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Erhvervs-, Vækst- og Eksportudvalget 2013-14
KOM (2013) 0550 Bilag 2
Offentligt

NON-PAPER

Interchange fee regulation and domestic debit card schemes

The regulation of interchange fees as proposed by the Commission may

help the payments framework to better serve the needs of an effective Eu-

ropean payments market, fully contributing to a payments environment

which nurtures competition and innovation. However, the regulation may

also have unintended and possibly harmful consequences for domestic deb-

it card schemes, that are in general cheaper than international card

schemes

and often subject to regulation on national basis.

Thus, it is important to ensure that the interchange fee regulation does not

impose regulation that may hinder a sound and cost efficient development

of the national card schemes. Following the assessments below the inter-

change fee regulation as a whole should therefore not apply to domestic

debit card schemes when the interchange fee in general is lower than the

proposed caps on interchange fees of 0,20 % when using debit cards.

The national card scheme in Denmark

The Danish card scheme, the Dankort, was launched in 1983 and is by far

the most used payment instrument in Denmark. Since 1988 is has been

possible to co-brand the Dankort with Visa meaning in practice that the

Dankort applies on all domestic transactions and the Visa card applies on

all foreign transactions.

Denmark is one of the countries with highest usage of payment cards per

capita. The number of transactions made solely with the Dankort per capita

exceeds the total number of card transactions per capita in UK, Nether-

lands, France and Belgium,

and around two thirds of all payments at the

point of sale (POS) is made with the Dankort and almost all Danish mer-

chants accept the Dankort.

For the Danish economy overall the Dankort is by far the cheapest solution

for card payments. This is primarily due to the large number of transactions

processed by the same card scheme and system in Denmark and that the

Dankort is a basic payment scheme without incentivising practices such as

free insurance, bonuses and rebates. The social cost per payment with a

Dankort amounted in 2009 to 0,40 € while the social costs of international

debit and credit cards amounted to 1,6 € and 2,8 € respectively.

IF-regulation, page 15.

ECB Blue Book and Nationalbanken.dk

“Costs of Payments in Denmark”, The Danish Central Bank, 2012:

https://www.nationalbanken.dk/en/publications/Pages/2012/04/Costs-of-payments-in-

Denmark.aspx

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The Dankort is owned by Nets A/S and is primarily financed through

banks and through fees paid by merchants. Nets is both the scheme owner

and the sole acquirer of the Dankort. Furthermore Nets also runs all pro-

cessing associated with the Dankort. All banks in Denmark have licence to

issue Dankort meaning that the Dankort scheme is a four-party scheme

according to the proposed regulation.

In general the Dankort enjoys strong support among merchants as well as

consumers.

The financing has been regulated since the launch in 1983. Regarding

ecommerce merchants pay a fixed fee per transaction around 0,16 €. This

is subject to regulation in the Danish Payment Service Act implying that

the merchant service charge (MSC) may not be higher than the associated

costs including a reasonable profit. A part of the MSC is passed on to the

issuers. This is also a fixed fee per transaction and is an interchange fee.

The interchange fee is also regulated by the Danish Payment Service Act.

At POS the merchants pay an annual subscription fee to Nets for accepting

the Dankort which is subject to regulation. The subscription fee is divided

into eight levels depending on the number of transactions and the levels are

regulated in a ministerial executive order. Until 2012 the sum of the sub-

scription fees was not to account for more than 50 % of the total costs of

the Dankort scheme regarding POS transactions. However, this regulation

was changed in 2013 and the share of 50 % will be raised gradually each

year and reach 100 % in 2018 implying that the merchants annual subscrip-

tion fee will cover the total costs of the Dankort scheme. The calculation of

the costs is supervised by the Danish Competition and Consumer Authori-

ty. The change in the regulation was made in order to ensure a continuous

sound and well-functioning domestic debit card scheme. The subscription

fee paid in 2012 amounted to around 0,05 € per transaction.

A part of the subscription fee is passed on to the issuers as a fixed fee per

transaction and is an interchange fee. Thus, an interchange fee applies

when using the Dankort. Due to the national regulation the interchange fee

(IF) connected with the Dankort is in general lower than the proposed cap

on interchange fees on 0,20 % of the amount when using debit cards.

Assessment of the consequences to the Dankort due to the interchange fee

regulation

The regulation may have possibly harmful consequences for domestic debit

card schemes, that are in general cheaper than international card schemes

and often subject to regulation on national basis. This is due to the fact that

the regulation may impose higher costs and possibly lower usage of do-

mestic debit cards.

Following the specific assessments below the interchange fee regulation as

a whole should therefore not apply to domestic debit card schemes, such as

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the Dankort, when the interchange fee in general is lower than the pro-

posed caps on interchange fees of 0,20 % when using debit cards.

