Card companies are warning corporate clients to expect additional fees should a surprise proposal to include commercial cards in a new European Union cap on interchange fees be voted into law. The last-minute amendment to the impending expansion of regulation on card payments reverses an earlier decision to exclude commercial cards. It would reduce to 0.3 percent from 1.5 percent the typical interchange fee on MasterCard and Visa commercial credit cards, according to AirPlus International. The European Parliament is scheduled to debate the amended proposal on April 2 and vote the next day.
An interchange fee is paid by an acquiring bank (the bank used by a merchant for accepting card payments) to the issuing bank of the cardholder. The acquiring bank in turn charges a merchant service charge (also known simply as the merchant fee), comprising the cost of the interchange fee and various other fees for services such as equipment hire, amounting to 0.2 percent to 0.3 percent.
The proposal directly affects issuers in the MasterCard and Visa networks, which are known as four-party systems (in which payment involves two banks as well as the merchant and customer). MasterCard head of commercial products for Europe Andrew Buckley told BTN the inevitable fees issuers would charge customers would tempt businesses to return to such less efficient forms of payment as invoicing. Executives at MasterCard and AirPlus said this situation would be worrying enough, but they regard as far worse an understanding that such three-party schemes as American Express and Diners Club would not be subjected to the new cap.
According to AirPlus U.K. managing director Yael Klein, four-party issuers would introduce fees while three-party issuers could charge no fee and pay rebates from the higher merchant fees they already command (about 2.5 percent in the case of Amex). "This would distort competition in a huge way," said Klein. "If I looked at two card products and said, 'Here I have to pay £500,000, and here they give me £500,000,' that would be an easy choice. The market would be dominated by one company, and it would result in loss of innovation."
In July 2013, the European Commission published its proposals to cap interchange fees at 0.3 percent for credit cards and 0.2 percent for debit cards, claiming a need to curb the "unjustifiably high levels of these fees." The proposals specifically excluded commercial cards. However, on Feb. 20, the European Parliament's Economic and Monetary Committee (ECON) removed this exemption, stating that "company cards need to be included, because otherwise consumers would cross-subsidize company cards."
The original proposals also exempted all three-party schemes (where the issuer and acquirer are effectively one and the same) because, as AirPlus estimates, they account for a mere 2 percent share of the European consumer card market, according to AirPlus. The new ECON amendment exempts three-party schemes only "where their volume does not exceed a threshold set by the Commission," although there is no indication of what this threshold will be. More importantly, AirPlus and MasterCard asserted that notionally including larger three-party schemes would make no difference because they do not charge interchange fees anyway (instead, they charge only merchant fees, which are not regulated). "There is a fundamental misunderstanding of how the three-party model works," said Buckley.
AirPlus and MasterCard said that if their interpretation is correct, the implications for the commercial card market would be far-reaching. According to AirPlus, three-party schemes command a 45 percent share of the commercial card market (ironically, this includes AirPlus, whose Company Account lodge card is issued on the Universal Air Travel Plan platform), a figure both AirPlus and MasterCard believe would increase substantially.
In a written statement to BTN that avoided any distinction between three-party and four-party systems, Amex commented: "Operationally, cardholders can use commercial cards in exactly the same way as they use their personal cards. From the merchants' perspective, transactions with commercial and consumer cards are processed in the same way. It has therefore never been clear to us why commercial cards were excluded from the initial proposals. While we do not have a specific view on their future inclusion, we will of course comply with whatever the final legislation says."
Even without the added complication of potential exemption for three-party schemes, Buckley claimed ECON's proposal to cap commercial cards would be bad for European businesses. "There has been no impact assessment," he said. "They don't have a full grasp of what the consequences could be. The alternative could be people going back to paying by invoice, yet the travel industry has built many processes around paying by card."
Buckley added that interchange fees fund extended payment terms for clients and prompt settlement for their travel suppliers. He said they also pay for management information and such processes as data feeds into accounting systems. "The average business traveler does €10,000 per year on a corporate card," Buckley said. Alluding to the shortfall for issuers on that spend caused by the reduced interchange fee, he asked, "Will they want to start paying €100 per card? Companies will probably leave frequent travelers with corporate cards but tell everyone else to use personal cards or invoicing, although the last thing corporates want do to is go back to the dark days of paper. This is a complete headache for the travel industry. It's a classic case of unintended consequences."
Klein expressed a similar view. "My personal belief is that [ECON] are simply not aware what the implications could be," she said. "To live on 30 basis points and pay ourselves and innovate is a big ask." She added that it would result in "a huge drop in income for all Visa and MasterCard issuers." AirPlus said the cap would cost it at least €20 million in revenue annually, even with the exemption for its dominant lodge card business. AirPlus issues corporate cards in many countries, and its fast-growing virtual card product would be hit too.
Klein claimed that customers do not benefit from a reduced interchange fee, saying there is no evidence of restaurants and other merchants dropping their prices accordingly in markets where interchange fees have been capped, such as Australia.
Ahead of the April 3 vote, opponents of the new amendments are lobbying members of the European Parliament to again exempt commercial cards. However, approval would not be the end of the road because adoption of the regulation requires a co-decision with the Council of Ministers from EU member states. Both institutions must agree to a common text. MasterCard hopes it can convince the council if it cannot persuade MEPs to reconsider. "Government representatives are slightly more technical and would look at it in greater detail," Buckley said.