Interchange Fee Warnings Coming True in EU

Competitive Enterprise Institute | February 4, 2016

We have often warned about the negative effects of interchange fee regulation and specifically a cap on interchange fees. Last year we warned the European Parliament that a proposed EU-wide cap on interchange fees would cause many banks to raise fees and interest rates on all their customers, not just those who use debit or credit cards. We said:

Capping interchange fees has been tried in some countries around the world.  Despite claims that these efforts were for the benefit of consumers, the real world results have shown the opposite to be true. In every instance, consumers faced higher fees for banking services, a reduction in benefits and services and saw no return in the form of lower prices from merchants despite promises by merchants and policy makers to pass savings to consumers.

We also noted in April that banks were already cutting back on card reward schemes.

The negative effects of this arbitrary cap on interchange fees are now being widely felt in Europe and are playing out exactly as we expected. Banks earning less on interest and interchange fees will raise customer fees to compensate for losses in other fields of activity:

  • The first domino to fall was the Eurozone’s largest bank Santander, whichannounced last month that millions of UK customers will face increases in fees due to increased costs.

However, this is not only having an impact on banks and their customers in the UK:

  • Poland’s largest bank PKO BP announced earlier this year that it will be raising fees on accounts for its customers, while ING Bank Slaski has recently eliminated free withdrawals from ATMs.
  • Customers of French banks Société Générale, Crédit Mutuel and BNP Paribas will have to pay €24, €24, and €30 extra per year in maintenance fees
  • Jyske Bank in Denmark has already raised its online banking account fees from $50 per quarter to $200 per quarter, a four-fold increase in just one year.
  • Meanwhile, Tesco, Capital One and RBS in the UK have all had to drastically cut their rewards schemes on the back of the EU limiting interchange fees.
  • Finally, HSBC bank in the UK has raised the interest rate on its Premier credit card by 42 percent because of interchange fee regulation.

Banks can only make money off credit cards in three ways—from interest rates, fees to customers, or interchange fees to merchants. Capping any one of these elements will cause one or both of the other elements to rise in cost, or result in a constriction of supply. That is now happening across Europe as we predicted.

The recent announcements by European banks such as Santander should not, therefore, come as a surprise. We can continue to expect higher fees and perhaps in some cases the elimination of fee-free accounts; we should also be under no illusion that the consumer will benefit from lower prices from merchants.

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