ServiRed REPLY TO THE EUROPEAN COMMISSION CONSULTATION ON CARD, INTERNET, AND MOBILE PAYMENTS

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1 ServiRed REPLY TO THE EUROPEAN COMMISSION CONSULTATION ON CARD, INTERNET, AND MOBILE PAYMENTS BRIEF DESCRIPTION OF ServiRed ServiRed, Sociedad Española de Medios de Pago, S.A. is Spain s leading Card Payments Scheme. At December 31 st, 2011, it had 37 million cards issued (18.8 million credit cards and 18.3 million debit cards), 670,700 merchants. and more than ATMs. ServiRed has 90 members (banks, savings banks, credit cooperatives, etc) of which 83 are shareholders of the company. ServiRed s chief mission is to assist financial institution members in the substitution of cash with innovative and efficient electronic payment systems, in order to reduce the high cost of using cash that is borne by society at large. ServiRed s business is currently focused on the Spanish market. However, the advent of the Single Europe Payments Area (SEPA) provides the opportunity to start offering services in other European markets. ServiRed s services rest on three main pillars: i) the ServiRed brand: ii) the operating rules and procedures; and iii) the interchange system. The most important activities carried out by ServiRed in its mission of replacing cash in payments are as follows: guaranteeing comprehensive interoperability of card transactions within the Spanish market by working closely with the other domestic schemes which operate in the country guaranteeing international access to holders of ServiRed cards, via direct connection with the international schemes (Visa, MasterCard, American Express, Diners Club, JCB) guaranteeing the acceptance of foreign cards used to make purchases at ServiRed merchants ensuring the correct use of the ServiRed brand, card designs, and the features of the products issued by ServiRed s member institutions ensuring the proper labeling and operation of the Point of Sale terminals and ATMs monitoring the processes of authorization, clearing, and settlement of interchange transactions amongst the Scheme s member financial institutions and between them and other payment networks, in a clean and quick fashion, and without incidents overseeing the certification of the solutions proposed by manufacturers of terminals used by ServiRed member financial institutions, in order to ensure their proper functioning when they are connected to the central interchange system arbitrating and resolving any incidents that may arise from the use of the shared payments network by member institutions preventing, detecting, and prosecuting fraud. All these activities take place against a backdrop of continuous commercial and technological innovation, which ensures that holders of ServiRed cards can make payments at millions of merchants in Spain and all over the world, quickly, safely and hassle-free. In addition to the many advantages for cardholders, the use of ServiRed cards facilitates the management of business expenses by the merchants which accept them and provides greater security by eliminating the negative aspects of using cash, such as theft and loss. 1

2 REPLY TO THE QUESTIONS EXTRACTED FROM THE EC GREEN PAPER 4. THE NEED TO FOSTER AND ACCELERATE MARKET INTEGRATION 4.1. Market fragmentation, market access and market entry across borders Multilateral Inter-change Fees (MIFs) 1) Under the same card scheme, MIFs can differ from one country to another, and for cross-border payments. Can this create problems in an integrated market? Do you think that differing terms and conditions in the card markets in different Member States reflect objective structural differences in these markets? Do you think that the application of different fees for domestic and cross-border payments could be based on objective reasons? In the context of payment card transactions at merchants, issuing entities provide a service to the cardholder, i.e. the payer of the transaction. As a result of this direct provision of services to the cardholder, the issuing entities also render other services to the payee through its acquiring entities, such as: the processing of the transaction, the payment guarantee (in case of fraudulent transactions, lack of payment or cardholder s insolvency). Moreover, for specific types of cards (credit cards and deferred debit cards), the issuing entities also provide other value-added services consisting in financing for free the purchase of goods and services at the merchant, i.e. the payee of the transaction (allowing the transaction to occur even if the cardholder has no funds available at the moment of the purchase). In addition, the issuing entity also renders other services to the payee that go beyond the regular payment, but that could be deemed as necessary to enable the payment collection by the payee or even to make possible the provision of goods or services to the client and other services that add an specific or autonomous value, such as, among others: the authentication of the cardholder for remote transactions (i.e., transactions through the internet e.g. hotel or flight reservations- purchases or reservations made by telephone, etc.), preauthorization, etc. Therefore, the essential purpose of the MIF is to remunerate, through the acquiring entity, the services provided by the issuing entity to the payee of a card payment. In conclusion, the MIF is inherent to the operation of a four-party card payment system. Nowadays different Member States show objective differences based on the different levels of multilateral interchange fees existing in each of them. The European Commission itself recognised in its Decision of 19th December 2007 in the MasterCard case that ( ) while the SEPA project may increase cross-border competition and may allow consumers to use payment cards in the entire Eurozone, at the current moment market conditions and in particular prices are still too heterogeneous to adopt a market definition going beyond the national scope (recital 328). Nevertheless, these differences do not necessarily mean per se that the market is artificially fragmented, but that the different national markets show various objective circumstances. The differences between MIFs in different countries do not necessarily cause a problem for the existence of an integrated market, as occurs with most of the markets for goods and services in which the differences among the costs borne are unavoidable. These differences are due to various reasons such as 2

