eu card legislation update and impact

©2013 MasterCard.Proprietary and Confidential©2014 MasterCard.Proprietary and Confidential

Hearing at Budget and Finance CommitteeJune 4, 2014

EU Card LegislationUpdate and impact

Ludovic Espitalier-NoëlVice-President – Head of Public Affairs Baltics Benelux France

©2013 MasterCard.Proprietary and Confidential

• What MasterCard does and does not• How the card system works and its benefits• The trends in general• The Latvian payment market• The EU legislative proposal• Our key concerns• Statements beyond MasterCard• Q&A

EU Card Legislation


• 3 activities:– Licensing– Processing transactions– Advising banks

• What we do not do:– Earn money from interchange– Set the price of terminals, cards and card-related services– Issue cards, and rent or sell terminals– Have direct relationships with merchants and cardholders

• Our slogan: being at the heart of commerce

What MasterCard does… and does not



EU Card Legislation


How the 4-party system currently works

Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees

Merchant Service Charges



Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees

Merchant Service Charges =

Bank Fees + Interchange

Interchange


• Convenience, flexibility and physical security• Less tax evasion and shadow economy• Payment guarantees

– Against fraud (merchant and consumer’s benefit)– Against cardholders’ default (merchant’s benefit)

• Incremental sales– Increased transaction value (28 € more for debit vs cash; 46 € for credit)– Increased transaction value within the credit card category (23€ more for premium vs

standard credit)– More clients for SMEs, as more opportunities to compete with big retailers

• Savings (cash on average 3x more expensive than debit cards)

– Time to count; going to bank; payment delays; ATM surcharges; black market; production and transportation; counterfeited money; etc

• More time dedicated to core business, less accounting mistakes

Some benefits brought to merchants, consumers and governments by cards


A fragile ecosystem…

…as everyone depends on the other…

…and as we all win if the market is efficient…

…but we all lose if one is unhappy

The card market



EU Card Legislation


• More e-commerce transactions– Key obstacles are consumer rights and logistics, not payment costs

• More innovation and payment solutions• More players• Better understanding of the benefits (especially by merchants and

governments)• More transparency pressure• Cash still king: around 70% of all payment transactions in Europe• 95% of card transactions still domestic transactions• Domestic card schemes still dominant in most EU countries

– MasterCard processes only 40% of its own card transactions

• Evolution of fraud (from physical attacks to phishing, etc.)

Electronic payments: the trends


March 10, 2014

Source: European Innovation Academy – Based in Tallinn


March 10, 2014

ECB Slide - 2012


March 10, 2014



EU Card Legislation


Payments with cards increased by 18.5% in 2013

In brief: the Latvian market (2013)

46.9%

50.9%

2.2%

Wire transferPayment cardsOther

84.20%

18.80% POS Online

65%

35% cash payments in stores (est.)card payments in stores (est.)


The shadow economy (% of GDP)

In brief: the Latvian market

2009 2010 2011 2012 20130.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

20.2% 19.4% 18.9% 19.2%

15.7%

36.6% 38.1%

30.2%

21.1% 23.8%

17.7%18.8%

17.1%18.2%

15.3%

Estonia

Latvia

Lithuania


March 10, 2014


Do payment cards play a significant role in fighting shadow economy?

Payment method used most often

Consumer survey by LNACP, 20131/2

60%

34%

6% Payment cards

Cash

Other

68%

29%

3% Yes No

Other


Would merchants lower the prices if paid less IC fee?

Would use more cash if costs of using cards went up

Consumer survey by LNACP, 20132/2

77%

13%

8%

2% Yes

No

Not sure

Other

38%

29%

18%

12%

3%

Hard to believe 38%

Are sure they won't 29%

It's possible 18%

Are sure they will 12%

Other 3%



EU Card Legislation


A package of 2 proposals on payments services, including a review of the PSD and a draft regulation, for all countries in

Europe, presented by the European Commission on 24 July

2013

The EC legislative proposal


More competition

More innovation

More transparency

More harmonisation

Less costs

The EC legislative proposal: objectives


• Competition– 11 acquirers http://www.mastercard.com/lv/merchants/becoming-a-mastercard-merchant.html

