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Interchange Commission Should Be Regulated by Market Only

Interchange Commission Should Be Regulated by Market Only

The Verkhovna Rada of Ukraine and the National Reforms Council are considering whether to include the provisions on the interchange commission limit into the draft law on payment services registered as No. 4364, as part of its finalizing it for the second reading.

Therefore, the National Bank of Ukraine (NBU) and Olha Vasylevska-Smahliuk, Chair of the Subcommittee for Payment and Information Systems and AML of the Committee on Finance, Taxation, and Customs Policy, have issued a joint statement on the unviability of imposing a limit on the interchange commission:

  • The NBU insists on adhering exclusively to market-driven approaches to interchange commission regulation to further advance noncash payments, reduce the share of the shadow economy, and increase revenues to the digital payments account of the state budget.
  • The initiators of the legal limitation of the interchange commission insist that this will promote the harmonization of the Ukrainian law with the EU laws and lead to positive changes such as reduced prices of goods and services.

However the outcomes of the administrative regulation of the interchange commission introduced by the EU in 2015 do not indicate straightforward benefits for users. On the contrary, there is evidence that the introduced interchange commission limit led to negative consequences, e.g.: 

  • fees for the annual servicing of credit cards increased 
  • free-of-charge servicing options for debit cards disappeared from the market 
  • the number of cards in circulation declined, as did the average number of cards per capita
  • prices of overdrafts and loans increased 
  • charges for cross-border operations increased (outside the issuing bank’s country)
  • cashback programs stimulating cashless payments were rolled back, and although these programs exist in theory, users cannot receive sufficient amounts of cashback. 

The consequences of administrative regulation of the interchange commission reported by other countries also suggest that this measure failed to reach the intended goals: 

  • in the U.S., after interchange commission regulation was introduced, prices did not change for the final consumer. At the same time, banks scaled back loyalty programs or introduced additional fees for account servicing
  • in Australia, interchange commission regulation proved to be complex, ineffective, and economically unviable, as it had no positive impact on the final consumer. After respective regulation was introduced, annual card-servicing charges increased, and vendors and final consumers did not pay any less for goods and services.

The NBU considers that an abrupt legal limit on the interchange commission would be dangerous and negative for the operation of the Ukrainian payment market. In Ukraine, this may:

  • stall the development of and possibly shrink the POS terminals network
  • increase charges for servicing bank accounts and cards of households and roll back loyalty programs (cashbacks, credit limits, and grace periods enjoyed by cardholders).

The alternative should be a market-driven and harmonized decrease in commissions charged by banks and payment systems. The NBU sees the readiness and intent of payment systems and card-issuing banks to gradually move in this direction.

The regulator calls for the parliament and other state authorities to refrain from legally limiting the interchange commission and give the financial market a chance to decide independently how best to price financial services.

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