Regulatory changes to the “multilateral interchange fee” – MIF


What is this all about?

The Multilateral Interchange Fee (MIF) is paid by the merchant’s acquirer to the card issuer (bank) to compensate their effort in enabling, authorising and clearing a card transaction. The cost of such a transaction is usually paid for by the merchant to the acquirer. The acquirer then pays the other players involved, in particular the Scheme Fee (e.g. Visa, Mastercard) and the Interchange (the issuer of the card, i.e. usually the shopper’s bank). Reducing the MIF will therefore reduce the merchant’s cost and the hope is that they will reduce their prices accordingly, which is the whole purpose of the exercise.

The MIF is set centrally by the card scheme, thereby avoiding bilateral negotiations between thousands of acquirers and thousands of issuers. From an issuing bank’s perspective, the interchange has been a healthy revenue stream, usually so profitable that the cards were often issued for free and bonuses were offered to the customers for using them. Therefore, many argued that the Interchange should be removed, completely forcing the issuing banks to cover the cost themselves, e.g. by charging their customers (the shoppers) for issuing and/or using the card.

The original legislation proposal by the EU Commission kept the MIF, but stipulated a cap for international payments within one year to 0.3% for credit cards and 0.2% for debit cards. After many heated discussions, the “final compromise” which has now been agreed, is still based on the principle of keeping the MIF, but also applies the cap to domestic payments at the same time and within only 6 months rather than a year. The debit card interchange is additionally capped to a total of €0.05 if that is lower than the 0.2% of the payment transaction value. The parliament had requested to apply the same to commercial cards and large third party schemes (like American Express) as well, but this wasn’t confirmed.

The new legislations can now be finalised and the MIF caps could come into force later this year. It will take time, however, until merchants pass on their reduced interchange cost to consumers through lower pricing – if at all. It will take months to analyse the exact cost position after the MIF regulation comes into force. Depending on their actual acquiring contracts, merchants may not see immediate savings at all.

However, the lower interchange will have significant immediate impact on the revenue of issuing institutions’ that offer the majority of their cards domestically. Issuers and co-affected organisations will have to reduce cash-back schemes as well as loyalty awards such as air miles or store bonuses. Less interchange revenue for issuers also means less to share with their marketing partners such as co-brands or program managers who will – together with the issuers – sooner or later move to transaction fee based models.

This means that potential savings at the POS would be loaded back onto the customers’ shoulders, and if such savings don’t materialise they will effectively pay even more which of course would defeat the whole purpose of the exercise.