Sunday, August 05, 2007

Yes, there is an interbank compensation mechanism (interchange fee) for POS in the Netherlands

For some unknown reason, I noticed that quite some websurfers seem to be interested in the question whether or not an interchange fee (for POS) exists in the Dutch retail payment systems. Well, the answer is that there are interchange fees for:
- direct debits
- bill payments (acceptgiro)
- interbank usage of ATM's
- and an interbank compensation mechanism (not a literal fee) for POS.

As for the latter mechanism, the NVB explains in its reply to the competition report of the Commission:
From an outside view it may seem that the Dutch POS scheme PIN indeed operated or operates without an interchange fee mechanism. But this was and is not the case. In fact there has always been an “implicit” interchange fee till March 2004. Card issuers received the net financial result from the acquiring operation of the only acquirer Interpay/BeaNet, to cover costs on the issuer’s side. From the moment on that the sole acquiring by Interpay/BeaNet ended (March 2004) and individual banks became acquirers for POS transactions, an explicit cost based interchange fee from acquirer to issuer was introduced that forms part of the cost base for acquirers. The underlying interbank agreement was notified to the Netherlands Competition Authority (NMa). The NMa however doubted the necessity of a multilateral interchange fee mechanism. Therefore the interchange fee structure will most likely be redesigned and be replaced by a system of bilateral interchange fees. The discussions with the NMa on this topic are ongoing.

Now, why would this be interesting to the readers?

I guess that it boils down to the current hefty ideological debates on whether or not interchange fees would be necessary in payment systems. While the answer is a clear yes (most certainly to get separate initiatives all aligned to become interoperable and standardized) the regulators seem to forget about the evolution of payment systems. And wish to abandon interchange fees to the past. So they keep on continuing the myth that it is possible to do payments without compensation mechanisms and keep referring to the Dutch situation as an example.

Although every regulator might learn from studying and trying to understand the industry, they also do have a fundamental right not to take things for granted and the right to climb the learning curve from scratch by themselves. In that spirit, I would encourage those interested to start studying the situation in payments via the phone in the Netherlands. At present we have a number of initiatives going. Some use the phone and a voice-mail application, others such as Payter use NFC. And Minitix is a combination of both, while a number of trials is pending.

While the newspapers this week all announced that in the future we would pay with our mobile rather than with e-purse, let's imagine what will happens if all these initiatives grow. Suppose we end up with 3 types of schemes. The consumer and retailer lobby organisations will then say it is too messy and unorderly. You can't expect shop owners to accept all those schemes: they need to be interoperable. And consumers would also benefit from one m-payment technology rather than having to choose from three.

What will happen then is that the initiatives will work out some interoperability agreement allowing one application/device to accept all 3 schemes. But then there is the question: which scheme had the relation with the retailer and which with the customer. And how are the schemes going to be compensated for their efforts in building their customer base (which will now be accessible to all involved). Particularly if the market coverage of the schemes is different:
Scheme A: 30 % consumers ; 30 % merchants
Scheme B: 10 % consumers ; 60 % merchants
Scheme C: 60 % consumers ; 10 % merchants

The answer to this economic puzzle is of course an interchange agreement. Yet, if regulators would insist on forbidding it, they force the market into a situation where no single technology will serve the whole market in an interoperable way. Which is beautiful from a competition perspective, because there is lots to choose for all. But perhaps it may be less convenient from a customer and efficiency-perspective.

So if we would call interchange fees a 'hidden tax' the alternative is an 'open and visual tax' consisting of the burden for merchants and consumers to have a higher number of different, not-interoperable payment instruments in their wallets, on their phone's and on their pc, in order to be able to pay for all the purchases they'd like to do (and to be able to accept all the payments from consumers). That is in my view the bottom-line policy choice in the interchange debate.

And if it's the hidden cash we're after, why not start eliminating the hidden tax (or stealth tax that Dave Birch calls it) that is out there for cash?