Interchange Fees in Card Payments in Croatia Higher than EU Average

Croatia is a country with rather high MIFs (fees charged for each sales transaction with a payment card) taking into account that the average fees rates in most EU Member States are lower than 1 percent.

The lowest interchange fee in Croatia is for transactions with Maestro cards and is 0.82 per cent on the average, whereas the highest average interchange rare of 1.45 percent is for Visa cards. Yet, when specific purchases cards are included (fuel cards, airline credit cards) the average interchange fee for Visa card transactions is 1.14 per cent. The average MasterCard interchange fee less special purchases cards (MasterCard World and MasterCard World Signia) is 0.97 percent, when these are included – 1.37 percent.

Croatia comparable to Slovenia

MIFs vary considerably in the EU Member States. The MIFs rate in Croatia is comparable to the one in Slovenia. However, compared with the more developed EU countries, for example, France, Italy, the Netherlands, the MIFs are comparatively high. On the other hand, these fees in Germany are distinctively higher for Visa debit card transactions, in Poland for all cards.

In principle, more developed EU Member States have comparatively low MIFs for debit card transactions – with a lower than 0.80 per cent rate, or less than 0.60 per cent rate for Visa cards. Yet, in Germany the fees for Visa debit card transactions are above average MIF rate.

Sample of nine banks  

The above indicators come from the overview presented by the Croatian Competition Agency (CCA) with the objective to define the situation on the payment cards market with respect to the types and the amounts of fees (multilateral interchange fee, merchant service charge) that are paid in transactions where payment cards are used for non-cash payments in Croatia, their interdependence and, finally, considering the potential effects of these fees on competition. The Overview of the payment cards market is based on the data from a sample of nine banks active on the territory of the Republic of Croatia, publicly available data of the Croatian National Bank, the European Commission, VISA and MasterCard.

Multilateral Interchange Fees (MIFs) are fees charged by a cardholder’s bank (the ‘issuing bank’) to a merchant’s bank (the ‘acquiring bank’) for each sales transaction made at a merchant outlet with a payment card. In payment schemes such as Visa and MasterCard, which are associations of banks, these fees are multilaterally agreed by member banks. MIF significantly defines the so called merchant service charge, the fee a merchant must pay to his bank for accepting the card as a means of payment.

Two types of payment schemes

The card schemes come in two main varieties. First, a more often four-party scheme where there are four parties: the issuing bank, the card user, the merchant and the acquiring bank. This scheme is both debit and credit, while the debit function is dominant.

Given the fact that MIFs are explicitly present in the four-party scheme, it appears that this scheme is also more likely to have effects on competition.

In a transaction within the four-party scheme the cardholder purchases goods or services on the basis of the credit or debit card payment, the issuing bank invoices the card holder but the amount which is increased by various fees that depend on the type of the card the cardholder uses.

At the same time the issuing bank, for and on behalf of the card user, makes the payment for the purchased goods or services by paying the acquiring bank the price deducted by the interchange fee. This actually means that the acquiring bank, with which the merchant has agreed on the basis of the contract to accept the card, pays the interchange fee to the issuing bank. Then, this acquiring bank pays the merchant the sales price less a ‘merchant service charge’ (MSC), the fee a merchant must pay to his bank for accepting the card as a means of payment (POS terminal fee).

Finally, both banks pay to the credit card institutions a fee for processing of the transaction, the membership fee, credit card fraud monitoring etc.

A three-party scheme consists of three main parties. In this card scheme model, the issuer and the acquirer is the same entity. These are primarily credit card schemes (in Croatia: Diners and American Express). In this scheme the cardholder purchases goods or services from the merchant, the bank invoices the cardholder the amount which is actually increased by other fees that must be paid by the user. At the same time the bank pays to the merchant the price less MCS. Since the same bank is both the issuer and the acquirer the interchange fee is not explicitly present. Finally, the bank pays to the card institution the fee for the processing of the transaction, for the membership etc. 

In this model there are no charges between the issuer and the acquirer, there are only the cardholder fees i.e. fees that are paid by the owner of the card to the bank and MSCs that the merchant pays to the bank. Yet, MSCs that the banks charge the merchants are much higher than the charges they impose on the card users, in other words, consumers. Hence, even though they are not explicitly present, the interchange fees in this scheme are implicitly present on the account of the fact that one side is “overcharged”.

Cardholder fees

Cardholder fees are actually fees or costs that card users must bear when they own a card. These are usually the issuance fee, annual fee, ATM withdrawal fees etc.