– 1 key player on the processing side (not MasterCard)

• Innovation– Contactless payments - PrePaid cards - PaySafe card – SecureCode - iZettle

• Transparency– Interchange levels publicly available on MasterCard website

http://www.mastercard.com/us/wce/PDF/Latvia.pdf

– Details provided to merchants when transactions processed by MasterCard

• Harmonisation– developed market, high card penetration– SEPA

• Acceptance costs (interchange)– MC Interchange around or below the EU average (0.5% for debit; 0.9% for credit)

The EC objectives in the Latvian market

http://www.mastercard.com/lv/merchants/becoming-a-mastercard-merchant.html

http://www.mastercard.com/us/wce/PDF/Latvia.pdf


The Card Regulation Legislative Process

Proposal Law

European Commission

28 EU Member States

24 J

ul 2

013

toda

y

Long and complex decision making process – can take months or even years to complete

Not a lawNot bindingCan be modified

Law directly applicable throughout EU

negotiationsamendments

European Parliament

European Commission

European Council

(28 Member States)

EP First Reading

3 A

pril

2014


Some details about the timing

2013 2014 2015

Timeline Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

TimingEP Elections

Institutional Changeover

New Commission

Current EP closes

1 2 3 4 5

1 2 3 4 5The process Council and Parliament

begin analysisDiscussions in Parliament

and Council Parliament and Council

agree their positionsDiscussions between

Parliament and Council and Commission

Formal Adoption of the Interchange Regulation

Milestones(potential media

milestones in bold)

Parliament Rapporteur Appointed

Rapporteur ‘s Report Report voted by Parliament

(Committee & Plenary)

[Council works towards consensus]

Compromise agreement reached

Directly applicable in all EU Member States

1 2 3 4 5



EU Card Legislation


• Card players having the same type of business would not be treated the same way (especially the most expensive and the less transparent)…

• Merchants’ contribution to the card system would be arbitrarily reduced at the expense of consumers…

• Consumers and merchants would experience higher prices for the same level of services and products…

• Payment delays would be longer for companies being paid with commercial cards, and the same companies would have less cash-flow facilities…

• Consumers would no longer be sure all their categories of cards would be accepted by merchants…

Cash usage will be encouragedInnovation and investments will be discouraged

Only big retailers would benefit Some consequences have not been

assessed

Our key concerns, in brief


• Card players having the same type of business would not be treated the same way (especially the most expensive and the less transparent)…

Our key concerns



Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees



Interchange


How the 3-party system works

Cardholder Merchant

Cardholder fees

Merchant Fees

Issuing side Acquiring side

Internal transfer


How the 3-party system works

Cardholder Merchant

Cardholder fees

Merchant FeesIssuing

Bank

Incentive Fee


• Merchants’ contribution to the card system would be arbitrarily reduced at the expense of consumers…

Our key concerns


Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees



Interchange


• Payment delays would be longer for companies being paid with commercial cards, and the same companies would have less cash-flow facilities…

Our key concerns


Corporate card users

Merchant

Acquiring Bank

Issuing Bank

Cardholder fees

Merchant Services Charges :


Interchange+Interchange


• Consumers would no longer be sure all their categories of cards would be accepted by merchants…

Our key concerns


March 10, 2014


• Consumers and merchants would experience higher prices for the same level of services and products…

Our key concerns


Before

Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees

Merchant Service

Licensing

Processing


After

Cardholder Merchant

Acquiring Bank

Issuing Bank

Cardholder fees

Merchant Service Charges

Licensing

Processing

Increased costs Increased costs

Increased prices Increased prices



EU Card Legislation


• Latvian National Association of Consumer Protection (LNACP): «We are concerned about the potentially damaging effects of these legislative propositions since they would, if voted, lead to higher card fees and harm the interests of consumers, particularly socially unsecure ones.» / « Compared to EU average, even the smallest price rises in Latvia may have an extremely adverse effect on consumers, particularly on socially less protected groups, by forcing them to refuse using payment cards and making them return to cash, which in turn is less secure for consumers as related to larger risks of fraud and theft. In the modern world, the system of electronic card payments is a basic need, alleviating consumers' life in several aspects. Indeed, the representatives of the Latvian National Association for Consumer Protection are convinced that the merchants benefit from the payment card system at least as much, if not even more, than the consumers do, and the latter should not suffer at the expense of the former.”