3 the standard of living, the financing costs, or, very significantly, the greater or lesser use of cards. Although there is a single market, the differences based on the specificities of different national markets are an indisputable fact that has to be taken into consideration. The European Commission, while assessing the compatibility of the MIFs with Competition Law, has taken as a reference, either the issuing costs (in the oldest Decisions), or (recently) the costs borne by merchants when accepting means of payment other than payment cards, such as cash. Due to the above mentioned reasons, these costs diverge in the different Member States. From the different empirical studies used by ServiRed in order to determine the ceiling limit of its MIFs, it clearly results that these costs vary from one country to another. There are many reasons that contribute to determine the greater or lesser use of payment cards in a specific country: o o o Different levels of technical and economic development in the different Member States Different costs for the financial institutions and for the merchants, depending on the Member State, and relating to the issuing and acceptance of the various means of payment The characteristics of the payment card markets (depending on the predominance of: i) credit or debit; ii) purchasing transactions or cash withdrawals at ATM; iii) purchases at brick-and-mortar stores or e-commerce merchants, etc.) A number of those reasons arise from cultural differences and even from the historical background of each country. Consequently, there would be a market for cross-border transactions in the EU, and as many domestic markets for card transactions as Member States are part of the EU (this extent has been confirmed by different Competition Authorities, at a national and European level, in the decisions taken in cases handled to date). As an example, at recital 17 of the Decision Visa MIF, case COMP/ from the 8th of December 2010 ( VISA MIF Decision ), the European Commission confirmed that the acquiring markets are still national in scope. The above mentioned different markets have different characteristics that greatly differ from one Member State to another and also in relation to the cross-border market in the EU. Such differences (e.g., the level of penetration of card payments use in private consumer expenditure) justify the different conditions within the different markets, and among these conditions, particularly the MIFs. In other words, any assessment on interchange fees, and especially a comparative assessment between different countries, should always be accompanied by the analysis of the level of penetration of card payments use in private consumer expenditure in those countries. Hence, fixing multilateral interchange fees for the European Union as a whole, including cross-border and domestic markets, would be damaging and discriminatory, particularly in those markets with a low level of penetration of card payments use in private consumer expenditure. Moreover, it has to be taken into account that the card payments market is a two-sided market (two demand sides: one from the merchants and one from the cardholders). Therefore, the market depends on the level of development of these two demands, which relates to: i) objective reasons from an economic, fiscal and sociological perspective; ii) the level of technical development and financial sophistication of the different actors; iii) 3

4 the level of risk on intermediation; and iv) the level of penetration of other means of payment. Multilateral interchange fees play an essential role in four-party card payment systems, optimising the use of cards from all actors perspective: issuers, acquirers, cardholders and merchants. Furthermore, they have greatly contributed to the growth of payment cards, at the expense of other less efficient means of payments, such as cash. In conclusion, current differences in interchange fees should not be considered as an obstacle for the issuing and the acquiring of card transactions, including central cross-border issuing and acquiring. With regards to central cross-border issuing and acquiring, the VISA MIF Decision specifically allows the registering of domestic interchange fees, which means that issuers and acquirers enrolled in programs for central cross-border issuing and acquiring in countries which decide to register their domestic fees for such programs, act on the market of that country with the same interchange fees that apply to domestic transactions. Hence, an eventual regulatory intervention in order to harmonise different interchange fee levels in Europe would not be the best way and, furthermore, it could jeopardise the future and the innovation of the electronic means of payment. Such harmonisation should not be the result of a regulatory or legislative intervention, but the result of the development of the market over time. 2) Is there a need to increase legal clarity on interchange fees? If so, how and through which instrument do you think this could be achieved? MIF should be the natural result of conditions and dynamics in each market, in respect of Competition Law. Anyhow, it would be helpful to establish a clear frame aiming at reducing current and future legal uncertainty on the MIF, and reflecting valid and objective criteria to determine the MIF, as well as the resulting level which must be enough to adequately compensate the issuers. The increase of legal certainty and the guarantee that the level of MIF allowed will be enough to cover the costs incurred by issuers, would prevent halting the necessary investments to allow the business to evolve adequately and maintain its competitiveness. Nowadays all card payment schemes using the mechanism of the MIF are compelled to self-assess such mechanism according to Competition Law. Therefore, the transparency of its calculation and the justification of the MIF are ensured. Furthermore, judgment of the General Court in the MasterCard case, appealing the European Commission s Decision of 2007 that concluded that the MIFs established at that moment by MasterCard were excessive is still pending. This judgment could constitute an important legal precedent for the whole industry in Europe. An eventual regulatory intervention on the interchange fees would imply price regulation, which is against the fundamental objectives of the Treaty on the Functioning of the European Union (TFEU) under which the promotion of competition ensures that consumers benefit of better products and services at a lower price. Moreover, as stated before, such a regulation would have fatal consequences to the means of payment industry, such as less innovation and wider use of cash. Additionally, the intervention of the 4

