Romania aims to tame interbank fees

The government has unveiled plans to cap interchange fees, in response to a wider proposal by the European Commission, the executive arm of the EU, which could save retailers across Romania up to EUR 40 million in annual charges. However, it remains uncertain if retailers will lower prices following the move.

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Romania ranks fifth in Europe for interchange fees on card transactions, according to EC data. The Competition Council says local fees in the Visa and MasterCard system stand at 1 and 1.2 percent, respectively, whilst in other EU member states such as France and the UK, charges do not exceed 0.8 percent for debit cards with chips.

The government aims to cap multilateral interchange fees (MIFs) at 0.2 percent for debit cards and 0.3 percent for credit cards, which are similar to the levels proposed by the EC last year. Under EU regulations, the limitation would apply in the first two years for cross-border transactions and should then be applied at a national level as well.

MIFs are fees charged by a cardholder’s bank to a merchant’s bank for each transaction carried out at a merchant outlet with a payment card. The fee represents a large part of the merchant service charge (MSC), the sum that is paid by a merchant to its bank for accepting card payments.

“We expect the consumer to benefit from the reduction of one of the MSC components,” Alin Iacob, president of the Association of Financial Services Users (AURSF), told BR.

He says that retailers have covered the merchant’s bank fees so far, but the growing number of card transactions will see this fee included in the cost of products.

Data provided by the central bank show that point-of-sale (POS) transactions with cards issued in Romania rose by 18.3 percent year-on-year to 136 million in 2013. Meanwhile, the value of POS transactions gained 15 percent to EUR 4.6 billion.

According to Flavia Matei, senior consultant at Ensight Management Consulting, Romania comes last in the EU for e-commerce usage. Around 5 percent of Romanians use e-commerce for domestic acquisitions, according to EC data, while only 1 percent use it in cross-border transactions.

The country comes second from bottom, ahead only of Bulgaria, for the value of per capita debit and credit card transactions. Cash withdrawals from ATMs reached EUR 1,391 per head last year, while POS transactions amounted to EUR 262 per head.

The draft bill regulating the fees will be debated in Parliament. Initially, the government aimed to pass it through a government ordinance but delayed the decision one week ago. Prime Minister Victor Ponta hinted that the caps could be changed following discussions with the banking system in Parliament.

The AURSF is calling for the introduction of guarantees in the draft bill that will see consumers benefit from the lower fees. The association has proposed that retailers be encouraged to reduce prices following the move, and that banks be discouraged from hiking card usage costs for consumers, for instance by increasing issue fees or annual administration costs.

The war on fees is part of the government package aimed at curbing tax evasion by limiting the scope of cash transactions. Another proposal will see cash transactions between individuals limited to RON 10,000 (EUR 2,200). In addition, transactions between companies or between companies and individuals will be capped at RON 2,000 (EUR 444) and RON 5,000 (EUR 1,100) per supplier, respectively.

Banks face fees conundrum

Although the government says the lower fees would woo more Romanians into making card payments at merchants, which in turn would mean more business for banks, players in the payments technology business warn that banks’ losses would reduce new investments in technology.

“Despite the major progress, Romania still needs large investments in payment infrastructure, considering that electronic transactions account for around 5 percent of all transactions,” Cosmin Vladimirescu, MasterCard general manager for Romania and Moldova, told BR.

“If these revenues decreased, our concern is that banks would reduce their investment pace in developing payment infrastructure and new technologies.”

He added that judging by the experience of other countries, the savings made by retailers from the lower fees are not passed onto card users in the form of lower shelf prices. “On the contrary, banks may hike card usage costs for consumers, who, as a result, may use their cards less for payments,” warned Vladimirescu.

The GM adds that MasterCard has voiced its point of view on the draft bill, including “concerns” that the “forced limitation” of bank fees may impact consumers, leading to an increase of card usage costs.

In a public statement earlier this month, Visa Europe said, “Interventions to regulate the market could have unintended consequences.” The company also stated its case about the danger of lower investment by banks in new technologies and the decrease of card payments by consumers. Visa Europe declined to comment on the amendments it had proposed to the draft bill.

Iacob, who is a member of the EC’s Financial Services User Group (FSUG), said earlier this month in Brussels that card issuance activity is very profitable for a significant number of issuers, even in the absence of interchange fees. He cited the results of a profitability analysis by the Competition Council, which found that over 50 percent of surveyed banks recorded profitability of 49-79 percent if revenues from interchange fees were extracted from total revenues. The study also found that revenues from the issuing bank’s interchange fees account for 8-11 percent of the total income from card issuance activity.

Retailers could save EUR 40 mln a year on lower fees

Although the EC says the lower fees should make products and services cheaper, the experience of some EU members suggests the opposite could be the case.

According to MasterCard, interchange fees fell by almost 60 percent over 2006-2010. However, issuing banks increased card holders’ commission by 50 percent. As a result, the EUR 2.75 billion saved by merchants resulted in a EUR 2.35 hike in commission for all card holders. Vladimirescu says the same trend has been seen in Hungary and Poland.

Matei of Ensight Management Consulting commented that the lack of regulation limiting interbank fees means that big players such as leading banks, credit card issuers and strong retailers have increased leverage in negotiating fees.

“Smaller merchants, which are under development, as well as smaller e-commerce players, have absorbed this type of cost. As a result of the regulation, the expected result is that these cost reductions will be transmitted to consumers through market mechanisms, and will not be absorbed by merchants, thus generating an increase of demand for products and in the usage of modern payment instruments: ATMs and POSs. There is, however, the possibility that other kinds of fees may be introduced to counterbalance the limitation of interchange fees,” Matei told BR.

She says that broadly, if the regulation fully impacts merchants, a maximum saving rate of 0.8 percent of the total trading value in Romania should follow, based on the average interchange rate included in the draft bill. This means retailers could save up to EUR 40 million, based on the 2011 domestic consumption figures from the Office for National Statistics (INS).

Retailers across Europe are set to save around EUR 4.5 billion in yearly charges thanks to the capped interchange fees. The Association of Large Retailers in Romania declined to comment.

“Merchants are paying an exorbitant price for card payments,” says Iacob of the AURSF.

Research by the Competition Council shows the average MSC paid by merchants hovers around 1.78-2.4 percent of the transaction value.

“The interchange fee collected by banks in the Visa and MasterCard system significantly influences the level of the service fees collected from merchants, and, as a result, the final prices of goods and services,” said the council in a statement last year.

However, the EC seems to have overlooked the negative impact that lower fees may have on SMEs, say pundits. Europe Economics, a London-based economics consultancy, said in a report commissioned by MasterCard last November that only large retailers will likely be able to take advantage of cross-border acquisitions and benefit from lower MSCs. The EC assumes that only those with a turnover above EUR 50 million would benefit from this measure.

The report points out that SMEs may end up actually paying more as merchants’ banks will seek to compensate for the loss in fees from large retailers.

Ovidiu Posirca

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