• Latvijas Tirgotajs (Latvian SME organisation): «Any forced harmonisation and regulation, if the national market specifications are ignored, is likely to impair the fragile balance in the card market and posts a threat to its existence. […]. The EC has not explained so far what would be the gains from such an intervention in the market. The situation demands a thorough appraisal of consequences by all involved parties. Nobody likes to join the club of losers! But alas! The EC seems unwilling to listen to customers and small entrepreneurs. Even worse, the Commission is not committed to analyse the evidence and experience of other countries.»

• Association of Commercial Banks of Latvia : «If income is capped but expenditure remains the same, other alternative ways must be found to get the income. In this case the alternative way, in fact, is the individual who does not pay the higher commission fee at the shop but then his card’s annual fee will probably be increased...» / «In case of messy situations when the consumer does not understand which shop accepts credit cards and which debit cards, ultimately, the consumer will choose to pay in cash.»

Some comments beyond MasterCard 1/5


• American Chamber of Commerce in Latvia: «The goal of the regulation was to harmonize European Union market of payment cards, plus, enhance innovation and to use payment cards in more efficient way and provide higher security, however we see that some of the provisions might harm ecosystem of payment cards and hinder the fight with shadow economy. We believe that there is no need to change system that works well and does not detect any market failures. Arbitrary intervention, for instance through the EC regulation, may hinder further development of Latvian payment card market.»

• Alliance of Lithuanian Consumer Organizations: «We would welcome any initiative which might result in benefit to the consumer, but in this case we see very different intentions. It is not by chance that major European merchants' associated organisations are actively pursuing the fee limiting. Unaccountably, it is thought that the regulation will also benefit to consumers, because after the reduction in the fee burden for merchants the price of the goods sold by them will purportedly decrease. Unfortunately, the regulation in no event would reduce maintenance costs of the payment system; there is merely an intention to divide them otherwise. Experience and economic theory say that in such cases a consumer is always the final payer.»

• Estonian Consumer Protection Association: “Considering the fact that in Estonia the monthly card fees, for example, are differentiated and the fees for seniors, children and youth are smaller, the planned regulation will bring an increase in prices to all consumers, but will especially limit purchasing power among the consumers with the smallest incomes. It can also be expected that the development of new payment options and safety functions (i.e. mobile payments) will be slowed down and the risks of economic environment will be increased. Neither does the regulation take into account the local characteristics of each member state.”



• Moovcard (French innovative company): “As an online merchant, I am worried about the European Commission’s plans. I should be the first one to be satisfied since I should theoretically anticipate a decrease of my bank fees. But, in fact, the whole model would be damaged while e-commerce has been able to develop in France and in Europe precisely because of its components (e.g. confidence in payment cards; efforts made to secure and generalize online payments).”

• Polish Consumers’ Federation: “The rules designated by the legislator will surely have a positive impact on the merchants' market, but it is difficult to predict how the other market participants will react. The simplest consequence may be an increase in fees for using cards or keeping bank accounts. Great precaution must also be taken regarding another privilege of merchants – the Honor All Cards rule. When we decide on a subsequent lowering of interchange fees, it seems unjustified to add another priviledge to sellers, especially if this comes at a cost – of both confort and payment security – to the consumers.”

• Czech Association of Enterpreneurs and Employers: “The entire legislative process is a result of pressure from supermarket chains for whom – unlike for small businesses – interchange fees constitute the largest cost linked to accepting payment cards. Our Association opposes the MIF regulation. We deem European Commission's approach (absence of impact assessment on consumers) as totally undue even in case it was beneficial for the customers. […] As banks and card issuers play a significant role in trade policy, problems can be solved by the market and not by European regulation...I understand that it could be confusing that various countries pay different levels of fees, however at the same time, different countries have different tax burden. If we wanted to downplay it a bit, subway tickets or fuel prices are also different in different countries and they won't get regulated, even though it might not be beneficial for the consumers."



