Why market regulation of the interchange rate is the only competitive option for Ukrainian fintech
COVID-19 pandemic has made its own adjustments to all spheres of human life, and we return again and again to its consequences. The total conversion to online is an obvious consequence of the quarantine and the coronavirus pandemic. As a result, we received a significant increase in turnover in e-commerce. (according to the National Bank of Ukraine). However, in my report at SheCongress, I shared the thought that COVID-19 was not the main reason for these changes, but rather a logical follow-up of the processes that have taken place over the past 5 years. During this time, the issuance of bank cards has increased, Apple Pay, Google Pay and Garmin Pay entered the market, and a number of launched applications have received not only Ukrainian, but also international recognition.
But certain problems are yet to come, because on the 1st. of October the draft law №4178 was registered in the parliament. It regulates the cut of the interbank commission for paying for goods and services through the terminal from 1% to 0.3%. That is a decrease in the interchange rate — in the percentage of the interbank commission. This is the commission that the card-issuing bank earns for POS transactions. This interest rate is not the income of the payment system, but it is the basis for the existence of the payment business.
Today the volume of non-cash turnover has reached from 40% to 50%. If at the early stages of the non-cash payments growth the number of transactions was small, now it has grown impressively. That is why we are watching the lobbying of the interests of retailers in the Verkhovna Rada. Their goal is to reduce the interchange rate to European standards — 0.2–0.3%. In Ukraine the interchange rate is more than 1%. The adoption of the law that regulates interchange rate could lead to a significant recession in the country’s cashless economy.
But first, let’s discuss the motivations of the “For” and “Against” sides of the draft, the discussion of which was observed by everyone. The “For” side is the retail representative, and the “Against” side is the co-founder of the well-known bank in the smartphone. What interests and threats does the bill №4178 represent?
Motivation of the “For” side, or a business that accepts payment by cards: they consider this draft as a possibility to reduce their costs and increase income. A decrease in the interest rate means an increase in income from each purchase, an increase in profits. The retail and restaurant business calls the existing commission unreasonably high and ruinous.
Motivation of the “Against” side, or banks: they declare that such legislative regulation will be beneficial neither for the user, or small and medium-sized businesses, nor for the banks. The key interested player is large retail. The adoption of the bill will mean an increase in the prices for servicing cards for users, the rejection of Apple Pay, Google Pay, as well as bonus programs, a cut of the terminal network, because banks will also need to cover their costs.
On one hand, it seems that each of the parties wants to obtain or maintain a profitable business model. But here’s the problem: the growth of non-cash payments in large retailers, and, consequently, a reduction in load on cash collection and an improvement in the user experience, happened due to the market interchange rate. Those retails are already indebted to banks for the convenience and cashless opportunities that they have been putting in service for years together with Mastercard and Visa.
Therefore, I stand in full solidarity with the position expressed by the regulator, justifying the need for market, but not legislative regulation:
1) On condition that the size of the interchange rate is reduced, banks will opt for the stant of development and, probably, downsizing the POS-terminal network. The smaller the business, the faster it will happen.
2) Banks are likely to start shifting their costs to regular users as well. At this moment, there will be an increase in the cost of servicing a bank card for the end consumer. It means, for you and me. After the adoption of a 0.2–0.3% commission in the EU, prices did not decrease, but the concept of a “free bank card” disappeared.
3) Banks will also limit bonus offers, cashbacks, credit limits and other loyalty programs.
4) Interchange is the bank’s source of income in the retail business. Due to this earnings, the bank keeps a staff of employees, purchases terminals and services them. In Ukraine, it is the bank that deals with this.
Today, the largest acquiring banks have announced a general proposal for a phased reduction of interchange rate: from 1.2% in July 2021 to 0.9% in July 2023. Banks offered a market compromise and a number of ideas to stimulate acquiring. What will be the answer to this?