Hearing note on Additional benefits when taking out credit – Visa Europe opinion
Thank you for the opportunity to comment on these proposals. Visa shares the FSA and Ministry’s interest in promoting a sound and efficient payments ecosystem that benefits all participants. At Visa, we believe in an open, transparent and competitive environment that promotes choice, inclusivity and diversity in payment options. However, we have significant concerns that the proposals will not achieve the stated aims and will negatively disrupt a well-functioning market to the detriment of consumers.
No evidence or justification has been provided that the proposals are needed
The hearing note acknowledges that both credit card balances and defaults are actually markedly falling, which is supported by figures from the Debt Register. The number of debt collection cases is also falling. Conversely compared to the reduction in unsecured debt, debt associated with other types of lending such as mortgages is increasing. Therefore, we would fundamentally question the need for further action in this space.
There is also no evidence provided which demonstrates a causal link between the use of additional benefits with increased debt or defaults. The hearing note purely makes an assumption that additional benefits ‘contributed to the growth of credit cards’ and ‘could lead to the taking out of more, larger and more expensive loans than necessary’. We would suggest that comprehensive testing and analysis of such a hypothesis would need to be completed before proposing legislative changes.
The hearing note also makes an assumption that consumers cannot or do not shop around or compare the value of utilising an additional benefit with purchasing goods and services another way. No consumer surveys or behavioural analysis have been provided to indicate that this is actually happening, or that consumers are losing out in any way by using additional benefits.
If consumers are unable to make the best decision for themselves, this would represent a market failure. The hearing note acknowledges that the pandemic has likely been part of the driver for the recent reduction in the use of credit, as it “ deterred consumers from spending on nonessentials and prompted them to prefer debt-free instruments”. This indicates that the market is working as it should, and that consumers are altering their use of credit reasonably in response to their personal financial situation and the broader environment. Therefore, there is no reason to presume consumers are not capable of making reasonable decisions about when to use a credit product, including those with additional benefits.
In addition, we understand from our clients in Norway that consumer that utilise additional benefits such as cashback are generally better at paying off their credit card balances and default less. This clearly indicates that additional benefits actually help to reduce consumer debt and are not a driver for increased lending or debt.
As highlighted by the hearing note, progress so far shows that recent changes to the Debt Register are working to reduce indebtedness. Enhanced transparency and affordability assessments are helping to ensure consumers are not offered credit that they cannot afford, and we fully support this. However, the full impact of the changes is yet to be seen, and therefore it would be premature to bring further legislation when existing changes are already proving to be successful.
The proposals will negatively disrupt the functioning of the market and competition
We believe there that placing these restrictions on business models is contradictory to rules of free movement in the Treaty on the Functioning of the European Union (TFEU), and also poses risks by departing from the EU Consumer Credit Directive (CCD) which is currently being revised. We strongly recommend that national regulators align with pan-European regulatory approaches as far as possible. Duplicative or disparate regulatory regimes can lead to increased risk and inefficiency for regulators, economic distortions, and an uneven playing field across the payments ecosystem. We would therefore encourage the Ministry to consider delivering any updates to consumer credit legislation through and in alignment with the European process.
Further, the proposals appear to be inconsistent with the direction of travel of the revised EU CCD. The latest European proposal include provisions around advertising and marketing of credit agreements as well as information that needs to be shared with consumers, but there are no references to any similar mandate that “additional benefits” offered with credit products must also be offered for debit products. Our understanding is that the European Commission’s view is that regulation, including the CCD, should continue to acknowledge that different products have different purposes, and are therefore accompanied by different features, protections and requirements. Moreover, one of the key objectives of the European Commission’s Retail Payment Strategy is to ensure that citizens and businesses in Europe benefit from a broad and diverse range of high-quality payment solutions, supported by a competitive and innovative payments market.
The proposal mandates that additional benefits can only be offered on credit products if they are also offered equally on one of more debit alternatives. This essentially removes the ability to differentiate between debit and credit products, however it is critical to recognise that these are fundamentally different products with legitimately different offerings. This is acknowledged and supported by existing EU regulation, specifically the Interchange Fee Regulation which specifies a higher interchange cap for credit vs debit cards. Interchange is paid from the acquirer to the issuer to provide the right economic incentives to support the two-sided payments model. Specifically, it provides reimbursement for investments made by issuers in additional security, innovations and services which also generate benefits for merchants through delivering secure, seamless payments and ultimately increased revenue. The higher interchange fee for credit acknowledges that credit products are often more tailored to specific needs and include additional benefits, and generally pose a higher cost and risk to the issuer.
Similarly, the annual fees associated with credit (and debit) products are proportionate to the extent of additional benefits offered. This contributes to the consumer’s decision making when considering a credit product, and the fees consumers may choose to incur to access the ‘best’ benefits already provide a ‘balancing’ effect to the attraction of additional benefits.
