK.

[89]             Source http://www.ukpayments.org.uk

[90]             It can be argued that some rules from Title III and IV
of PSD cannot be easily applied to one-leg transactions –e.g. those on charges
or execution times. However, most of the user protection rules can be easily
applied to one-leg payments.

[91]             See London Economics and iff in association with PaySys
Study on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p136-139

[92]             While not defined in the PSD, the concept basically
indicates that the user of a payment instrument (e.g. of a card) did not take
the efforts that could be reasonably expected from him to make the instrument
secure.

[93]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p255-256

No
information means no response was received from national banking association;
unknown means that the national banking association has no information on the
number of days it takes to for a defective or unauthorised transaction to be
remedied. 1. The Estonian Banking Association defines such cases as
“extraordinary”, so that there is no “typical” time, but reports that it tends
to be immediate. 2. The Standard mentioned specifies the time; however, the PSD
supersedes this Standard. 3. For defective or unauthorised transaction where
the payer's or payee’s payment service provider is
liable same day (maximum next working day). For defective or unauthorised
transaction where the payer's or payee’s payment service provider is not
liable, on request, make immediate efforts to trace the
payment transaction and notify the payer of the outcome (minimum 10 working
days after PSU request). 4. In only one instance there is a rule, and this is
under the Dutch domestic direct debit scheme Incasso. The scheme rules
stipulate that if a consumer states that he did not give a mandate (after the
56 day refund period of the PSD and before the end of the 13 month period, or in
case of a non-refundable direct debit) for a direct debit the debtor and the
creditor bank must investigate and where relevant reimburse the consumer within
15 working day, counting from the day the consumer has filed his case. 5.
Maximum 2 days from the date of complaint. 6. This rarely happens as payments
without the correct details cannot generally be processed. Therefore, there is
little information.
Source: special mini-survey of national banking associations

[94]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p207

[95]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p207

“15 Member
States have used the option allowing for a waiver of all or part of the
procedure and conditions applying to API. However, so far, payment service
providers have prevailed themselves of this option in only 9 countries.”

[96]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p207

[97]             London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p208

[98]             See in particular London Economics and iff in association
with PaySys Study on the impact of Directive 2007/64/EC on payment services
in the internal market and on the application of Regulation (EC) NO 924/2009 on
cross-border payments in the Community (February 2013)

[99]             It should be noted that such dependence on other
provider for the acess to payment systems exists, to some extent, between
smaller and bigger banks. However, for PIs, whose business model is built
exclusively around payments, such dependence has a completely different
magnitude than for any small bank, for which payments are only one of several
business activities.

[100]            The source for these figures, the RBR report classifies
co-branded domestic debit cards as either Visa debit or Maestro cards; hence
the market share of Visa and MasterCard is overestimated.

[101]            For example, providers of payment initiation services or
any new pan-European card scheme would entirely depend on such access to
existing bank accounts.

[102]            i.e. payment initiation services, account information
services and other equivalent services enabling e.g. financial consolidation of
data from different accounts

[103]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) Annex – Page 162 and subsequent
analysis

[104]                  See http://www.verbraucher.de/UNIQ134063320310606/link1042271A.html,
accessed 25 June 2012.

[105]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border payments
in the Community (February 2013) Annex – Page 28

[106]            Except payments in Swedish Krone

[107]            The social and private costs of retail payment
instruments. A European perspective by Heiko Schmiedel, Gergana Kostova and
Wiebe Ruttenberg. ECB Occasional Paper Series, September 2012

[108]            See: http://www.emerce.nl/nieuws/ideal-52-miljard-euro-aan-betalingen-in-2010

[109]            For example, MasterCard may charge over 200 different
fees, depending on the type of the transaction and card used. Visa uses over 40
different fee categories.

[110]            For example an assessment for Poland, country with the
highest level of average MIFs in Europe, indicates that only about 20% of all
establishments accepts payment cards. Even some big retail chains (including
the biggest discount supermarket chain in Poland with over 2000 stores) do not
accept cards.

[111]            While the use of cash or cheques is also generating
costs for merchants, all analysis and reports undertaken over the last years
consistently indicate credit cards as by far the most expensive, from the
social point of view, means of payment.

