MEPs Agree To Cap Card Fees (#MIFs)

Based on the recent deal amongst MEPs, it looks like the Merchant Interchange Fees (MIF) Regulation will sail through the EU Parliamentary process in early 2015.

#Crowdfunding the EU

Suddenly it's all go on the EU crowdfunding front.

I'm still digesting last week's ESMA opinion on crowd-investing and the advice on how to regulate it, which is to be followed by the European Banking Authority's view on the regulation of P2P lending.

It's too early to expect anything conclusive - both ESMA and the EBA say they are merely supporting the Commission in its broader efforts to embed crowdfunding in a range of policy areas - but it's good to see official recognition of the benefits of crowdfunding, as well as the risks, and some sunlight on the highly technical challenges to accommodating the new business models. Let's hope they consider how any changes will impact customer experience, marketability and the need to scale these platforms quite quickly.

In addition to regulatory reform, it would be great if the EU agenda could evolve to include realigning traditional tax incentives to boost personal investment in new asset classes.

More on the detail soon!

Thoughts On The Growth Of EU #Crowdfunding

I've just spent a fascinating few days at the ECN Crowdfunding convention in Paris this week discussing the development of crowdfunding across the EU. The main focus was on regulation, since that is perceived as being the key difference from country to country. But of course there are other factors involved and these were also covered in the presentations. In particular, crowdfunding is a huge marketing challenge, given the vast advertising budgets of mainstream financial services providers and customer inertia. There are also many perverse incentives and implicit subsidies favouring the traditional financial models. I helped explain such problems in a recent submission The Finance Innovation Lab to the Competition and Markets Authority on retail/SME banking, for example.

A European twist on the scale and nature of the competitive problems was emphasised by an early presentation from our hosts, BpiFrance, a state financial institution targeting traditional funding at SMEs. It has 2000 staff in 37 offices and arranged funding of €10bn for 3500 French SMEs in 2012 alone. So not only do French crowdfunding platforms face a banking monopoly, but they must also compete against direct public programmes. With that kind of competition, it's little wonder the French crowdfunding market is only a twentieth the size of the UK! Thankfully, Bpi appears to have switched to supporting the development of many new private platforms, rather than trying fund plug the French SME funding gap all by itself - rather like the strategy adopted by the British Business Bank.

Of course, the SME funding gap is not exclusive to France. Christian Katz, CEO of SIX, the Swiss stock exchange, explained that the EU's 23 million companies face a funding gap of 2 trillion over the next 5 years. Yet only 11500 have access to the public markets. Currently, SMEs are creating 1 job for every 5 that big companies are eliminating. In other words, the companies that create the jobs are starved of access to working capital.

This kind of problem is not simply financial, and Joachim Schwerin, Policy Officer, DG Industry & Enterprise gave an excellent presentation on Friday explained how Crowdfunding features in five of the EC's key policies for stimulating economic growth:

• Improving access to finance, especially for SMEs;
• Financing projects that have found it hard to obtain traditional finance
• Boosting the digital economy
• Increasing the level of entrepreneurship, which is completely lacking in many EU countries; and
• Enhancing democracy, by enabling people to mobilise their savings to produce financial returns, rather than always having to trust their funds to banks and other traditional intermediaries that may not actually have their interests at heart.

Joachim outlined plans for extensive guidance to SMEs on types of crowdfunding via the EC's "Access to finance for SMEs" portal, highlighting the opportunities for SMEs rather than just focusing on the risks to investors. So watch that space during early 2015.

Many delegates were pressing Joachim to outline an EU regulatory timetable, but he was right to point out that this is premature. He confirmed that the EC is still in listening mode, which is as refreshing to hear now as it was in October. Regulation does not create markets, as the EC has discovered in its regulation of consumer credit and contract law. Indeed, it is plain from the recent French law and German proposals that regulating without an understanding of the market could kill them altogether.

For instance, the French authorities have limited participation in P2P lending to individuals who may only lend up to €1,000 per project/borrower. The authorities say this is necessary to ensure that lenders diversify the total amount they lend. This seems harmless enough until you realise the marketing challenge faced by someone starting a brand new P2P platform who cannot rely on a few large lenders to fund the bulk of early loans, or to step in where liquidity is scarce from time to time. Yet in more developed markets there is no evidence that lenders fail to diversify. In the latest UK market study Nesta has found that 88% of lenders say they engage in P2P business lending because they think diversification is important, which is supported by the figures:

"The average P2P business lending loan size is £73,222 and it takes approximately 796 transactions from individual lenders to the business borrower to fund a listed loan, with the average loan being just £91.95. P2P business lenders have, on average, a sizeable lending portfolio of £8,137 spread over a median of 52 business loans."

