What is FCA’s Position on Facebook Libra Crypto-Currency?

Facebook Libra Currency

Facebook has ‘let it be known’ in the USA to a House Financial Committee, that it has selected the Swiss Financial Markets Supervisory Authority (FINMA) to be Libra’s regulator. It stated that the Swiss were “best prepared to oversee the global market for digital currencies and privacy”.

This in itself shows a great naiveté on behalf of Facebook OR some extreme gall.

The currency will seemingly replace various fiat currencies in the jurisdictions in which it acquires customers. In the UK: the FCA (Financial Conduct Authority) has in recent days published its findings on its Digital Currency consultation in the form of its Guidance on Cryptocurrency (CP19/22). This makes it very clear that such currencies, if offered to customers in the UK, then the currency will be governed by UK legislation and will fall into the UK perimeter for FCA regulation.

This means that to operate and supply services (Libra) to people in the UK, then it must have a UK FCA licence; and must comply with UK legislation and regulations, even if some of these happen to be have common or shared laws with the EU.

Accordingly, this then means that Facebook et. al. are being either a) Extremely naive or b) Very ‘gung-ho’. In either case, we should be worried.

If they are being naive, and if they have not understood the FCA guidance and the UK regulations then perhaps we should be very concerned, as this may be an example of companies, such as Facebook, disregarding what their lawyers ought to be telling them. Or maybe they are doing this, in spite of what the lawyers say. Either way this does not appear professional, nor a company / consortium in which we should trust to manage our highly-regulated payment systems if they simply ignore the regulations.

Facebook et.al ***may*** however, have even made a commercial decision (the ‘gung-ho’ position) to ‘press ahead’ with a ‘minimum viable product to disrupt the market’ and to then argue their position as having been a sensible alternative route not requiring the same regulations; i.e. when things go wrong and when the prosecutions arrive. They may have decided even, that the legal process involved in pursuing them might take long enough to start, for them to be impossible to stop by this time, so as to decide now to worry about the whole ‘consequences’ problem later. Maybe they also think that this worked for them for Facebook data protection law issues (remember the Cambridge Analytics case and Data Protection fine in the UK for £5billion last month) or for their tax jurisdiction selection.

Above all, FINMA in Switzerland do not have jurisdiction over, or authority to regulate across Europe: and if they did, I am not sure that the rest of Europe would be happy for them to do this, given the complete inability to get the Swiss financial system to release any data from ‘their clutches’ in relation to any matter (crime included), and where they banks routinely hide behind the Swiss secrecy laws. Seventy+ years on, people are still trying to uncover hidden assets from all sides from the 1940s that the United Nations demanded of them and has done consistently ever since.

The regulators in the EU (and globally) have a very good reason to be concerned. I am not sure that regulators really know how to deal with a company that believes that they can ‘do what they like’ and which tells them as the regulator what they must do.

RiskSkill provides Services for all Risks, Fraud and Compliance solutions for e-money, e-payment, internet payments, e-funds, e payment systems, online payment and digital cash’s safe transactions. RiskSkill is also a permanent member of AIRFA an independent and global risk and fraud advisors organization.

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European Union Decides to Reduce Inter-Regional Card Processing Fees

Kevin Smith, Riskskill: What does the inter-regional interchange fee rate picture look like today and where is it moving to?

Card Payments

The European Commission is the first competition authority to take action against Visa and Mastercard for their excessive inter-regional interchange fees. With its experience and successes in reducing intra-regional interchange fees in Europe, this latest action and its positive impacts has set an interesting precedent. It is great news. The European Commission move addresses both regulator and merchant concerns about the unfair and extreme costs of processing non-European cards.

Since 2015, domestic and intra-regional consumer card interchange rates within Europe have been driven down significantly. Although the end result of these fee reductions should have been passed through from merchants to customers, it is not clear how or if this has occurred. Recent Payment Systems Regulator (PSR) attention and their UK industry consultation has shown that the merchant service charge (MSC) also contains many other scheme fees, acquirer fees and margins.

