Card sharps

TO POLITICIANS, banks are both incompetent behemoths waiting for public bail-outs and conniving profiteers pulling a fast one on their customers. Just as one arm of the European Commission has been finalising new rules that will force banks to have much more capital on their balance-sheets in order to make them safer, another arm has been writing rules to stop the “unjustifiably high” fees charged whenever a credit or debit card is used.

A proposal released by the commission on July 24th (which it hopes will become law next spring) plans to cap “interchange fees”, charges levied on merchants by payment-card firms and their member banks whenever consumers use cards to pay for things. The commission wants to limit these fees to 0.2% of the value of the transaction for debit cards and 0.3% for credit cards. This compares with fees as high as 1.6% on credit-card transactions in countries such as Germany, and 0.8% in Britain, where card usage is higher.

The impact on banks from lower fees may be significant. A study conducted for MasterCard (which therefore comes with a big conflict-of-interest warning attached) by Europe Economics, a consultancy, estimated that British banks that issue cards receive some £2.3 billion ($3.5 billion) in interchange fees each year. It reckons that a cap on fees could trim the revenues of issuing banks by £1.1 billion.

The commission’s hope is that retailers will pass the savings they realise from lower fees on to consumers. It thinks that a cap is needed because market failures have prevented competition from pushing down prices. This, it argues, is because card companies such as Visa and MasterCard set uniform fees across their networks. Rules forbidding retailers from offering discounts for cash hamper competition. Consumers, too, are often incentivised to use cards that charge retailers higher interchange fees because they get more back in loyalty points or air miles.

The commission’s diagnosis of a competitive failure looks sound but its remedy may have passed its sell-by date. A decade ago it made sense to think of card companies as essential utilities that ought to be regulated like monopolies. Yet over the past few years the payments industry has started to bubble with new entrants. Start-ups like Square in America and iZettle in Europe, for instance, have dramatically lowered the barriers to people wanting to accept card payments. In San Francisco, where Square is based, people now routinely pay their yoga teachers and personal trainers by card instead of cheque.

More importantly, there is increasing competition for the card-payment networks from new plumbing. PayPal gives consumers the choice of paying using their credit cards or via direct debits from their bank accounts. Pingit, a service launched in Britain by Barclays, a bank, lets customers make payments using their mobile phones. The commission welcomes this competition and is passing some new rules to encourage it. But capping fees risks the worst of all worlds: the margins that start-ups can earn by undercutting the existing card-payment networks disappear, and retailers do not pass their savings on to consumers.