5 MIF by means of regulation may cause anti-competitive effects on the acquiring market, since, by establishing a common MIF level, such level would homogenise and act as a common reference for merchant discount rates. 3) If you think that action on interchange fees is necessary, which issues should be covered and in which form? For example, lowering MIF levels, providing fee transparency and facilitating market access? Should three-party schemes be covered? Should a distinction be drawn between consumer and commercial cards? In line with the answer to the previous question, it does not seem necessary that the value or methodology to establish the MIF is imposed by means of regulation. Market forces should determine the appropriate level, always in respect of Competition Law. Therefore, decreasing MIF s level should not be considered as an objective per se. The objective should be ensuring that interchange fees are established at an appropriate level and in a flexible manner so they could be adjusted to the different and changing conditions of the market. Competition Law provides enough and flexible tools in order to ensure that interchange fees are established at acceptable levels, i.e. by the fulfillment of all conditions of Article 101(3) TFEU. MIF have suffered an important downward adjustment during the last year, and that without any regulatory intervention. By way of example, in Spain, according to the data published by Banco de España, domestic MIF decreased over 60% from 2002 to It is logical to think that progressive convergence of the MIF between the different Member States of the European Union is desirable. This convergence will occur as different markets reach a similar maturity level and the issuing costs, along with the costs of other means of payment in the different EU Member States approximate. Any decision applying to four-party schemes should also apply, according to their specific structure, to three-party schemes. Otherwise, market conditions could be distorted to the benefit of three-party schemes. The corporate market is very different from the consumer market. Consequently, the dynamics of products and services are also very different. Therefore, this must be taken into account in any decision taken. A distinction should also be drawn with regards to pre-paid cards, which would have to be considered differently because of their specific features. With regards to transparency, ServiRed, has been publishing its interchange fees for a long time. The same transparency should apply to all means of payment, including three party schemes and cash payments. With regards to the access to the market, there is no evidence that the level of interchange fees acts as a barrier to the entry of new payment systems or new entrants so it has to be decreased. It is not foreseen that new systems would be incentivized to enter the market through decreasing the level of interchange fees. In the current situation the actual entry barrier arises rather from the uncertainty of risks relating to the insufficient compensation to the issuer. 5

6 Cross-border acquiring 4) Are there currently any obstacles to cross-border or central acquiring? If so, what are the reasons? Would substantial benefits arise from facilitating cross-border or central acquiring? Nowadays, both Visa and MasterCard, have central cross-border acquiring programs with substantial volumes that have been growing over the years. This would demonstrate that all parties involved have found an acceptable balance and, thus, there is no obstacle to central cross-border acquiring. Furthermore, these programs guarantee the security and soundness of cross-border payments at the same level than the rest of transactions. Consequently, there is no need to intervene in order to enable crossborder acquiring. This service is growing in a natural way and it will continue like this, under the increasing pressure of merchants over acquirers, so the latter improve their services. 5) How could cross-border acquiring be facilitated? If you think that action is necessary, which form should it take and what aspects should it cover? For instance, is mandatory prior authorization by the payment card scheme for cross-border acquiring justifiable? Should MIFs be calculated on the basis of the retailer s country (at point of sale)? Or, should a cross-border MIF be applicable to crossborder acquiring? As for any other card payments program, MIFs should be established according to market forces. Consequently, and bearing in mind the answer given to question in this document, the historical and cultural background of consumers in each country, at the end of the day, determine their behavior when buying. Therefore, in any cross-border acquiring program the MIF of the country in which the point of sale is located should apply. This would allow creating a level playing field for domestic and crossborder acquirers. If this is not done so, acquiring entities operating in the different markets and applying the MIF objectively justified according to Competition Law, may be discriminated against cross-border acquirers. For central or cross-border acquiring in e-commerce, it is capital to distinguish between the country or countries where the e-commerce merchant is operating and the country where it is incorporated. In this sense, MIFs from the country where the e-commerce merchant is effectively operating should apply and not those from the country where it is incorporated. To this extent it is necessary to take into consideration that: (i) the transaction is domestic also in cross-border acquiring cases; (ii) costs for the issuers correspond to those of the country where the merchant operates (are domestic); (iii) the costs of alternative means of payment that would be taken as a reference when applying the so-called tourist test would be 6