As a result, project-by-project caps are not a feature of the regulation of P2P lending in the UK, nor the rules allowing wider retail participation in crowd-investment. These regulations only took effect in April 2014, well after these markets were firmly established, well understood, and were able to benefit from the credibility that proportionate regulation can bring without being strangled by red tape.

Finally, it was interesting to hear Christian Katz's recommendations to help ensure the success of crowdfunding in the EU, based on how stock exchanges have developed:

• Clear, common terminology;
• Code of conduct - especially promoting transparency - e.g. disclose the details underpinning credit ratings;
• Platform stability/availability;
• Fund recovery - safeguarding customer funds and how to get money out;
• Cross-border - don't ignore potential that the Internet brings;
• Positioning crowdfunding - e.g. as a source of pre-IPO funding (under €5m).

Each of these points merits a post in its own right, but an EU code of conduct would seem to be a good way to focus market participants on achieving them. The team at ECN presented some early thoughts. Clearly the code will need to be consistent with applicable national laws and accommodate all the different types of crowdfunding. It should also be negotiated by the CEOs of platforms, as they understand the development plans for their own businesses better than the lawyers and the policy staff. Such codes have already been agreed by the leading participants in more developed markets. For example, the Peer-2-Peer Finance Association (P2PFA) has developed Operating Principles specific to P2P lending, and the UK CrowdFunding Association (UKCFA) has produced its own code of practice to accommodate donation-based and investment-based crowdfunding.

While it is possible that specific enabling regulation may be necessary in some countries to initiate the ability to establish dedicated crowdfunding platforms (e.g. allowing normal loans to be concluded on such platforms, rather than only participation loans, or lifting the €100,000 limit on equity crowd-investment in Germany, for example), the EC's approach of allowing platforms to develop in line with self-regulation seems the wiser than rushing to regulate in detail.

Lack of Transparency In Negotiation Of #PSD2

I don't think the Beurocrats are terribly concerned by rampant Euroscepticism pervading national electorates. The byzantine EU legislative process trundles on as secretively as ever. All the nonsense about immigration is a nice distraction from lack of transparency on more fundamental issues.

The latest attempt at a fait accompli is the revised proposal for a new Payment Services Directive (PSD2), which is designed to shape the EU's payment systems for the decade to come. Having published several drafts previously with some attempt to mark-up the changes from previous meetings of member state representatives, a rapid-fire draft (dated 21 November) was suddenly published on 24 November, the same day it was due to be debated.

Today, as a result of the 24 November negotiations, a further draft (dated 1 December) was published without any changes marked, along with a recommendation that it be used as the basis for negotiations with the EU Parliament. Never mind that alternative service providers and other stakeholders with minimal lobbying power are attempting to understand and warn of the impact of seismic changes to the payments regulatory framework.

This is no way to approach the regulation of the EU financial system - if you have any interest at all in bringing the market along with you. But it's a perfect way to leave control of the market to the major banks and card schemes who have lobbyists plugged into the process.

Rant ends. I'll be trying to update my article on the changes to the proposals in the coming week.

Though it's hard to see the point.

Card Scheme MIF Regulation [Updated 20 Jan 2015]

In addition to a new Payment Services Directive (PSD2), the Beurocrats have been busy on a Regulation aimed at payment card transactions - mainly to cap merchant interchange fees, but also to introduce some 'business rules' (MIF Regulation). Unlike PSD2, the MIF regulation will take effect directly in each member state, rather than having to be implemented into national law first. The caps on fees described below apply from 6 months after the regulation enters into force, while the grace period for the business rules is 12 months after the regulation enters into force. The MIF regulation must be reviewed by the Commission four years after entering into force, with any recommendation to amend the fee cap. Underlining and strike-through reflects changes made to the MIF Regulation since October 2014.

Capping fees:

The January 2015 version of the MIF Regulation (updating the October 2014 version) caps the hidden interchange fees that card issuers receive from merchant acquirers for cross-border all debit card transactions at 0.2%. However, for domestic debit card transactions, Member States may apply either a lower cap per transaction and a fixed maximum fee amount, or allow payment service providers (PSPs) to apply a per transaction fee of up to €0.05 in combination with a maximum percentage rate of no more than 0.2%, provided that the interchange fees of the payment card scheme does not exceed the fee is capped at a weighted average of 0.2% of the annual transaction value of the domestic debit card for all transactions within each payment card a scheme, or 0.2% per transaction. But for 5 years, Member States may allow PSPs to apply to domestic debit card transactions a weighted average interchange fee of up to 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme, or a lower weighted average if they wish.

The interchange fee for each credit card transaction is to be capped at 0.3%, although member states can reduce this for domestic transactions.

