EU Court of Auditors criticizes hidden surcharges for credit card payments

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The EU's legal framework for digital payments, including card payments, generally contains the right conditions for secure, fast and cost-effective transactions. However, interventions in the market when setting prices, in particular around card fees, and requirements for the exchange of account data as part of so-called open banking are problematic. This is the finding of the European Court of Auditors (ECA) in a special report published on Thursday.

The ECA examined the impact of EU rules on the electronic transfer of money via mobile devices and digital channels with a view to the years 2013 to 2023, analyzing in particular two rather far-reaching "price interventions": the cap on fees between banks for card payments and the "surcharge ban" on the use of certain payment instruments.

For transactions with consumer cards, which are subject to the cap on interchange fees limited to 0.2 or 0.3 percent of the payment value, and for SEPA credit transfers and direct debits, merchants are prohibited from charging surcharges. "This solution could potentially benefit consumers, but could also have negative consequences," the auditors note. For example, the regulation reduces the cost transparency of payments.

General price impact of credit cards

The ban on surcharging was introduced by the EU legislator with the Payment Services Directive PSD2. The ECA is now complaining that the EU Commission has not provided sufficient evidence to support the reasons given for this. It had not been able to establish any solid empirical data according to which the surcharges in the EU were "systematically excessive" at the crucial time of 2015. Furthermore, the Commission had not considered in detail the effects on competition between the various payment methods and distribution channels such as e-commerce or points of sale. Providers of more expensive, widely used payment instruments such as credit cards would have "no incentive to reduce the fees charged to merchants due to the lack of transparency".

This ultimately has an impact on the price of goods and services, the auditors explain using an example: A retailer wants to sell the same goods to two consumers for 100 euros. Customer A uses a credit card, B pays by bank transfer. The merchant has to pay a merchant fee of two euros to the payment service provider for the card payment, while no fees are incurred for the bank transfer. In order to remain cost-neutral, "the merchant must charge a general surcharge", writes the ECA. In this particular case, this would amount to one percent (two euros fee for a total turnover of 200 euros). Therefore, each consumer would pay an amount of 101 euros.

"Price increases resulting from the costs of payment instruments are not transparent for the consumer and are ultimately likely to lead to an increase in the global surcharge and thus in overall prices," the financial watchdogs point out. If merchants were allowed to directly charge higher prices for credit card payments, while the surcharges were effectively monitored at the same time, the price for consumer A would be 102 euros and for consumer B 100 euros. This transparency "would probably lead to better-informed decisions and thus to more competition in the payments industry".

Digital payments account for over a quadrillion euros

According to the ECA, the Commission does not have sufficient basis for its assertion that the potentially positive effects of the surcharge ban would clearly outweigh the long-term consequences for competition and ultimately for consumers. The level of fees for credit card payments depended on the size of the merchant and the distribution channels, as well as on whether the customers were one-off or existing customers. However, due to the card schemes' confidentiality clauses, this information is not publicly accessible.

Overall, the sums involved are considerable: in 2023, transactions in e-commerce and at points of sale in the EU amounted to almost 1.2 quadrillion euros. Around 80 percent of this amount was accounted for by card-based payment transactions. Furthermore, the ECA estimates the total volume of annual interchange fees paid by accepting payment service providers to card-issuing payment service providers in the EU for such transactions at EUR 2 to 3 billion, the annual scheme fees at around EUR 1 billion and the annual merchant fees at EUR 5 to 6 billion.

Lack of standards for open banking

The auditors also found two aspects of the EU regulations for open banking to be objectionable. These include the obligation for account-holding institutions to grant third-party providers such as Klarna free access to customer data. As a result, banks and savings banks may no longer have an incentive to provide high-quality services themselves, they say. Account information service providers are also obliged to maintain at least one interface for secure communication free of charge, which can be used by third-party providers. However, according to the experts, there is still a lack of technical standards for this, which makes data retrieval more difficult. In addition, open banking has so far only been implemented and monitored at national level, meaning that no hard data is available at EU level. Nevertheless, the Commission wants to open up the banking sector further.

The ECA acknowledges the Commission's efforts to step up the fight against "discrimination against payment accounts based on their location". However, payments originating from a foreign account continue to be rejected, although such rejections are prohibited under the SEPA Regulation. Regulatory gaps in enforcement and cooperation between national authorities need to be closed. The authority did not shed any light on the potential consequences of the decline in cash transactions, which according to the report is set to fall to 15 percent in the EU by 2026. In 2022, the cash share was still at 22 percent.

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