7 those from the country where the merchant is operating, and not those of the country where it is incorporated. If the MIFs from the country where the merchant is incorporated apply, instead of the MIF from the country where it is operating, it could cause a distortion on competition between national and cross-border acquirers, since it would mean bundling the costs borne by the cross-border acquirers to factors beyond its own efficiency and to the conditions of the environment where the transaction occurs thus applied to other acquirers. This may result randomly advantageous or disadvantageous for cross-border acquirers in relation to domestic acquirers Co-badging 6) What are the potential benefits and/or drawbacks of co-badging? Are there any potential restrictions to co-badging that are particularly problematic? If you can, please quantify the magnitude of the problem. Should restrictions on co-badging by schemes be addressed and, if so, in which form? Co-badging is a mechanism that has existed ever since the beginning of the history of cards and, to date, it has not created problems. Quite the contrary, for example, co-badging allows a product to be used both locally and globally at the same time. Therefore, there are no reasons why it should be restricted, as it opens consumer choice. Co-badging is not only a marketing tool consisting in the mere juxtaposition of two brands, but the coexistence in the same payment instrument of two systems, with the same scope (international or local) or with two different scopes, one for international transactions and the other for domestic transactions. This is the case of cards issued by ServiRed Members, belonging to the ServiRed system and to the international systems, Visa or MasterCard. In order to distinguish global acceptance from local services (with the subsequent benefits that it creates for consumers), any co-badging between an international scheme and a domestic one should guarantee and protect the autonomy of both of them at their respective scope. This entails that the international system does not impose the prevalence of its own criteria over the domestic schemes for domestic transactions. Specifically, in co-badging cases the MIF applicable to domestic transactions should be established by the domestic system, even if this domestic system coexists with one of the international systems in the same card. The most important service that the co-badging indicates to the Consumer is interoperability, which is the cornerstone in the means of payment industry. 7) When a co-badged payment instrument is used, who should take the decision on prioritisation of the instrument to be used first? How could this be implemented in practice? Prioritization of the payment instrument must be decided by the party responsible of the risk in the transaction, i.e. the one who provides payment guarantee. Nowadays, it is the issuer of the payment instrument which 7

8 assumes the risk of transactions, provides payment guarantee, and serves the cardholder with regards to the mean of payment. Therefore, the decision about the payment instrument to be used primarily must rest in any case on the issuer-cardholder side. This is reflected in the SEPA Cards Framework (SCF), which indicates that, in cases of co-badging, the issuing bank, in agreement with the cardholder, can pre-select the brand to be used first at point of sale. According to the SCF, this should be included in the contract with the cardholder: Cardholder experience: Card scheme rules must enable and facilitate for cardholders a consistent payment and cash withdrawal service experience throughout SEPA. In accordance with Directive 2007/64EC, where several payment applications are made available by the issuer in the same card, supported by the same terminal, and are accepted by the merchant, cardholders will have through their cardholder agreement with their card issuer the choice of which payment application they will use provided the merchant accepts it and its POS equipment supports it. The agreement between the cardholder and the issuer will define the choices available to the cardholder. Prevalence at POS or ATM for a particular payment application may not be mandated by a card scheme or ATM operator or merchant In no case should the merchant be allowed to choose the instrument to be used primarily. In cases of co-badging between an international and a national system, the application of one or the other system must be determined according to the cross-border or domestic scope of the transaction Separating card schemes and card payment processing 8) Do you think that bundling scheme and processing entities is problematic, and if so why? What is the magnitude of the problem? The EPC, which reflects this unbundling principle in the SEPA Cards Framework, is ambiguous on how to implement such separation. Moreover, the documents of the European Central Bank ( Oversight Framework for Card Payment Schemes and SEPA Seventh Progress-Report ) are inconsistent with regards to the manner to implement unbundling. Domestic schemes that, following this guideline, have already implemented unbundling with the processing entity are facing the difficulties arising from this lack of certainty. Therefore the compliance with this guideline has resulted in a significant loss of competitive strength on the market for the schemes which have implemented it, especially compared to other schemes which have not yet tackled the unbundling of their processing entity (e.g. the international schemes and domestic schemes in other countries). The experience of the Schemes that have truly implemented unbundling shows that in order to comply with the guidelines reflected in the Oversight Framework for Card Payment Schemes, the scheme has to necessarily play a relevant role with regards to processing in relation to the switching (i.e. the routing and interchange of transactions between the entities belonging to that scheme). There is a clear distinction between issuing processing services, acquiring processing services and switching or interchange 8