And let’s not forget the myriad of other organisations in the transaction processing flow, providing their services and expecting their fees.

European regulatory attention and merchant concerns should not be a surprise. Not when typical consumer card interchange rates within Europe are now at just 0.20% (debit) and 0.30% (credit) – where they are 1.20% and up to 1.97% for equivalent inter-regional POS transactions in Europe.

Most merchants in Europe, have more domestic card payments than other European card payments; and only lastly non-EU card payments. On this basis, most European merchants, do not experience or notice the impact of accepting cards issued outside of Europe.

However, for many European merchants with lots of international customers, their cost of accepting cards is exaggerated by these disproportionately higher inter-regional interchange fees.

The wide gap between domestic and intra-Europe interchange costs and those for inter-regional transactions makes us ask what the different costs are for processing these transactions, i.e. are there really any greater risks or costs involved with the inter-regional transactions?

Based on the rhetoric use by the European Commission, Visa and Mastercard strangely, did not fight for the status quo, so quickly led to the agreement of new and reduced fees.

So what does the inter-regional interchange fee rate picture look like today and where is it moving to?

Figure 1: Card Present Transactions acquired in Europe

Face-to-Face / Card Present Transactions Inter-regional Interchange Fee – Today Inter-regional Interchange Fee – Pending
Visa Consumer Debit Between 1.10% and 1.97% 0.20%
Visa Consumer Credit 0.30%
Mastercard Consumer Debit Between 1.10% and 1.98% 0.20%
Mastercard Consumer Credit 0.30%

Figure 2: Card Not Present Transactions acquired in Europe

Online / Card Not Present Transactions Inter-regional Interchange Fee – Today Inter-regional Interchange Fee – Pending
Visa Consumer Debit Between 1.44% and 1.97% 1.15%
Visa Consumer Credit 1.50%
Mastercard Consumer Debit Between 1.44% and 1.98% 1.15%
Mastercard Consumer Credit 1.50%

The European Commission argued that this reduction: “will lead to lower prices for European retailers to do business, ultimately to the benefit of all consumers”.

For those merchants with higher card acceptance from outside of Europe, the European Commission believe that the cost savings could be 40%.

The European Commission decision does not raise important further questions about other payment scenarios:

a) Now that the parties have agreed lower inter-regional interchange rates, when will these revised fees come into force?

The European Commission states: “Under the commitments, Mastercard and Visa each undertake to reduce the current level of inter-regional interchange fees to or below the following binding caps, within six months:”

NB: the scheme commitments will apply for five years and six months from the above date.

But when does this six-month period begin?

  1. The date from the which the European Commission made the scheme commitments legally binding under EU antitrust rules, or
  2. Is it from the date communicated by each scheme to its respective client issuers and acquirers?
  3. Or as reported by the BBC UK website on 29th April 2019, i.e. on 19th October 2019 for five years.

Scheme updates posted following the European Commission press release confirm that the effective date for the inter-regional interchange alterations is indeed 19th October 2019.

b) What about inter-regional debit and credit cards in mail order and telephone order (MO/TO) in Europe?

The European Commission only refer to online payments. Can we assume that MO/TO transactions, though not specifically mentioned, are included in the European Commission definition of Card Not Present transactions?

Scheme updates posted following the European Commission press release confirm that Card Not Present transactions are all transactions other than card present transactions, so MO/TO transactions are included in the planned fee reduction.

c) A trustee will be appointed by the Commission to monitor the implementation of the commitments. Who will be monitored?

  1. Will they monitor Visa and Mastercard and whether they enforce the fee reductions in line with the agreement?
  2. Or will they monitor individual merchant acquirers and their agents to see if they deploy lower pricing within the agreed timeframe?
  3. Or will they monitor individual merchants to see if the lower costs lead to lower consumer prices?

d) How will EU card issuers justify and defend their continued receipt of higher interchange rates for card usage outside of Europe – i.e. the reverse of this agreement?

