In its charm offensive for the Digital Euro (D€), the ECB is primarily targeting merchants. This is an easier argument to make compared to convincing consumers, for whom the benefits are neither immediately obvious nor apparent even after careful consideration. According to the ECB, the D€ would be a “cost-effective alternative to the current fragmented payments landscape”[1]. At the same time, however, only the merchant would bear all costs, including a reasonable profit margin for the involved payment service providers (“intermediaries”), through acceptance fees. This is outlined in the current concept of the so-called compensation model, as envisioned by the ECB and the European Commission. The calculation would only work if the new payment system were significantly cheaper than existing ones. However, cost estimates are not yet available. For now, the prevailing principle is hope.
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Another advantage for merchants was mentioned a few months ago by ECB Board Member Pierro Cipollone. Without citing specific figures, he criticizes the high card scheme fees that merchants in Europe must pay to schemes like Mastercard and Visa:
“This costs European merchants a lot of money. They collectively pay a significant amount each year to international card schemes like Visa or Mastercard. And the cost is mostly borne by smaller merchants, who incur charges three to four times higher than those of their larger competitors. A digital euro would include safeguards for merchants by capping the fees they pay to banks for processing payments. A digital euro would thus narrow the gap between what smaller and larger merchants are charged for digital payments.”[2]
Are these statements accurate? Would D€ merchant fees, due to price caps, lead to leveling effects?
Background Facts
The merchant fee for accepting a card payment (excluding terminal costs) generally consists of three components:
- Interchange Fee (Revenue for the issuer as a percentage of the transaction amount)
- Scheme Fee (Fees charged by the respective card scheme, including processing fees, assessed per transaction and as a percentage of sales)
- Acquirer Fee (Compensation for the acquirer’s services)
Under Article 9 of the EU Interchange Fee Regulation (EU Regulation 2015/751), every merchant can request a breakdown of these fees from their acquirer (“unblended fees”). However, many – especially smaller merchants – voluntarily forgo transparency, or the breakdown is so complex that it provides no added value.
Confusion Between MSC and Scheme Fees
In his statement, “And the cost is mostly borne by smaller merchants, who incur charges three to four times higher than those of their larger competitors,” Cipollone conflates two different aspects. The term “cost” refers to scheme fees, while the gap between small and large merchants pertains to the total merchant service charge (MSC). For merchants with unblended fees, scheme fees are not higher per transaction for small merchants than for large merchants, as they are calculated per transaction and as a percentage of transaction volume.[3] It is likely that the 70/30 (or even 80/20) rule applies in the acquiring business: 30% of card transactions are generated by 70% of (smaller) merchants, while 70% of transactions come from 30% of (larger) merchants. Accordingly, 70% of scheme fees are paid by large merchants. The claim that scheme fees are “mostly borne by smaller merchants” by referencing the MSC gap is therefore unsustainable.
Even when looking at total MSC costs, the price gap does not imply that small merchants disproportionately shoulder the acquirer’s costs. If an acquirer serves only two merchants (a small corner kiosk and a nationwide discount retailer), the discounter nearly fully covers its costs. Due to fixed costs, the cost per transaction is higher for a small merchant than for a large one. Additionally, acquirers often apply a cross-subsidization strategy.
Does a Price Cap Reduce Price Differences?
Now to Cipollone’s thesis: Would a regulated merchant fee for accepting the D€ reduce the gap between the lowest and highest fees? Firstly, a price cap does not automatically lead to smaller price spreads. And how would the cap be determined? It is expected that a uniform cap will be set (i.e., no differentiation based on merchant size, in-store vs. e-commerce transactions).
The planned EU D€ Regulation proposes two methodologies in Article 17 (2):
Cost-Based Approach (Method 1)
The regulator would likely set the limit based on the average cost (+ reasonable profit) of the most cost-efficient merchant PSPs. If a cost-efficient PSP has a comparable merchant portfolio, they will offer uniform pricing up to the cap (no volume discounts for large merchants, as that would reduce their profit or cause losses). An acquirer focusing solely on small merchants would lose money under this price cap (assuming cost-based price differentiation). To avoid market distortions disadvantaging small merchants, the regulator would have to set the cap based on the highest-cost segment (e.g., small merchants in e-commerce).
Comparable Means of Payment (Method 2)
The regulation does not specify how the cap will be set. Will it be based on the average, highest, or lowest price? Given that it is a price cap, logic suggests that – as with Method 1 – the highest price (small merchants) must be used as the cap. Under both scenarios, a uniform cap would still allow price differentiation.
Two Side Notes
The regulation states that the method yielding the lowest cap must be used. Method 2 would always result in a shortfall (uncompensated costs) for distributors at a macroeconomic level. Method 1 relies on the “most cost-efficient” merchant PSPs, assuming a uniform product/service, which in reality does not exist.
Would a merchant prefer dealing with a chatbot or an acquirer offering a personal call center and same-day terminal replacement? Realistically, small merchants are often willing to pay more for better service.
This Sounds Suspicious…
Since mid-February, the compensation model has been under discussion in the European Council, following a Spanish government discussion paper. Since distributor costs at the D€ launch are still unknown, Spain proposes suspending Method 1 for a five-year transition period. Instead, the inter-PSP fee would be capped at 0.2% (aligned with the IFR 2015 interchange fee cap for debit cards). MSC limits would still follow Method 2, but with an additional cap at the average debit card MSC level in the Eurozone.
Cipollone’s exaggerated “three-to-fourfold” price gap claim (which in Germany, per EHI’s 2023 report, is actually a 1:3 ratio) is now being generalized for the entire Eurozone.
The added MSC cap (average debit card MSC level) aims to protect small merchants from “excessive” MSC fees, assuming acquirers engage in price differentiation even under Method 2. If inter-PSP fees are capped at 0.2%, and D€ acquirer costs are comparable to debit cards, setting the cap at the average debit card MSC would result in losses in the small merchant segment.
Acquirers may exit this unprofitable business. However, the proposal mandates that acquirers must continue servicing small merchants.
Regulators fail to acknowledge that the higher costs per transaction for small merchants are primarily cost-driven. The forced price equalization to “protect” small merchants from “greedy” acquirers is well-intentioned—but as the saying goes, “the opposite of good is well-intentioned.” If the Spanish proposal is adopted, acquirers should brace for impact: Beyond forced losses, they would face stricter reporting requirements for costs and pricing to the European Commission and the ECB.
Sources
[1] https://www.ecb.europa.eu/euro/digital_euro/faqs/html/ecb.faq_digital_euro.de.html
[2] https://www.ecb.europa.eu/press/key/date/2024/html/ecb.sp240923~cccba29006.en.html. Für die Aussage, dass die Händlerentgelte kleinerer Händler um das drei- bis vierfache höher liegen als für große Händler bezieht sich Cipollone auf die jährliche EHI-Erhebung in Deutschland (Stand 2023). Die Differenz zwischen den Händlerentgelten für kleine Händlern und Key Accounts ist 2023 laut dieser Quelle „nur“ Faktor 3 (bei Mastercard und Visa): Die Disagio-Spanne beträgt 0,5 bis 1,5%.
[3] Einen Überblick der derzeitigen Scheme Fees für deutsche Händler finden Sie z. B. auf der Website des Acquirers Worldline: https://worldline.com/content/dam/worldline/global/documents/brochures/scheme-fees-germany.pdf