9 processing services. For the latter, unbundling must be understood in such a manner that it does not prevent the Scheme and its governance authority from performing its own functions and responsibilities and from removing all possible systemic risks, such as settlement risks or risks relating to payment fraud. The Card Scheme governance authority must be able to decide the conditions under which processing must be performed, even if this service is provided by a third party. This governance authority should also be able to receive processing services according to its needs. 9) Should any action be taken on this? Are you in favour of legal separation (i.e. operational separation, although ownership would remain with the same holding company) or full ownership unbundling? In order to ensure that all schemes and processing entities currently serving in the European market compete at the same level, all companies that still bundle the scheme and the processing should unbundle these activities and the way of performing such unbundling should be consistent across Europe. Otherwise, there might be cases of unfair competition due to companies that have not followed the recommendations of the European Authorities. In other words, the companies that have already unbundled the scheme and the processor might be harmed by this accomplishment, unless the rest of competitors perform such unbundling too. Unbundling should not necessarily extend to the ownership of the processing entities. The point is only to ensure that processing services are provided in an open and non-discriminatory manner Access to settlement systems 10) Is non-direct access to clearing and settlement systems problematic for payment institutions and e-money institutions and if so what is the magnitude of the problem? All ServiRed Members have the right to access clearing and settlement systems, under the conditions set forth in Article 28 of the Payments Services Directive and Article 5 of the Spanish Payment Services Law (Ley 16/2009, November 13 th of Payment Services) transposing the Directive. However, indirect access to clearing and settlement systems does not necessarily create a problem if they choose to do so. Payment Institutions and E-money Institutions will not be the only ones indirectly accessing these systems, since there are many financial institutions that follow this course of action. By way of example, just 20 out of the entire ServiRed membership (99 Members) participate directly in clearing and settlement. Therefore, in our opinion, indirect access cannot be deemed as a competitive disadvantage. On the contrary, we believe that it guarantees Payment Institutions and E-Money Institutions the sound settlement of their transactions, and this entails systemic significance. According to the Payment Services Directive and the SEPA Cards Framework, access to clearing and settlement systems of the four-party schemes is simple, fair and guaranteed by issuers and acquirers, in compliance with operational and risk management conditions. 9

10 11) Should a common cards-processing framework laying down the rules for SEPA card processing (i.e. authorisation, clearing and settlement) be set up? Should it lay out terms and fees for access to card processing infrastructures under transparent and nondiscriminatory criteria? Should it tackle the participation of Payment Institutions and E-money Institutions in designated settlement systems? Should the SFD and/or the PSD be amended accordingly? The framework for authorisation, clearing and settlement of card payment transactions should be common (not just applicable in the SEPA region, but also in the rest of the world), since card payments are not restricted to the borders of a certain country, region or continent. There are already common rules for processing set at a global level that also apply to SEPA transactions. Therefore, it is essential to ensure that card payment processing rules that are to be established for SEPA transactions are not different or conflict with global rules, so to avoid any risk on interoperability at a global level. With regards to fees and conditions in Spain, after the unbundling between the ServiRed scheme and its processing entity (SERMEPA), the Spanish Competition Authority (Comisión Nacional de la Competencia) has closely monitored the later concentration operation between the processing entities. During this concentration control proceedings, and in order to obtain clearance for the above mentioned merger, the resulting processing entity Redsys (the main processing company for ServiRed members) offered a set of commitments relating to its fees, which were accepted by the Spanish Competition Authority. For all the above mentioned reasons it does not seem necessary to regulate fees and other conditions relating to card payment processing. It would be enough to guarantee the access to processing services and nondiscrimination between entities, according to competition rules Compliance with the SEPA Cards Framework (SCF) 12) What is your opinion on the content and market impact (products, prices, terms and conditions) of the SCF? Is the SCF sufficient to drive market integration at EU level? Are there any areas that should be reviewed? Should non-compliant schemes disappear after full SCF implementation, or is there a case for their survival? SCF is still a sound basis, although it does not guarantee the disappearance of different levels of market maturity existing in each Member State. One of the SCF recommendations that has contributed the most to boost and develop the payments industry is, undoubtedly, migration from magnetic stripe to EMV-chip technology. Nevertheless, for the time being the market is not mature enough to remove magnetic stripe from EMV cards, since such removal would harm consumers preventing them to use their cards in sectors that, for various reasons, have not been able to migrate to EMV technology. 10

