Goodbye to Cash in Search of Rules

Among the controversial points, the EU rule on “interchange fees.”

Electronic payments, led by credit cards, are growing exponentially. In the world today, they represent 60% of the total, with transactions doubling between 2001 and 2012. And new technologies will mean they will grow even more: already in 2014 online payments will rise by 20% per year, while those via mobile devices by 52.7%.

Fostering the transition towards a cashless society could bring structural benefits that would not be at all bad, especially in these times of crisis: reduction in the shadow economy (an increase in e-payments between 5% and 15% in Italy could translate into a 3 to 14 billion euro recovery in tax revenues); reduced money handling costs (today, over 100 billion euros in the EU); and stimulus for growth (around the world, between 2008 and 2012, 983 billion dollars were created from increased consumption tied to e-payments, 11 of which in Italy).  To concretize this potential, polices must be adopted to assure market competitiveness, and there must be a push to adopt new instruments and guarantee their cost-effectiveness for users.

In the last decade, the EU has acted to create a single market for e-payments that is competitive, transparent and innovative. The publication this past July of a new package of proposals marks yet another step forward. In fact, measures were introduced to facilitate the use of payments over the Internet, stimulate online purchases and boost consumer protection. In light of these certainly commendable goals, some of the proposed initiatives risk having just the opposite effect of the one hoped for.

The new regulation regarding interchange fees—the interbank card commissions that for years have been at the center of the debate between payment networks, retailers and consumers—proposes a EU-wide ceiling (0.2% per debit card transactions and 0.3% for credit cards), while currently the fees are set on a national basis using market criteria. This push for uniformity does not take into consideration the unevenness in development of the various national markets and does not clarify what the impact could be on consumers. The Commission proposes a system of price-regulation which is an extreme measure normally justified by market failure, but the presence of many traditional players and new entries makes this approach a questionable one.

Even from the standpoint of consumers there is reason for caution as shown by the experience of countries such as Spain, Australia and the United States which in the past have undergone sharp reductions in interbank fees. According to a study by the University of Madrid, from the 57% reduction in fees, Spanish consumers experienced an additional 2.4 billion in fees due to the increase in the cost of cards, while retailer savings did not translate into a drop in merchandise prices. There could also be a problem for bank balance sheets given the current economic situation. For example, in the United Kingdom, a 1.5 billion euro decrease per year in revenues is forecast, with further risks connected to the extra capital reserves to be put aside as called for by the new Basel 3 regulations.

Other controversial points involve the elimination of the “honor all cards” rule (the obligation of retailers to accept all cards) and the introduction of “co-badging” (the possibility of having multiple payment brands on the same card) which would create risks for the safety of transactions given the various protection standards applied, and would also create confusion for consumers and retailers because of the various PIN numbers, regulations and transaction closing times.

These questions must have a speedy response during the amendment phase in the European Parliament to provide for greater autonomy for national authorities in setting the parameters to be regulated on a local basis, such as interchange fees.

In addition, Italy has a lot of catching up to do: it is in 16th place in Europe, with one-third the e-payments of the EU average, and cash costs the country about 15 billion each year. The Italian government must relaunch its commitment on this issue that is not an insignificant one for the country. There is much that can be done: further reduce the limit for use of cash (already lowered to 1,000 euros in 2011); accelerate the spread of e-payments within the PA (in line with the Digital Agenda); provide incentives for retailers to install latest-generation POS; and create measures to reward consumers who pay by card (South Korea and Argentina have implemented a partial reimbursement of VAT on e-payment transactions, but other solutions could also be developed). These are just some ideas that could be launched during the EU debate to find effective rules to modernize national payment systems.

Managing Partner The European House-Ambrosetti