Could this EU fee rule end free banking?
AN EU law designed reduce costs at the till is more likely to herald the end of free banking, according to a report out this week.
The proposed law would cut or remove the interchange fees (explanation) retailers pay whenever we pay for goods by debit or credit card.
However, the Mastercard commissioned research says, banks could impose fees on consumers - annual fees of as much as £11 for debit cards and £25 for credit cards, the researchers calculate - to recoup their losses.
Why cut interchange fees?
The EU doesn't like interchange fees partly for the same reason that we don't like the card surcharges we can see added to the price of plane and train tickets at the till: they drive up the cost of purchases.
Unlike surcharges, however, consumers can't see these fees so they have no incentive to use cheaper methods of payment.
And since there are so few issuers, the retailers have little power to refuse expensive payment methods (although some do).
In fact, consumers are incentivised by credit card rewards like points, cash back and interest free periods to spend on the cards that are the most expensive for retailers.
Effectively, everyone is paying higher prices at the till for a minority to be paid to use reward credit cards.
|What are interchange fees?|
|Think of interchange fees as behind the scenes card surcharges. Every time you make a purchase with a debit or credit card, the bank that issued your card charges the retailer's bank an interchange fee. The retailer's bank receives the money and gives it to the retailer, taking another fee for its trouble.|
|Example: £100 purchase > 50p to your bank > 50p to the shop's bank > £99 goes to the retailer|
If you think that sounds unfair, the EU and in the UK the Office of Fair Trading (OFT), which has publicly supported regulation of fees and has been investigating the issue for years, would agree.
An end to free banking?
However, as this week's report points out, eliminating fees is far from a simple business.
The Australian example
The researchers, working for consultancy firm Europe Economics and University of Essex academics, argue that retailers are unlikely to respond to lower fees by lowering prices on goods.
In Australia, they note, interchange fees were reduced from 0.95% to 0.55% per transaction but retail prices and quality of goods showed no change while card fees increased.
"Regulation of interchange fees in Australia has been great news for retailers and bad news for banks, but it is consumers who've had the worst deal," Richard Koch, a senior executive at the Cards Association commented earlier this year.
"It is wrong to assume that what looks bad for banks is always good for consumers."
That is one view on the Australian reforms but it's one that ignores the view of the payments experts reporting to the Australian federal reserve.
In a 2008 report (the Australian reforms were implemented in 2003) they note: "The fact that issuers receive no interchange income from debit cards has not led to any attempt to generate additional income from cardholder fees since the debit interchange reforms were implemented."
A briefing put together by Australian consumer group Choice noted that it felt the change had been misrepresented overseas.
"Again and again, we found references to Australian consumers having been harmed by the reforms... [It] appears to be a campaign against the Australian reforms."
Perhaps it's worth noting at this point that we don't actually have free banking in the UK now, not really.
In a December 2010 Treasury Select Committee hearing senior bankers estimated the true cost of a 'free' current account as something like £150 a year.
That's derived from fees and charges - like overdraft fees - and also from the forgone interest banks collect on the money.
Neither is this the first time that banks have warned that reforms will lead to higher fees.
Back in April 2008 the banks warned that a ruling to reduce bank charges would just lead to higher fees across the board.
This week's report also predicts that losing the huge profits banks currently make from interchange fees will lead to less lending and cause particular problems for those soon to be in receipt of Universal Credit, since those benefits will be paid straight into a bank account which, the report strongly suggests, will be an expensive place to keep it.
Implications for surcharges
Finally, it's worth noting that this news interacts with the efforts to eliminate another type of card fee, surcharges also termed 'drip pricing', in an interesting way.
In February 2011 Which? launched a super complaint and called on the Government to outlaw card surcharges.
Government has also promised at various times to reduce or eliminate them.
However, surcharges are at least indicating to consumers that their method of payment comes with additional costs (albeit often with a fee that far outweighs the cost to the retailer).
Getting rid of surcharges without any reform of interchange potentially puts consumers even further in the dark and allows card issuers to keep increasing prices on the retail side.
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