Therefore, it is not straightforward – as the hearing note assumes – for issuers to simply offer additional benefits on debit as well as credit products, as there would not be sufficient revenue to support this for debit products. This will be detrimental to competition as smaller or emerging players will be placed at a significant disadvantage compared to larger, more established banks that are more able to absorb the additional cost of offering additional benefits on debit as well as credit products.
Moreover, there are many lenders in Norway that do not actually offer debit solutions at all and therefore would also be placed at a significantly disadvantage compared to institutions that already offer debit products. Pure-credit lenders would be faced with the following options, both of which would result in a significant reduction in competition:
A healthy and dynamic competitive environment is characterised by a broad range of solutions, tailored to varying and evolving user needs. Both the scenarios above will result in a significant contraction and consolidation of the market, towards an environment comprised only of large banks with significantly less variety of business models and choice for consumers. A further, and perhaps the most likely scenario, is that additional benefits will no longer be offered across either credit or debit products, as the proposal removes the incentives and necessary business conditions for providers to offer additional benefits.
The proposal is also unclear in relation to its scope and application. The proposed legislative text states that credit must not be offered on better terms (i.e. with additional benefits) ‘than the consumer would otherwise receive’. This could be interpreted to include, for example, payments with cash, where benefits would need to be provided by merchants. Practically, this is impossible to implement – issuers and lenders have control over additional benefits offered as part of card products, but have no control or connection to benefits that may be offered by merchants. The only possible outcome is therefore that additional benefits cease to be offered across all payment types.
The proposals will result in consumers being disadvantaged
Consumers benefit from a dynamic environment with a diverse mix of digital payment solutions that each bring unique features and value propositions. Consumers need different things from their payments in different scenarios – such as the level of security, protections, speed and value added services. This is particularly relevant when considering additional benefits – for example, consumers need travel insurance when booking holidays but not for everyday spending. The market should be free to tailor solutions for consumer needs; forcing an artificially homogenous offering is likely to result in a lower quality of products overall, and consumers’ needs not being met.
Consumers will also continue to have legitimate need of credit products, however the proposal is likely to result in fewer credit products available, with less or no additional benefits. Different consumer credit products involve varying degrees of risk, consumer protection and costs to the consumer. Credit cards, for example, offer advanced security and consumer protection, and when making a purchase the consumer is acting in line with previously assessed affordability checks with no incremental risk being created. The proposals may encourage consumers towards forms of credit and non-credit payments that carry fewer protections and security, as well as fewer benefits, such as buy-now-pay-later and high interest, short term loans.
A shift of spending from credit to debit cards also leads to fewer protections for consumers. According to Norges Bank’s 2021 payment statistics, 63% of debit card transactions are made using BankAxept, which offers significantly lower consumer protections than international (debit or credit) cards. When using an international card, consumers are protected if they do not receive the goods or services they paid for, including in scenarios where the merchant goes out of business. Consumers are also always protected against any unauthorised use of their Visa card. These protections are particularly important for the kind of purchases that are more likely to be made with a credit card, such as travel or event bookings and other large and/or online purchases.
The majority of debit cards in Norway are ‘co-badged’, where two payment brands – specifically BankAxept and an international scheme (Visa or Mastercard) - are combined onto the same card. European Interchange Fee Regulation requires that consumers must be able to choose which scheme to pay with when using a co-badged card. Merchants can make a default scheme pre-selection, but cardholders must be able to override this and have the ultimate choice. However, research commissioned Visa shows that choice continues to be seriously limited, due to terminals not being updated to comply with the regulation. In Norway specifically, we found that consumers are only able to make a choice 34% of the time for chip & pin transactions, and 17% of the time for contactless transactions. Therefore, a shift from credit to debit cards will result in consumers generally being prevented from accessing the features and protections offered by international schemes, leading to clear consumer detriment. Independently of the proposal relating to additional benefits, we call on European and National authorities to monitor implementation practices and enforce consumer choice.
As detailed above, we are concerned that the proposal will lead to a number of unintended consequences, all of which will be detrimental to consumers and competition. We would therefore strongly recommend that the proposal is not progressed, and that no action in this space is taken without analysis and evidence into consumer behavior and the potential impact of the proposals. We would recommend dialogue with industry to identify what risks or issues, if any, are present in relation to credit in Norway and discuss how best to address these. We would be very happy to participate in this.
We would be happy to discuss any questions or comments you have on any aspect of this response.
Thank you for the opportunity to comment on these proposals. Visa shares the FSA and Ministry’s interest in promoting a sound and efficient payments ecosystem that benefits all participants. At Visa, we believe in an open, transparent and competitive environment that promotes choice, inclusivity and diversity in payment options. However, we have significant concerns that the proposals will not achieve the stated aims and will negatively disrupt a well-functioning market to the detriment of consumers.
No evidence or justification has been provided that the proposals are needed
The hearing note acknowledges that both credit card balances and defaults are actually markedly falling, which is supported by figures from the Debt Register. The number of debt collection cases is also falling. Conversely compared to the reduction in unsecured debt, debt associated with other types of lending such as mortgages is increasing. Therefore, we would fundamentally question the need for further action in this space.