11 The current version of the SCF should be reviewed, especially regarding the following areas: o o separation between scheme and processing, in order to ensure that the processing services are rendered according to the requirements set by the scheme governance authority and the priorisation of the payment system to be used first in cases of cobadging Information on the availability of funds 13) Is there a need to give non-banks access to information on the availability of funds in bank accounts, with the agreement of the customer, and if so what limits would need to be placed on such information? Should action by public authorities be considered, and if so, what aspects should it cover and what form should it take? Measurement of credit risk is the main asset of a card issuing entity and is also the basis from which such entities assume the risk of a transaction and provide payment guarantee. An eventual information exchange would entail that service providers different from financial institutions would have a competitive advantage over financial institutions, since they could use the funds of their clients without assessing if such funds are available due to savings or to a credit line granted to that client by the financial institution. Consequently, this would force financial institutions to apply stricter Risk Management controls, which in the end would be detrimental to consumers and to the market. Credit risk information is private between the client and its Institution and should not be shared with third parties. This should be respected not only for privacy purposes (the Spanish Data Protection Act Ley de Protección de Datos-, transposing the European Directive on Data Protection, which protects the socioeconomic information of individuals) but also for fraud prevention purposes (in case the third party accessing the credit risk information does not protect it sufficiently). The information on the availability of funds is not an essential facility and financial institutions do not necessarily handle it in order to reinforce a dominant position. Hence, it is not necessary to share this information with third parties, account taken of the risks that it will involve Dependence on payment card transactions 14) Given the increasing use of payment cards, do you think that there are companies whose activities depend on their ability to accept payments by card? Please give concrete examples of companies and/or sectors. If so, is there a need to set objective rules addressing the behaviour of payment service providers and payment card schemes vis-à-vis dependent users? 11

12 The Green Paper acknowledges that there are some situations where cash payment is not an option. No merchant is required to accept card payments, and consumers are never required to pay by card. In fact, there are always payment alternatives in the physical and virtual environments. Cash payments (before or after merchandise delivery) are, at least in Spain, still a valid payment alternative for electronic commerce transactions. Besides, there are other alternatives to card payments, such as bank transfers, direct debits, etc. Although there are some companies (e.g., low-cost airlines) whose activity highly depends on card acceptance, they are, if they wish to do so, able to accept other means of payment. The scheme rules governing the activities of those companies (i.e. the rules of its acquirer s scheme) should be enough to preserve the smooth operation of payments in that merchant. And, in any case, the rule preventing the scheme to forbid surcharging, which is included in the Payment Services Directive, is enough guarantee for any merchant suffering costs associated to card payments. However, control mechanisms (protecting clients from abusive surcharging, that do not mirror the real costs borne by the merchant for the acceptance of card payments) should be adopted. In line with this, we should highlight the investigation launched by the OFT with regards to the surcharges applied by a low-cost airline to their customers. In any case, these operating rules are binding the Payment Services Providers, since there is no contractual relationship (between the payment schemes and the companies) that justifies any intervention. In conclusion, there are no card-dependent users and, consequently, there would be no need to issue rules governing the way Payment Services and card payment schemes behave towards the users Transparent and cost-effective pricing of payment services for consumers, retailers and other businesses Consumer merchant relationship: transparency 15) Should merchants inform consumers about the fees they pay for the use of various payment instruments? Should payment service providers be obliged to inform consumers of the Merchant Service Charge (MSC) charged / the MIF income received from customer transactions? Is this information relevant for consumers and does it influence their payment choices? The Green Paper seems to assume that consumers would be likely to change their choice of mean of payment (and choose more efficiently), should they be better informed about the costs that card payments acceptance imply for merchants. However, this does not appear to be supported by any evidence. On the contrary, consumers are likely to select the mean of payment which is less costly for themselves (and not for the merchants). 12

13 Although nothing would prevent merchants from providing their clients with information on Merchant Service Charges (MSC), it is unclear whether this would suppose a real advantage. Besides, the MSC are just a tiny part of their total costs (which also include providers, staff, electricity, delivery, taxes, etc.). What would be the advantage in unveiling the MSC s costs and not doing so with the other costs? Merchants do not inform of the margin they charge (mirroring their management expenses) and the client takes the decision based on the final price and regardless of the costs linked to each of the products or services. The biggest risk would be that the merchant transmits the message (or the client understands) that cash payments are free, and this assuming that the European Commission does not intend to foster cash payments. In fact lack of clarity today seems to be more necessary with regards to the cash payment, since it seems that neither consumers nor merchants are aware of the high costs that this mean of payment implies. Hence, unless consumers are informed about the costs of cash payments too, greater transparency on card and other means of payment, will always result in the increase of cash payments, considered as the most inefficient, and this would go against the goals of the Green Paper. The above would also apply to payment service providers. Why should an issuer be required to share information with its cardholders regarding income from interchange fees and not from other sources? Even assuming that this information was to be provided to consumers, it is unlikely that this would influence their choice of payment method Consumer merchant relationship: rebates, surcharging and other steering Practices 16) Is there a need to further harmonise rebates, surcharges and other steering practices across the European Union for card, internet and m-payments? If so, in what direction should such harmonisation go? Should, for instance: certain methods (rebates, surcharging, etc.) be encouraged, and if so how? surcharging be generally authorised, provided that it is limited to the real cost of the payment instrument borne by the merchant? The Spanish Payment Services Law (Ley de Servicios de Pago) currently in force, allows surcharging limited to the costs that the merchant incurs for the acceptance of a particular mean of payment and prohibits the schemes to forbid surcharging. This balanced regulation is due to the transposition of Directive 2007/64/CE, which under its harmonisation framework allows finding balanced solutions in each of the countries where the Directive is implemented. Therefore, there is no need of an additional harmonisation on MSC s, surcharging or other steering practices. Despite surcharging being currently allowed in Spain, there is no sign of its advantages, for consumers and merchants, to date. Moreover, we do not expect surcharging resulting in greater price transparency for consumers. 13

