In May 2006, Belgian-based financial institutions decided that the simplest way of becoming SEPA compliant for debit cards was to migrate their domestic debit scheme, Bancontact/Mister Cash (MC), onto the Maestro scheme. But in March 2007, in response to heavy criticism that the migration plans received from the European Commission (EC), the European Central Bank (ECB) and the merchant community; Febelfin, the Belgian banking federation, announced that the programme was to be delayed indefinitely. The main point of contention, from the EC’s and ECB’s perspective, was that the migration plans were deemed not European enough. The merchant community was of the opinion that migration might result in increased merchant service commission, associated with the higher interchange fees charged by Maestro.
In explaining its decision to indefinitely delay the programme, Febelfin stated that: ‘The reason is a lack of sufficient support from the European authorities on the business model, which had been established within this framework… nevertheless, the Belgian financial sector maintains its engagement towards SEPA’.
It is interesting to see that while the EC had only determined the destination and left open the avenues for becoming SEPA-compliant, it changed its stance of neutrality quite quickly once it found that many had chosen to migrate to an international debit scheme. Both the EC and ECB have expressed reservations about the fact that two non-European organisations, namely MasterCard and Visa, could establish a duopoly position in the European debit card market.
I think it is important to highlight the fact that while both MasterCard and Visa were founded in the US, they both have well-established independent operations in Europe. It is also important to note that, with the exception of Spain, all other European markets are dominated by a monopolistic debit scheme; hence, having a duopoly is an improvement on the status quo. Furthermore, given the extensive competition that exists among European banks, it would be highly unlikely that a long-term solution to SEPA could be found through political pressure. It goes without saying that the dream of making Europe the most dynamic economic area in the world cannot be achieved through regulatory protectionism of any kind.
The European regulators should respect their own guidelines, which was to allow financial institutions to find their own way to compliance and not to influence how they get there. The ultimate goal should be to mitigate any barriers to creating an efficient market for European consumers. Interestingly, that also seems to have been the objective behind the Belgian banks’ decision to migrate to Maestro, since the process would have required minimal effort on the part of cardholders. Whereas Maestro functionality is already incorporated in 95% of MC cards for international transactions, according to Banksys turning MC debit into a SEPA-compliant scheme seems to be economically unfeasible.
While it might not be surprising that European regulators are trying to influence how banks should become SEPA-compliant, it is surprising to see how easily banks are surrendering to such pressures.
Other countries, such as the UK and Switzerland, who have migrated their domestic debit schemes onto an international scheme, have been quite successful. The Swiss experience was not that different to what the Belgian banks experienced when they announced their decision to migrate. Swiss merchants also made their concerns about the potential increase in interchange fees quite clear to the banks and, as a result, the same zero interchange rate as the previous scheme was retained.
Merchants seem to suggest that higher interchange fees are detrimental to consumers, as they are the ones who ultimately bear the cost of merchant payment acceptance through higher retail prices. It should be noted that there are previous cases, such as Australia in 2002, Spain in 2005, and Mexico in 2005, where interchange rates were reduced by regulatory or judiciary intervention and, in all cases, merchants, and not the consumers, reaped the benefits. The lower costs were not passed onto consumers in the form of lower prices. The investment made in lobbying regulators by the merchants has resulted in a number of investigations into interchange fees, which in certain cases have resulted in cuts.
Similar investigations, however, into the behaviour of retailers are quite rare. It is time that the banking community got their act together and for once stood up to merchant lobbying and propaganda instead of just supplying mandatory responses to accusations and enquires. In the unlikely scenario that such action is taken, it would be interesting to see how the merchants and regulators would react should banks decide to give up their struggle against the insatiable appetite of the merchant community and limit card functionality solely to ATM withdrawals. Similarly, it would be interesting to see the regulators requesting that retailers also disclose their cost bases and force them to lower their margins. Ultimately, consumers are disadvantaged by high retail prices as well as the alleged high cost of payments and I wonder if this is an acceptable outcome to SEPA for the regulators.