[112]            For example, complaints received by the Commission
indicate that local payment applications are the only payment option (no cash
possible) on some public parking and at the vending machines in the Netherlands
(including Amsterdam). Regular complaints are also filed against the
impossibility to use international cards at the payment terminals of some
petrol stations e.g. in France.

[113]                  EMV standard should ensure interoperability
between the chips on cards issued in the EU and point-of-sale terminals (POS terminals) or
automated teller machines (ATMs). In order to be SEPA-compliant, card schemes
must apply the EMV specifications and must require the use of PIN codes.

[114]            http://www.ecb.int/paym/sepa/about/indicators/html/index.en.html#EMV

[115]            Even if offered, it typically comes with high fees for
the payer.

[116]            A potential decision factor could be a more complicated
refund procedure in case of e.g. failed delivery or low quality of received
goods, in comparison to a credit card payment.

[117]            Blueprint for a Pan-European e-services solution, EBA,
June 2011

[118]            http://epp.eurostat.ec.europa.eu/portal/page/portal/information\_society/data/main\_tables

[119]            "Report on Cross-Border E-commerce in the EU"
Commission Staff Working Document, SEC(2009) 283 final, 5 March 2009

[120]            http://epp.eurostat.ec.europa.eu/cache/ITY\_OFFPUB/KS-QA-09-046/EN/KS-QA-09-046-EN.PDF

[121]            For example, the EPAS initiative (terminal-to-acquirer)
was established in 2006

[122]
           Capgemini: SEPA – potential benefits at stake, p. 19; http://ec.europa.eu/internal\_market/payments/docs/sepa/sepa-capgemini\_study-final\_report\_en.pdf

[123]            Consulting firm Booz and Company estimates that a
standardised environment would lead to 62% more proximity m-payment
transactions in Western Europe in 2016 (versus a fragmented environment).
http://www.gsma.com/publicpolicy/wp-content/uploads/2012/03/mp12simbasednfc.pdf

[124]            http://www.etsi.org/deliver/etsi\_tr/102000\_102099/102071/01.02.01\_60/tr\_102071v010201p.pdf

[125]            See for example: Bradford and
Hayashi (2008), at: http://www.kansascityfed.org/publicat/psr/briefings/
psr-briefingApr08.pdf, ECN Information Paper
on Competition Enforcement in the Payment Sector (2012) at: http://ec.europa.eu/competition/sectors/financial\_services/information\_paper\_
payments\_en.pdf

[126]            http://www.federalreserve.gov/paymentsystems/regii-about.htm

[127]            TransAction Resources, Review
of the impact of Australian Payment Reform, Federal Reserve System Docket
Number R-1404. For a complete overview of Australian regulatory measures in the
payment system, see: http://www.rba.gov.au/payments-system/reforms/current-reg-framework.html#debit

[128]            Federal Registry, Final Rule 'The Board proposed a
definition of the term ‘‘United States’’ that is consistent with the EFTA’s definition
of ‘‘State.’’ The definition of ‘‘account’’ in § 235.2(a) is limited to
accounts that are held in the United States and the definition of ‘‘electronic
debit transaction’’ to those transactions accepted as a form of payment in the
United States because the EFTA provides no indication (such as a conflicts of
law provision) that Congress intended for Section 920 to apply to international
transactions (i.e., those where the merchant or account debited is located in a
foreign country). Accordingly, limiting the scope of this part to transactions
initiated at United States merchants to debit accounts in the United States
avoids both extraterritorial application of this part as well as conflicts of
laws'. Cf.  http://www.gpo.gov/fdsys/pkg/FR-2011-07-20/pdf/2011-16861.pdf

[129]            The investigations in Spain resulted in binding
agreements or 'moral suasion' from the government (i.a. Ministry of
Economy). See: 'Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, table 2 p. 31.

[130]            Ibid, p.8

[131]            Ibid. See also: http://www.kansascityfed.org/publicat/psr/dataset/regulator-dev-interchange-fees.pdf 
p.6.

[132]            Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, p. 9-10.