14 The evidence gathered to date in our market seems to indicate that generally merchants do not apply surcharges, although they can. Consumers do not seem to appreciate surcharges and tend to avoid them. In any case, given the high cost of cash payments for society (in several forms, such as shadow economy and tax evasion), it would appear more convenient to discourage cash payments, with regards to more efficient payment methods. merchants be asked to accept one, widely used, cost-effective electronic payment instrument without surcharge? This would imply a competitive disadvantage for those payment instruments that, according to merchants (and not according to consumers) are the most appropriate. All payment instruments have two main demand sides: merchants and consumers. Consequently, the definition of an efficient electronic payment instrument has to be agreed by both sides. Taking this into account, the advantages of card payments for consumers (ability to charge the transaction back, insurance, etc.) and the advantages for merchants might not match. specific rules apply to micro-payments and, if applicable, to alternative digital currencies? Surcharging should not be permitted for these sectors where the acceptance of electronic means of payment is at an early stage, since it could prevent card payments deployment and development and, at a later stage, its evolution Merchant payment service provider relationship 17) Could changes in the card scheme and acquirer rules improve the transparency and facilitate cost-effective pricing of payment services? Would such measures be effective on their own or would they require additional flanking measures? Would such changes require additional checks and balances or new measures in the merchant-consumer relations, so that consumer rights are not affected? Should three-party schemes be covered? Should a distinction be drawn between consumer and commercial cards? Are there specific requirements and implications for micropayments? There is no need to introduce changes in card schemes rules or in acquiring practices, to enhance transparency and favor cost efficiency of fees to be paid for payment services. Four-party and three-party schemes should be treated equally. The Green Paper specifically mentions the Honor All Cards Rule (which require merchants that accept a specific card brand to accept all cards bearing that brand) and the No Discrimination Rule, (which require to 14

15 merchants the application of the same prices for a product or service, regardless of the mean of payment). Nevertheless, none of the rules are a source of either lack of transparency or inefficient pricing system for payment services. The Green Paper also refers to Blending (consisting in blending all fees charged by the acquirers to the merchants regardless of the type of card used in the transactions) as a problem for the acquiring market, although this has already been solved in the European Union. The Honor All Cards rule is a requirement within any Payment scheme and it is crucial, especially in those schemes that group thousands of members. If this rule were to be eliminated, schemes would suffer an enormous brand and reputational damage, and thus it would be very difficult for the schemes to continue to develop new products and to innovate. This would also cause a particularly harmful damage with regards to the acceptance of micropayments, since it would mean that merchant acceptance levels would decrease, while consumer s uncertainty would increase. Consumers are normally attracted towards payment card schemes that are offered as universally accepted. If the cardholder has no guarantee that the card is accepted internationally, the value of such card would decrease. Moreover, schemes usually establish the Honor All Cards rule by product type (e.g., credit or debit), so merchants can decide to accept just credit or debit cards, or all of them. This segmentation between debit and credit regarding universal acceptance, and that reflects the functionality of each product, has become mandatory due to the commitments offered by the international systems and accepted by the European Commission, and thus solves all issues relating to potential restrictive practices associated to this rule. Complete removal of the Honor All Cards rule for consumer and commercial products would entail significant uncertainty and would prevent European companies from taking advantage of the multiple benefits associated to commercial cards. With regards to the Non Discrimination Rule, the Spanish Payment Services Law (Ley de Servicios de Pago), as the Directive 2007/64/CE (Payment Services Directive), allows surcharging. Therefore, the ServiRed rules do not prohibit merchants to steer cardholders to their preferred payment instruments through surcharging, rebates or similar incentives. Therefore, merchants in Spain are free to apply surcharges, as long as they are limited to the cost borne by the merchant for accepting that payment instrument. With regards to blending, it should be reminded that this practice, consisting in blending the fees charged to the merchants by the acquirers for the different types of cards used in the transactions (MSCs), has been already solved through the agreement (informal commitments) reached between the European Commission and MasterCard on the 1 st April In this agreement, MasterCard defined a new rule allowing merchants to require to its acquirers unblended MSCs for the different types of MasterCard and Maestro cards. In addition, Visa Europe in accordance with the commitment formally accepted by the European Commission in 2010 prohibits blending the MSCs charged for their transactions with those corresponding to transactions from other payment systems and also prohibits blending MSCs corresponding to different Visa cards (immediate debit, deferred debit and commercial cards). ServiRed rules also require the unblending of MSCs, in line with Visa and MasterCard. 15