If domestic payment transactions are not distinguishable as debit or credit card transactions by the payment card scheme, the provisions on debit cards or debit card transactions apply. However, for 1 year after the fee caps apply, Member States may rule that up to 30% of the indistinguishable transactions are considered to be credit card transactions to which the credit card cap shall apply.

At these levels, the authorities believe that retailers should not be allowed to impose additional charges for use of cards that are subject to the caps (such 'surcharging' is controlled by PSD2). However, cards issued to businesses ('commercial cards') and those issued by 'three party payment schemes' (like Amex) are exempt from the caps. That's because businesses are thought to be able to fend for themselves (unlike consumers); and in a three party scheme all fees are charged by the scheme operator, so both the consumer and the merchant know who's paying what to whom. In those cases, then, the merchants can charge for the pain of accepting such cards and it's up to the scheme operators whether to lower their fees. But there are certain limits to the exemption for three party schemes.

In addition, the caps will not apply to 'limited network' payment instruments (like gift cards) which:

• allow the holder to acquire goods or services only within a limited network of service providers under direct commercial agreement with a professional issuer; or
• can only be used to acquire a very limited range of goods or services; or
• instruments valid only in a single Member State provided at the request of an undertaking or public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer.

Confusingly, however, there's a similar exemption under PSD2 which carries an additional limitation that “The same instrument cannot be used to make payment transactions to acquire goods and services within more than one limited network or to acquire an unlimited range of goods and services”. So it's conceivable that a scheme may be exempt from the need to be authorised under PSD2, yet have its interchange fees regulated under the MIF Regulation.

Business Rules:

The MIF Regulation has some additional 'business rules':

1. there can't be any territorial licensing restrictions on scheme membership within the EU;
2. card schemes (other than three party schemes) must: ensure their system is technically interoperable with other systems of processing entities within the EU; must separateensure the rule-making entity is independent from entities providing payment processing and other services; eliminate cross-subsidies among scheme services; and not make any one service conditional on taking or providing another;
3. all card schemes must:

• allow 'co-badging', so that a single card can be accepted under multiple schemes;
• enable co-branded instruments on the same card, if possible, but give clear and objective information on the different instruments and their characteristics;
• not discriminate between issuers or acquirers concerning co-badging of payment brands or applications or in terms of reporting, fees or other obligations, routing of transactions or by using mechanisms that limit the choice of application by payer and payee when using a co-badged instrument (though prioritising is okay);
• not charge fees on a blended basis for different card types, unless requested;
• not insist that all their types of cards are honoured if a merchant only wants to accept some of them (and so must enable customers to readily distinguish between the different types of cards offered by the scheme);
• not prevent retailers ‘steering’ customers toward using a preferred payment method, without prejudice to rules under the PSD or the consumer rights directive.

While the MIF Regulation is reasonable advanced, the UK Payment Systems Regulator (PSR) recently warned that if the adoption of the MIF Regulation is delayed, or the implementation of its domestic fee caps is deferred from the caps on cross-border interchange fees, it will consider taking action in advance of the Regulation; and that it may still consider whether it is appropriate to take any further action even if the MIF Regulation is adopted.

In other words, official trust in card schemes is low.

Payment Systems Regulator Publishes Regulatory Proposals

It's all go in the payments world at the moment. The EU is trying to hammer out a new payment services directive (PSD2), while the UK's new Payment Systems Regulator (PSR) is setting up shop ahead of its official launch in April 2015.

The PSR has just announced the results of a joint market study with Ofcom on the level of innovation in the payments sector, which casts doubt on certain aspects of PSD2.

In addition, the PSR has published its response to an earlier consultation on its proposed rules for regulating payment systems. The term "payment system" is defined very broadly as:

“a system which is operated by one or more persons in the course of business for the purpose of enabling persons to make transfers of funds, and includes a system which is designed to facilitate the transfer of funds using another payment system.”

The intention behind the rules are to:

• set a new approach to industry strategy development - a new 'Payments Strategy Forum';
• change the governance and control of payment systems to ensure greater transparency and representation of users in decision making, avoidance of conflicts of interest, publication of board minutes and compliance reports to the PSR;
• make it easier for participants of all sizes to access payment systems – directly or indirectly;
• action on interchange if EC regulation is delayed; and
• require system operators to discuss significant developments with the PSR in advance and on an on-going basis.

If the rules still aren't to your liking, you have until 12 January to kick up a fuss.

The Updated Updated Review Of #PSD2

The European Council produced a further update of the proposed new Payment Services Directive (PSD2) in late October, and I have now updated my review article for the SCL, as well as the posts assessing the impact on:

• loyalty schemes, including store card and gift card programmes;


• third party gateways and other technical service providers;


• the providers of the newly regulated payment initiation and account information services; and


• security, innovation and competition.