[133]            See: ECN information paper
(2012): http://ec.europa.eu/competition/sectors/financial\_services/ information\_paper\_payments\_en.pdf

[134]            See: http://ec.europa.eu/competition/ecn/brief/01\_2011/brief\_01\_2011.pdf p.14.

[135]            Judgment of the General Court
(Seventh Chamber) of 24 May 2012, case T-111/08 - MasterCard and Others v
Commission.

[136]            Cf. The analysis for option 15 under 9.2.1.4 below

[137]            The proceedings against
MasterCard cover only MIFs for cross-border transactions, while the Visa
proceedings cover also national MIFs in some countries. MasterCard's unilateral
undertakings (expired on the day of the General Court's judgment) covered both
debit and credit cards, while Visa's commitments (to expire in 2014) cover only
debit cards and the investigation on credit cards is still open

[138]            This would be likely in particular if option 13 is
considered in combination with option 15 under which a common EU-wide IF level
cap is set, the latter possibly under a second phase but without any
conditional review clause, see below.

[139]            Cf. Feedback
statement of 27.06.2012 on the Green Paper "Towards an integrated
European market for card, internet and mobile payments", part 3.3.1. Standardisation
— cards, p.19-20

[140]            See the section on a quantitative assessment below.

[141]            See Commission Communication "A coherent framework
for building trust in the Digital Single Market for e-commerce and online
services" January 2012 p11 - http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0942:FIN:EN:PDF

[142]            According to Eurostat, of all the activities (NACE divisions), motor
trades and repair (NACE Division 45), retail trade (NACE Division 47), and
veterinary activities (NACE Division 75) had the lowest levels of concentration
in 2009. Cf. http://epp.eurostat.ec.europa.eu/statistics\_explained/index.php/Structural\_business\_statistics\_at\_regional\_level

[143]            http://economix.blogs.nytimes.com/2012/11/05/the-big-swipe/?src=recg

[144]            http://www.forbes.com/sites/greatspeculations/2012/06/18/lower-credit-card-fees-leads-to-cheaper-prices-at-home-depot/

[145]            2007/08 Review of the Reform of Australia’s payments system
at http://www.rba.gov.au/payments-system/reforms/review-card-reforms/pdf/review-0708-pre-conclusions.pdf

[146]            http://www.rba.gov.au/payments-system/reforms/review-card-reforms/pdf/review-0708-pre-conclusions.pdf
p. 23

[147]            Cf. Federal Reserve Board in the
US. See: http://www.federalreserve.gov/aboutthefed/boardmeetings/
20110629\_REG\_II\_FR\_NOTICE.FINAL\_DRAFT.06\_22\_2011.pdf p.277.

[148]            See: Ibid, section IV B.

[149]            See: Federal Reserve System, 12 CFR Part 235: Debit Card
Interchange Fees and Routing; Final Rule

[150]            In the case of Visa, commitments cover cross-border MIFs
for debit cards and national debit card MIFs in 9 (smaller) MS. In the case of
MasterCard, commitments cover cross-border MIFs for debit and credit cards.

[151]            http://ec.europa.eu/consumers/strategy/docs/prices\_current\_accounts\_report\_en.pdf

[152]            General Court of the European Union, MasterCard
judgment, pars 108-110.

[153]            ECB Statistical Data Warehouse: http://sdw.ecb.europa.eu/

[154]            The European Central Bank has
recently published a study on social cost of the various payment instruments. 
This study shows that per transaction the cash is the cheapest (42 cents),
followed by debit card (70 cents) but credit cards are much more expensive
(2.39€). But if the analysis is made on the basis of the transaction value,
debit cards are the cheapest (1.4%) followed by cash (2.3%). Credit cards are
more expensive, (3.4%).  This last point allows concluding that there is a
societal interest to replace cash by debit cards, but not by credit cards.

[155]            See quantitative assessment section below.

[156]            Norges Bank (2012) Annual report on Payment systems
2011, tables 10a and 14a.

[157]            See: http://www.norges-bank.no/pages/89034/Paymentsystem\_2011.pdf

[158]            See: Norges
Bank (2012) Annual report on Payment systems 2011, chart 1.3, p. 7.