Will similar regulatory and merchant pressure outside of Europe lead to reduced interchange fee costs elsewhere and therefor reduced income for European issuers for non-EU based transactions?

As with previous interchange fee rate reductions, we should expect unexpected and unintended consequences?

e) If a South African-issued card accepted in Europe incurs the new lower interchange rate, what does that mean for the same card accepted in Australia or the US?

This is not a matter for the European Commission, but clearly, they will provide essential guidance and advice to other national payments and competition regulators around the globe to challenge Mastercard and Visa further.

International merchants with a presence in Europe and in other regions and countries around the world will increasingly question why they are incurring very different interchange fees across different regions and markets.

Is this the ‘beginning of the end’ for over-inflated and higher global inter-regional and local interchange rates?

f) What about the three-party model?

Inevitably, such schemes will be forced to revisit their merchant pricing to ensure any merchant preference or favour for such brands.

g) Will lower interchange fees, mean increases in other card processing fees?

In the UK most noticeably, and across the rest of Europe, we have witnessed that lower interchange rates have been offset by increases in acquirer pricing, such that the positive pricing effect does not pass through to the end customers.

Are we going to see a similar offset of inter-regional interchange fees with poorly explained increases in scheme fees for inter-regional transactions and corresponding acquirer processing fees?

h) What about non-EEA countries? The European Commission press release on 29th April 2019 states that the inter-regional interchange rate reduction will positively impact transactions acquired in EEA countries.

Effective April 2019, Visa no longer treats Israel, Switzerland and Turkey as part of their EEA market definition. This means that transactions into and out of these countries, for example the UK or US, are now treated as international for interchange purposes and scheme fee levels.

i) So what does this mean for commercial cards and any other programmes? These have been excluded from regulatory pressure on interchange reimbursement fee reductions.

Inter-regional commercial card transactions do remain a very small percentage of total card expenditure for many European merchants.

Commercial card interchange rates are typically between 0.20% and 2.10%.

Small Business, Commercial and Corporate Card Transactions Inter-regional Interchange Fee – Today
Visa Commercial Debit Between 0.20%+ GBP 0.01 (according to Visa Business Immediate Debit) and 2.00%
Visa Commercial Credit
Mastercard Commercial Debit Between 0.20% (according to Mastercard debit Government payments) and 2.10%
Mastercard Commercial Credit

So how long will it be before commercial debit and credit cards are included in the regulatory challenges to reduce interchange fees?

The changes and this agreement are all great news and positive developments, but the implications and implementation still need to be better understood and defined, and there remain many questions and some big issues there-in.

About Kevin Smith

With over 25 years in the payments business, Kevin is a trusted and experienced practitioner and thought leader in payments, technology, issuance, acceptance and acquiring. At Visa, Kevin headed acceptance and acquiring development and was instrumental for changing how Visa viewed payment acceptance, acquiring and retailers in Europe. Kevin also led fraud and compliance management functions at a senior level at Visa. Kevin has worked in retail management for a major UK retailer, and for a major UK high street bank in its retail banking cards and acquiring development business; in senior roles at Switch, the original UK domestic debit card scheme; as well as in Visa Europe and Visa International in the US.

About Riskskill

Riskskill is a leading Europe-based payments and risk management consultancy, with an impressive international track record of helping payments businesses to find and mitigate payments challenges and risks. The firm works with clients to put in place strategies and programmes of work to make payments businesses or functions more profitable, less susceptible to losses, risks and regulatory issues and compliance problems. Riskskill.com is a global GARS Reviewer for Visa and a member of AIRFA, the Association of Independent Fraud and Risk Advisors

For further information, please contact: Bill Trueman or Kevin Smith at www.riskskill.com and enquiries@riskskill.com