16 4.3. Standardization 18) Do you agree that the use of common standards for card payments would be beneficial? What are the main gaps, if any? Are there other specific aspects of card payments, other than the three mentioned above (A2I, T2A, certification), which would benefit from more standardization? In general, the use of common standards in the card payments industry is beneficial. ServiRed has always supported the global standardization initiatives led by the industry. A clear (and successful) example of global standardization is EMV deployment that has led to an increase in card and POS security. These standards should be adopted by the industry (like EMV), and not imposed by means of regulation. Uniform and strict standards must be treated carefully so they do not hamper innovation or reduce competition. Any additional standard should be defined globally, with the aim of ensuring global interoperability of the card payment systems. ServiRed is not aware of any significant loophole in the area of standardization, apart from the need to advance with the assessment of POS certification and security. In this respect, it is crucial to guarantee that certifications are recognised in the whole SEPA, to create a more competitive environment. 19) Are the current governance arrangements sufficient to coordinate, drive and ensure the adoption and implementation of common standards for card payments within a reasonable timeframe? Are all stakeholder groups properly represented? Are there specific ways by which conflict resolution could be improved and consensus finding accelerated? As indicated above for the previous question, it is highly important that any standardization processes for any kind of payment are led by the industry, and not through a regulatory intervention. To this end, it is capital to involve all market participants in these standardization processes. ServiRed considers that current governance provisions are sufficient to coordinate, boost and guarantee the adoption and application of common standards for card payments within a reasonable timeframe. However, it should be noted that there is still need to find a greater balance between an effective decision-making process and gathering the perspective of all stakeholders involved. 20) Should European standardization bodies, such as the European Committee for Standardization (Comité européen de normalisation, CEN) or the European Telecommunications Standards Institute (ETSI), play a more active role in standardising card payments? In which area do you see the greatest potential for their involvement and what are the potential deliverables? Are there 16

17 other new or existing bodies that could facilitate standardization for card payments? The card business is global by definition. Therefore, terminals in Europe must accept non-european cards and European cards must be accepted globally. Hence, Europe must be interested in the implementation of the global standards led by the global payments industry, which, in turn, allows infrastructure and its components to be standardised and are therefore cheaper. We therefore believe that the current ISO ( International Standards Organization ) international standards are sufficient. ISO, for example, already supplies the primary global standard for PIN management and security. CEN or ETSI are not specialised in the payments industry. Hence, they should not be involved in the standardization of card payments. Standardization should be carried out by existing specialised bodies, such as ISO. 21) On e- and m-payments, do you see specific areas in which more standardization would be crucial to support fundamental principles, such as open innovation, portability of applications and interoperability? If so, which? As noted above, it is important that the process for standardization / normalisation for all payments is led by the industry (and not by regulation or by standardization bodies that have no experience in the payments industry). Therefore, there is no need for standardization initiatives led by the European Commission, or by any other regulatory Authority or standardization body. In line with the above, standardization related to electronic and mobile payments should also be led by the market, which holds the best position to test the capabilities being developed of operating systems that are the basis of the mobile payments platforms. M-payments are still in their infancy. Therefore it is still too early to determine "specific areas in which more standardization would be crucial." In fact, imposing external standardization measures at this early stage, could stifle innovation. Once m-payments are fully operational, the standard will emerge naturally and with it the aims of the Green Paper, will be fulfilled (there will be more competition as the standard becomes public, which will result in more choice for merchants and consumers, more innovation and greater security). The EPC and the GSM Association have published some initial guidelines that for the moment should be maintained: o o o The consumer is the owner of the wallet The consumer is free to choose which payment methods to include in the wallet Wallet portability between operators must be ensured 22) Should European standardization bodies, such as CEN or ETSI, play a more active role in standardising e- or m-payments? In which area do you see the greatest potential for their involvement and what are the potential deliverables? 17