[159]            http://www.kfst.dk/fileadmin/webmasterfiles/publikationer/konkurrence/2012/The\_Danish\_Payment\_
Card\_ Market\_2012.pdf

[160]            Ibid, p. 28.

[161]            See: ECB Statistical Data
Warehouse 2011

[162]            RBR: Payment Cards in Western Europe (2012)

[163]            Ibid

[164]            'Klein bedrag?, pinnen mag'
Translated this means: 'small amount? Use PIN' : See: http://www.effie.nl/cusimages/013\_Brons\_Pinnen.pdf

[165]            Ibid.

[166]            See: 'Cash payments counted': Contante Betalingen geteld:
een Studie naar het Gebruik van Contant Geld in Nederland in 2010, DNB at: http://www.dnb.nl/binaries/DNB%20onderzoek%20Contante%
20betalingen%20geteld%202010\_tcm46-267292.pdf

[167]            Agreement with banks on
small-ticket transactions:'Akkoord banken over pinnen van
laagwaardige betalingen’, 12 jan 2011 and ‘Pinnen gaat het winnen van contant’
by Currence-directorr Piet Mallekoote, in the 2009 annual report.

[168]http://www.pin.nl/wp-uploads/2012/08/p\_uk\_key\_figures\_pinnen.pdf

[169]            Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, p. 5.

[170]            Ibid.

[171]            ECB Statistical Data Warehouse (2012) at:  http://sdw.ecb.europa.eu/

[172]            Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, p. 8.

[173]            RBA Annual Report of the Payment
System Board (2012) at: http://www.rba.gov.au/publications/annual-reports/psb/2012/html/dev-ret-pay-sys.html

[174]
           See:
http://www.currence.nl/NL-NL/OVERONZEPRODUCTEN/COLLECTIEVEBETAALPRODUCTEN/IDEAL/Pages/iDEAL.aspx

[175]            Based on transaction costs charged by IcePay (e-commerce
PSP): http://www.icepay.nl/online-betaalmethoden-en-betaalsystemen

[176]            According to Eurostat retail trade had one of the lowest
concentration levels in 2009. See: http://epp.eurostat.ec.europa.eu/statistics\_explained/index.php/Structural\_business\_statistics\_at\_regional\_level

[177]            See: http://www.federalreserve.gov/aboutthefed/boardmeetings/20110629\_REG\_II\_FR\_NOTICE.FINAL\_DRAFT.06\_22\_2011.pdf p.277.

[178]            Allan Shampine, Testing Interchange Fee Models Using
the Australian Example, available at; http://www.bankofcanada.ca/wp-content/uploads/2012/09/allan-shampine-paper.pdf

[179]            See: http://www.bportugal.pt/SiteCollectionDocuments/DPG-SP-PUB-Instrumentos-Pagamento-Retalho-Est-en.pdf

[180]            http://www.dnb.nl/en/binaries/working%20paper%20300\_tcm47-254378.pdf

[181]            TransAction Resources, Review
of the impact of Australian Payment Reform, Federal Reserve System Docket
Number R-1404, p. 19.

[182]            See to that effect: Harry Leinonen, Debit Card
interchange fees generally lead to cash-promoting cross-subsidisation, Bank
of Finland Research Discussion Papers, no. 3. 2011, p. 27.

[183]            RBR:
Payment Cards in Western Europe (2012)

[184]            See
graph 8: http://www.rba.gov.au/publications/annual-reports/psb/2012/pdf/2012-psb-ann-report.pdf

[185]            See:
http://www.rba.gov.au/publications/annual-reports/psb/2012/pdf/2012-psb-ann-report.pdf

[186]            See:
RBA, Review of Surcharging: A Consultation Document, June 2012, p.2.

[187]            Ibid.

[188]            See: Case COMP/34.579 MasterCard, COMP/36.518
EuroCommerce and COMP/38.580 Commercial Cards, section 7.3.2.1.3. (paras
426-439.

[189]            Norges Bank (2012) 2011 Annual report on Payment
systems, box on p.11.