The analysis carried out by the CCA clearly indicates an upward trend in the payment card market in the Republic of Croatia. Despite the fact that from 2010 to 2013 the volume of payment cards in circulation has slightly fallen, their use rises. The volume of transactions has risen by 16 per cent from 2010 to 2013, the value of transactions by 8 percent in the same time period.  The most transactions have been performed by debit cards, some 66 per cent annually, which corresponds to the rate showing the share of the debit cards in the overall volume of cards in circulation. Logically, the value of transactions carried out by debit cards holds the highest 75 per cent share annually on the average. When looking at the volume of transactions the debit cards are followed by the charge cards with the average annual share of 12 per cent, the revolving cards and the deferred debit cards with a 10 per cent share in the same report period.

In addition, it has been established that all banks do business with MasterCard and Visa, with one, or both of them. Consequently, they offer these cards. Besides that, Erste banka also offers Diners cards, whereas the acceptance of the Diners card complies with the above described three-party scheme where the MIF is not explicitly present. American Express cards offered by PBZ are based on the same three-party model.

MIF and MSC

A large part of the merchant service charge is determined by the interchange fee. The MIF is an important part of the total cost for card acceptance and ultimately contributes to the price of goods and services for final consumers. The MSC, on the other hand, directly affects the price of the goods and services in the merchants’ offer.

It could be reasonably assumed that a reduction in MIFs would lead to lower MSCs, which would translate into lower prices of goods and services for card users. On the account of this assumption the European Commission intents to set the cap benchmark for MIF levels for credit and debit cards.

In April 2014 the European Parliament voted on the proposed Regulation of the Commission to cap the MIFs.  The service or “interchange” fees that banks charge for processing transactions under payment schemes, would be capped at 0.3 per cent of the transaction value for credit card transactions and 7 euro cents, or 0.2 per cent of the transaction value, for debit card ones.

The new caps would involve both commercial and consumer cards, and would apply to both cross-border and domestic transactions in the EU. However, the Member States would still be able to set lower MIF rates and to impose other possible restrictions on card institutions. The new rules would apply exclusively to four-party card schemes, whereas the three-party payment schemes would be subject to the new rules only where they would go beyond the threshold set by the Commission. The proposed Regulation on multilateral interchange fees for card-based payment transactions (MIF Regulation) is to be further considered at the European Parliament’s plenary sessions and discussed between the Commission and the Member States before the adoption of the final text.

The proposed MIF Regulation

The above mentioned MIF Regulation proposed by the Commission regulating the cap MIF rate for Visa and MasterCard would reduce the average interchange fees in Croatia by some 80 per cent for Visa and some 70 per cent for MasterCard. The reduction in MIFs would presumably call for the reduction of MSCs.

Namely, in accordance with the collected data, the average MSCs are more than two times higher form the average MIFs. The proposed MIF Regulation would therefore after setting the cap rates for MIFs leave ample space for the banks to reduce the MSC rates and for the merchants to reduce the prices of goods and services.

Beside the negative effects they have on MSCs, the MIFs may have other restrictive effects on competition. The MIF appears to be a decision of an association of undertakings that may have the object and the effect of restricting competition by foreclosing the market concerned, by restricting competition between acquiring banks and inflating the cost of card acceptance, absence of competition between card schemes, inflated merchants’ costs for accepting payment cards and ultimately increased consumer prices within the internal market etc.

The proposal is part of a legislative package within the EU payments framework and the aim is to create a single payments market in the EU to lower costs for users and enhance procompetitive effects in the EU.

Benefits for merchants and consumers in Croatia

The setting of the MIF caps would benefit retailers who would be then more open to accept cards and card payments. At the same time the new rules would promote wider use of card payments by the consumers, lead to reduction of prices for goods and services. Furthermore, the increase in the volume of the transactions made by payment cards and cash management savings would at least partially compensate for the potential costs of the banks when setting the cap rates of these fees, whereas other savings could be the result of less ATM cash withdrawals. The regulation of cross-border transactions would benefit the retailers who would be able to look for cheaper acceptance services outside their domicile market and thereby promote competition between the domestic banks.

If adopted, the proposed MIF Regulation would also cover the fees and charges applicable in the Republic of Croatia and the positive, procompetitive effects of the new rules for MIFs announced by the Commission after its adoption would be also realized in its territory.

The Commission is presently conducting a study to measure merchants’ costs of processing payments by card and by cash. The results will provide the basis for calculating a MIF benchmark and will be published during 2014.

The banks whose data have been used in this overview:

Zagrebačka banka

Privredna banka Zagreb,

Erste&Steiermärkische bank

Raiffeisenbank Austria

Hypo Alpe-Adria-Bank

Societe Generale – Splitska banka

Hrvatska poštanska banka

OTP banka Hrvatska

Podravska banka

*The complete text is available in Croatian:

https://www.aztn.hr/ea/uploads/documents/istrazivanje_trzista/Istrazivanje_trzista_platnih_kartica_u_republici_hrvatskoj.pdf