Article 4

Since the interchange fee with respect to the Dankort has a flat fee struc-

ture it may exceed the levels capped by the proposal in article 4 when the

payer uses the Dankort for small amounts. If the interchange fee is say 0,07

€ per transaction, payments for amounts smaller than 35 € will imply a

breach of the price cap. Thus, the current proposal lacks an appropriate

flexibility regarding smaller amounts. This issue may be solved either by

not letting the cap on the interchange fee apply to domestic payments cards

or by introducing a cap on debit cards that is not a percentage of the

amount but a flat fee.

A flat fee may also be more in line with the actual costs held by issuers. A

study carried out by the Danish Central Bank shows that the Danish banks

have no costs that vary with the value of the transaction when using a debit

card, but indeed have costs that vary with the number of transactions.

When using credit cards the banks have both costs that vary with the num-

ber of transactions and the value of transaction. Hence, it may be more

appropriate with a low flat fee cap on the interchange fee when using debit

cards on say 7 eurocent as proposed by the European Parliament Commit-

tee on Economic and Monetary Affairs in its first reading.

Such cap will

also ensure appropriate low interchange fees to transactions with larger

amounts.

Article 6 and 7

The articles 6 and 7 regarding licensing and separation of card scheme and

processing entities will also have an impact on the Danish card scheme.

Since the payment card infrastructure primarily is based on the Dankort

card scheme the possibility that authorisation and clearing messages of

single card transactions be separated and processed by different processing

entities may imply a greater incentive for other players than Nets to enter

the Danish market. However, it is unlikely in the shorter run that these

benefits can compensate for the likely increase in costs of handling the

Dankort.

This is due to the fact that the economics of scale by processing all

Dankort transactions will be diminished leading to a possible increase in

the costs of the scheme. A domestic debit card scheme being cheaper than

international card schemes is often due to the large number of transactions,

The study shows that the banks transaction-variable costs are 0,37 DKK (0,05 €) per

transaction with Dankort and 0,88 DKK (0,12 €) per transaction with an international

debit card. The amount-variable costs are zero for both cases. Regarding international

credit cards the banks transaction-variable costs are 1,86 DKK (0,25 €) per transaction

and the amount-variable costs are 0,12 %. “Faste og variable omkostninger ved betalinger

i Danmark, Nationalbanken, 14. juni 2014” , page 13.

http://www.nationalbanken.dk/da/publikationer/Documents/2012/06/WP_79_2012.pdf

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2014-

0279&language=EN

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the centralized handling and processing of all transactions and the lack of

incentivizing practices such as free insurance, bonuses and discounts.

Thus, an exemption from article 6 and 7 will secure a sound and cost effi-

cient development of the national card schemes.

Article 8

The extended possibility regarding co-badging and choice of application in

article 8 may have substantial impact on the number of transactions for

domestic debit cards that are often co-badged with an international scheme

as is the case with the Danish Visa/Dankort. As mentioned, the Vi-

sa/Dankort is always a Dankort when using it domestically, while the Visa

card applies when used abroad.

Following the proposal banks may co-badge the Dankort with international

credit cards with more benefits to the payer such as rebates and free insur-

ances. Since surcharging will be prohibited for all cards subject to the in-

terchange regulation payers may have less incentive to actively choose the

Dankort when co-badged with other cards even though the Dankort is in

fact a cheaper payment instrument. This may lead to a lesser usage of effi-

cient payment cards and give rise to transparency issues, since the payer

when making his choice of application will not be able to see which costs

are associated with the payment card. Possible discounts or rebates provid-

ed by the merchants may also lead to reduced transparency since it may be

more difficult for consumers to compare prices between merchants.

This may reduce the number of transactions with the Dankort and thus lead

to higher costs per transactions and a possible increase in consumer prices.

Thus an exemption from article 8 regarding domestic debit card schemes

may ensure that the usage of cost effective cards is not reduced.

Proposed changes in the interchange fee regulation

Following the assessments above the interchange fee regulation should

provide an option for member states to let domestic debit card schemes that

operate with an average interchange fee or net compensation model which

is verifiably below the threshold value in Articles 3 and 4 be exempted

from the regulation as a whole.

The articles that may in particular impose regulation that may hinder a

sound and cost efficient development of the national card schemes are the

following:



Article 4

The current cap on interchange fee on debit cards lacks an

appropriate flexibility regarding smaller amounts when in-

terchange fee is a low flat fee.



Article 6 and 7

The articles may diminish economics of scale by acquiring

and processing all domestic debit card transactions leading

to a possible increase in the costs of the scheme.

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

Article 8

The regulation of co-badging may reduce the number of

transactions with the Dankort and thus lead to higher costs

per transactions and a possible increase in consumer prices.