[190]
       Judgment of the Court
of 8 June 2010 In Case C‑58/08 (Regulation (EC) No 717/2007 – Roaming on
public mobile telephone networks within the Community – Validity – Legal basis
– Article 95 EC – Principles of proportionality and subsidiarity)

[191]            OECD Roundtable on Competition
in Payment Systems (2012). Note by the delegation of Hungary.

[192]            ECB Statistical Data Warehouse (2012) at:  http://sdw.ecb.europa.eu/

[193]            According to the regression carried out in Valverde et.
Al. a 1% decrease in the average MSC results in a 0.043% increase in
acceptance. See: Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, Table 5.

[194]            Ibid.

[195]            ECB Statistical Data Warehouse (2012) at:  http://sdw.ecb.europa.eu/

[196]            Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010, p. 8.

[197]            EPSM Market Research Newsletter December 2012 p. 6

[198]            Ibid

[199]            Juan Iranzo, Pascual Fernández, Gustavo Matías and Manuel
Delgado: The effects of the mandatory decrease of interchange fees in Spain,
2012 (Study June 2012)

[200]            RBA Annual Report of the Payment
System Board (2012) at:
http://www.rba.gov.au/publications/annual-reports/psb/2012/html/dev-ret-pay-sys.html

[201]            See: Norges
Bank (2012) Annual report on Payment systems 2011, chart 1.3, p. 7.

[202]            Ibid, table 14b.

[203]            OECD Roundtable on Competition
in Payment Systems (2012). Note by the delegation of Switzerland, para 14

[204]            Ibid.

[205]            RBR Payment Cards Western Europe
2012.

[206]            ECB AUD-EUR exchange rate October 2006: http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-aud.en.html

[207]            http://www.rba.gov.au/publications/consultations/201206-rev-reg-frmwrk-eftpos-sys/pdf/201206-rev-reg-frmwrk-eftpos-sys-doc.pdf

[208]            See: http://www.rba.gov.au/payments-system/resources/statistics/index.html

[209]            Available at: http://www.bankofcanada.ca/wp-content/uploads/2012/09/allan-shampine-paper.pdf

[210]            Ibid.

[211]            TransAction Resources, Review
of the impact of Australian Payment Reform, Federal Reserve System Docket
Number R-1404, p. 19.

[212]            RBA Annual Report of the Payment
System Board (2012), p.18.

[213]            Hayashi, F. The New Debit Card Regulations: Initial
Effects on Networks and Banks. Economic Review, Fourth Quarter 2012, p.
103.

[214]            Ibid

[215]            Hayashi, F. Do U.S. Consumers Really Benefit from
Payment Card Rewards? KCF. At: http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/09q1Hayashi.pdf

[216]            Scott Schuh, Oz Shy, and Joanna Stavins'Who Gains and
Who Loses from Credit Card Payments? - Theory and Calibrations', Federal
Reserve Bank of Boston, Public Policy Discussion Papers, August 31, 2010

[217]            OECD
Roundtable on Competition in Payment Systems (2012). Note by the delegation of
Switzerland.

[218]            Juan Iranzo, Pascual Fernández, Gustavo Matías and
Manuel Delgado: The effects of the mandatory decrease of interchange fees in
Spain, 2012 (Study June 2012). See also the EPSM Market Research Newsletter
December 2012 for a criticism of this study

[219]            Santiago Carbó Valverde, Sujit Chakravorti and Francisco
Rodriguez Fernandez, Regulating Two-Sided Markets: An Empirical
Investigation, Federal Reserve Bank of Chicago Working Paper No. 2009-11,
revised April 2010

[220]            See : Joseph Farrell, "Assessing Australian
Interchange Regulation: Comment on Chang, Evans and Garcia Swartz", Review
of Network Economics, Vol. 4, No. 4, 2005, pp. 359-363

[221]            http://www.mastercard.com/us/company/en/whatwedo/interchange/Country.html

[222]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p75

[223]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p74

[224]            Information gathered internally by Commission Services
in DG Competition.