• Negative consequences - EstoniaOn 17 January 2014, the Estonian Parliament required the Government to oppose the interchange capping provisions of the European Commission, and their vote is binding:

– “The committee does not support capping interchange fees on card payments, as this can restrict free competition and prevent new participants from entering the market.”

– We do not support administratively set caps on interchange fees, as this does not encourage competition in the market and can endanger the security and development of services.”

– The Estonian Government also “supports equal treatment of card payment systems” and considers that three-party schemes (as well as hybrid schemes) should be treated as four-party schemes



• Subsidiarity and lack of data - FranceOn 28 November 2013, the French Senate (France represents 1/3 of all card transactions in the EU) stated that the EC has not respected the subsidiarity principle, and criticized the EC on various items:

– The impact assessment misses many data and information– The underlying methodology (MIT) to set interchange rates is not consistent

enough– The EC fails to show what would be the predominant consequence(s) of its

proposed measures– There are not enough elements from the EC to explain why and how it has

correctly defined the appropriate level of actions– There are not enough elements from the EC to explain why and how any action

from Member States would not be able to better achieve the objectives set by the EC



March 10, 2014

“The aim of the regulation is to promote competition and innovation, and to strengthen the market.” How can the EC promote competition if not players are not regulated the same way? How can the market be strenghtened if the less transparent players are not regulated? Why has the consequences of some measures not been assessed at all? What are concretely the market failures in Latvia, and in each country? Why does the EC consider that forced harmonisation will work, although all countries are

not the same, and one solution cannot fit all? Why does the EC never mention the Monet Project which was abandoned in 2012 because

of the upcoming card legislation? Why does the EC say there is not enough competition and innovation, whereas it proposed

a revision of the PSD to regulate “the growing number of payment institutions”? Where are the data and studies showing that what several academics studies will never

happen, and that all the fears expressed above are vain? How can the EC foster innovation if it weakens certainty about card acceptance and if it

makes consumers pay more?

Some arguments in favour of the regulation


March 10, 2014

“The IC regulation will lower prices for consumers” Why do merchants (EuroCommerce; ERRT) lobby so much for this regulation, if they

actually want to transfer all their new savings to consumers? 6 billion euro will be saved by European merchants every year. Why do not we have any

exact figure for consumers? Why does the EC only “trust” retailers? Why is the EC so sure that merchants will reduce prices in shops, whereas we have no

evidence of price reductions in other markets (rather the opposite) and in countries where VAT was reduced?

Does the EC ignore that several banking associations warned they would increase cardholder fees (France, Latvia, UK, etc.) in other markets (for instance Spain, in 2005, i.e. before the crisis; or Poland, last year?)

Why does the EC ignore so many consumer organisations in Europe (including Latvia) which express regularly their concerns?

Where are the data and analysis which show that similar regulations concretely benefited consumers and merchants?



March 10, 2014

“The payment card market in the EU is controlled by two players, MasterCard and VISA, limiting the competition and innovation” How can MasterCard be a dominant player when it processes nearly none of the

transactions in the Baltics, and only 40% of transactions made on its own cards in Europe? How can MasterCard be a dominant player when most of the transactions in Latvia are

processed by one competing company? How can MasterCard be a dominant player for e-commerce transactions when most of them

are processed by PayPal? How can MasterCard be a dominant player in various sector when AmericanExpress has at

least two-third of these markets (e.g. tourism industries, hotels, airlines, luxury products, etc.?)

Cards in Europe must be SEPA compliant, which is possible thanks to international brands How can MasterCard bring people using cash and chèques to electronic payments, if not

developping innovation? Why does MasterCard partner so much with Public Authorities to innovate (e.g. Greece,

Nigeria, etc.)



Paldies!

eu card legislation update and impact

Documents

card market2013 mastercard

confidentialwhat mastercard

confidential2014 mastercard

confidential2013 mastercard

cards2013 mastercard

confidential1what mastercard

not2013 mastercard

card system