In terms of the number of transactions, payment cards are by far the most widely used non-cash payment instrument in the EU compared to credit transfers, direct debits and e-money payments. More than 55% of all non-cash payments are made by a payment card. On average, an EU citizen takes out a card about 170 times a year to make purchases in physical shops or on the Internet. The card is also used to withdraw cash from ATMs.
A distinction is made between the following types of card in terms of the settlement of transactions between the card user and the card issuer (“issuer”):
- Debit card (settlement is usually made without delay via a current account)
- Charge Card or also called “delayed debit card” (monthly statement)
- (Revolving) credit card (transactions can be converted into a consumer credit)
- Prepaid card (billing is made against a credit balance previously paid into a card account with the issuer)
In Germany most cards are debit cards or charge cards.
Payment cards can also be classified according to the respective card/account holder:
- Consumer cards (mainly C2B)
- Commercial cards (mainly B2B)
The role model is important for the economic and legal view of the card business. A distinction is made between four roles in a card payment:
- Cardholder (payer)
- Acceptance point / merchant (payee)
- Card issuer (“Issuer”)
- Contractual partner of the payee for acceptance and settlement (“acquirer”)
When these four roles are performed by different entities (legal or natural persons), one speaks of a four-party system. If the issuer and the acquirer are identical, it is a three-party system (example: American Express). In a two-party system, one unit assumes the roles of issuer, acquirer and point of acceptance (example: customer card, issued by a department store).
In contrast to credit transfers and direct debits, there are different payment schemes in card payment transactions, which compete with each other. In addition to the global schemes (e.g. Mastercard and Visa), there are other European schemes in the EU, but their business is de facto (not de jure!) mainly limited to one member state (examples: “girocard” in Germany and Cartes Bancaires in France). With few exceptions, the schemes are organised as four-party systems. They grant licences to banks and other payment service providers for the issuing and/or acquiring business.
The scheme in question plays an important role for merchants, since their card acceptance depends on the scheme in question and not on general card acceptance or on the cards of a particular issuer. Accordingly, the schemes also have a different scope in terms of acceptance. In order to increase card acceptance for a cardholder, many cards in the EU are equipped with the acceptance brands of several schemes (“co-badged” cards. Example: girocard & Maestro).
With the exception of two-party schemes, under the EU Payment Services Directive 2015/2366 (“PSD2”), the issuing and acquiring business is a payment service subject to authorisation and can be offered by credit, payment and e-money institutions only. The authorisation requirement does not apply if the card payment procedure is limited in terms of acceptance (e.g. a fuel card). In this case, however, the criteria of the area exception under § 2 (1) No. 10 ZAG must be fulfilled (see door 7).
From an economic point of view, at least in the case of four-party schemes, the market is a so-called two-sided market: the issuer and the cardholder on the one hand, and the acquirer and the merchant on the other. There is economic dependence between the two sides of the market through so-called externalities. The benefit for the cardholder or the merchant depends on the other side of the market. In addition, when a card payment is authorised, the issuer provides a service for the acquirer, or when the acquirer (owner of an ATM) provides a service for the issuer in case of a cash withdrawal. To compensate for these external effects or services, payments are made between the two market sides. This transaction-related payment between the acquirer and the issuer is called an “interchange fee” (IF).
In the case of a card payment, the fee flows from the acquirer to the issuer (and vice versa in the case of an ATM transaction). The IF thus presupposes the existence of a so-called four-party payment system. In the EU, the IF is subject to legal requirements for card-based payments by means of an EU Regulation (EU Regulation 2015/751). The IF may be the subject of an agreement between two (bilateral IF) or more than two payment service providers (multilateral IF or MIF). In the card business, MIF agreements are dominant. IF rates are capped at 0.2% (debit cards including prepaid cards) or 0.3% (credit cards including charge cards) for intra-European payments with consumer payment cards issued within four-party card payment schemes (such as Mastercard and Visa). On the other hand, the IF rates of transactions with company cards are not regulated. Price regulation has led to a massive redistribution of system costs from the acquirer to the issuer market side within the EU, amounting to several billion euros.
In addition to the above-mentioned IF ceilings, the IF Regulation contains in its Chapter III (“Business Rules”) a number of other rules which are also relevant for third-party scheme cards and for commercial cards, such as the
- the transparency of the merchant service fees,
- Option to choose between the payment marks at the terminal for co-badged cards,
- Obligation to accept cards of the same type and brand,
The addressees of the IF Regulation are not only the payment service providers subject to authorisation (issuers and acquirers), but also the respective schemes.
It is irrelevant for the relevance of the legal provisions whether the card is used physically (usually as a plastic card) or virtually (e.g. as a card number in an app).
Cover picture: Copyright © Adobe/ sutthinon602