[225]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (November 2012) p75

[226]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p75
Source: Analysis of surcharge survey

[227]            The Office of Fair Trading in the UK highlights in its
response to the Which? super-complaint that 'To address the concerns raised
in the super-complaint we are recommending that the Government introduce
measures to prohibit retailers from surcharging for debit cards to ensure a
meaningful and consistent solution across the economy’. Cf.
http://www.oft.gov.uk/OFTwork/markets-work/super-complaints/which-payment-surcharges,

[228] http://www.ecb.int/pub/pdf/other/recommendationssecurityinternetpaymentsoutcomeofpcfinalversionafterpc201301en.pdf

[229]            The consultations have shown that virtually all TPPs are
very keen to be included in the scope of the PSD.

[230]            Limited purpose, e.g. a petrol card, a cinema entrance
voucher, a restaurant ticket, but not e.g. a leisure card, regrouping hundreds
of different entertainment services or a commercial platform voucher, allowing
for purchases of goods and services of many different merchants.

[231]            For example, cases of abusive premium SMS services,
reported in some Member States, would no longer be possible.

[232] Eurostat labour cost survey of 2007, labour costs in the financial
services sector. Data extracted from Eurobase for NACE section K
(lc\_n08cost\_r2  / lc\_n08costot\_r2 )

http://epp.eurostat.ec.europa.eu/portal/page/portal/labour\_market/labour\_costs/database

[233]            In addition, some 268 Mobile Virtual Network Operators
are registered in the EU, according to the Digital Agenda Scoreboard 2012.
However, as these operators, with few exceptions, possess a fraction of the
national mobile market share, they are excluded from these calculations.

[234]            On the basis of information provided by ATM industry
association

[235]            According to UK Payments (www.ukpayments.org)

[236]            See Eurostat – Statistics in focus nr 4/2012 http://epp.eurostat.ec.europa.eu/cache/ITY\_OFFPUB/KS-SF-12-004/EN/KS-SF-12-004-EN.PDF

[237]            http://europa.eu/rapid/press-release\_MEMO-09-143\_en.htm?locale=en

[238]            http://ec.europa.eu/competition/antitrust/cases/dec\_docs/39398/39398\_6186\_3.pdf

[239]            http://europa.eu/rapid/press-release\_MEMO-09-143\_en.htm?locale=en

[240]            http://ec.europa.eu/competition/antitrust/cases/dec\_docs/39398/39398\_6186\_3.pdf

[241]            http://www.mastercard.com/us/company/en/whatwedo/interchange/Intra-EEA.html

[242]            http://www.visaeurope.com/en/about\_us/our\_business/fees\_and\_interchange.aspx

[243]            http://www.europeanpaymentscouncil.eu/knowledge\_bank\_detail.cfm?documents\_id=132):

[244]            "The payment service provider shall not prevent the
payee from requesting from the payer a charge or from offering him a reduction
for the use of a given payment instrument. However, Member States may forbid or
limit the right to request charges taking into account the need to encourage
competition and promote the use of efficient payment instruments."

[245]            See London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) and complaints and inquiries the
Commission received on this subject.

[246]                  CAQS13 Which? (UK). For further details, see Which?, Bank charges:
how clear are they?, Which? Magazine, February 2012, p.15-16.

[247]            Test-Achats answer in the study on the impact of the PSD
and Regulation 924/2009 for the European Commission

[248]            Art 9(1) a of the PSD.

[249]            The fifth adopts the insurance method.

[250]            See London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p199

[251]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p180

[252]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p180

[253]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p184

[254]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p175

[255]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p175

[256]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p175

[257]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p174

[258]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p176

[259]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p177

[260]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p176

[261]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p174

[262]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p176

[263]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p176

[264]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p185

[265]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013)  p181-2

[266]            London Economics and iff in association with PaySys Study
on the impact of Directive 2007/64/EC on payment services in the internal
market and on the application of Regulation (EC) NO 924/2009 on cross-border
payments in the Community (February 2013) p181

[267]            This was subsequently used in the first Commission
Recommendation on the subject of liability of card users, Commission
Recommendation 97/489/EC

[268]            http://www.ecb.int/pub/pdf/other/cardfraudreport201207en.pdf

[269]            Report on card fraud, July 2012, ECB

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