There is also no evidence provided which demonstrates a causal link between the use of additional benefits with increased debt or defaults. The hearing note purely makes an assumption that additional benefits ‘contributed to the growth of credit cards’ and ‘could lead to the taking out of more, larger and more expensive loans than necessary’. We would suggest that comprehensive testing and analysis of such a hypothesis would need to be completed before proposing legislative changes.
The hearing note also makes an assumption that consumers cannot or do not shop around or compare the value of utilising an additional benefit with purchasing goods and services another way. No consumer surveys or behavioural analysis have been provided to indicate that this is actually happening, or that consumers are losing out in any way by using additional benefits.
If consumers are unable to make the best decision for themselves, this would represent a market failure. The hearing note acknowledges that the pandemic has likely been part of the driver for the recent reduction in the use of credit, as it “ deterred consumers from spending on nonessentials and prompted them to prefer debt-free instruments”. This indicates that the market is working as it should, and that consumers are altering their use of credit reasonably in response to their personal financial situation and the broader environment. Therefore, there is no reason to presume consumers are not capable of making reasonable decisions about when to use a credit product, including those with additional benefits.
In addition, we understand from our clients in Norway that consumer that utilise additional benefits such as cashback are generally better at paying off their credit card balances and default less. This clearly indicates that additional benefits actually help to reduce consumer debt and are not a driver for increased lending or debt.
As highlighted by the hearing note, progress so far shows that recent changes to the Debt Register are working to reduce indebtedness. Enhanced transparency and affordability assessments are helping to ensure consumers are not offered credit that they cannot afford, and we fully support this. However, the full impact of the changes is yet to be seen, and therefore it would be premature to bring further legislation when existing changes are already proving to be successful.
The proposals will negatively disrupt the functioning of the market and competition
We believe there that placing these restrictions on business models is contradictory to rules of free movement in the Treaty on the Functioning of the European Union (TFEU), and also poses risks by departing from the EU Consumer Credit Directive (CCD) which is currently being revised. We strongly recommend that national regulators align with pan-European regulatory approaches as far as possible. Duplicative or disparate regulatory regimes can lead to increased risk and inefficiency for regulators, economic distortions, and an uneven playing field across the payments ecosystem. We would therefore encourage the Ministry to consider delivering any updates to consumer credit legislation through and in alignment with the European process.
Further, the proposals appear to be inconsistent with the direction of travel of the revised EU CCD. The latest European proposal include provisions around advertising and marketing of credit agreements as well as information that needs to be shared with consumers, but there are no references to any similar mandate that “additional benefits” offered with credit products must also be offered for debit products. Our understanding is that the European Commission’s view is that regulation, including the CCD, should continue to acknowledge that different products have different purposes, and are therefore accompanied by different features, protections and requirements. Moreover, one of the key objectives of the European Commission’s Retail Payment Strategy is to ensure that citizens and businesses in Europe benefit from a broad and diverse range of high-quality payment solutions, supported by a competitive and innovative payments market.
The proposal mandates that additional benefits can only be offered on credit products if they are also offered equally on one of more debit alternatives. This essentially removes the ability to differentiate between debit and credit products, however it is critical to recognise that these are fundamentally different products with legitimately different offerings. This is acknowledged and supported by existing EU regulation, specifically the Interchange Fee Regulation which specifies a higher interchange cap for credit vs debit cards. Interchange is paid from the acquirer to the issuer to provide the right economic incentives to support the two-sided payments model. Specifically, it provides reimbursement for investments made by issuers in additional security, innovations and services which also generate benefits for merchants through delivering secure, seamless payments and ultimately increased revenue. The higher interchange fee for credit acknowledges that credit products are often more tailored to specific needs and include additional benefits, and generally pose a higher cost and risk to the issuer.
Similarly, the annual fees associated with credit (and debit) products are proportionate to the extent of additional benefits offered. This contributes to the consumer’s decision making when considering a credit product, and the fees consumers may choose to incur to access the ‘best’ benefits already provide a ‘balancing’ effect to the attraction of additional benefits.
Therefore, it is not straightforward – as the hearing note assumes – for issuers to simply offer additional benefits on debit as well as credit products, as there would not be sufficient revenue to support this for debit products. This will be detrimental to competition as smaller or emerging players will be placed at a significant disadvantage compared to larger, more established banks that are more able to absorb the additional cost of offering additional benefits on debit as well as credit products.
Moreover, there are many lenders in Norway that do not actually offer debit solutions at all and therefore would also be placed at a significantly disadvantage compared to institutions that already offer debit products. Pure-credit lenders would be faced with the following options, both of which would result in a significant reduction in competition:
A healthy and dynamic competitive environment is characterised by a broad range of solutions, tailored to varying and evolving user needs. Both the scenarios above will result in a significant contraction and consolidation of the market, towards an environment comprised only of large banks with significantly less variety of business models and choice for consumers. A further, and perhaps the most likely scenario, is that additional benefits will no longer be offered across either credit or debit products, as the proposal removes the incentives and necessary business conditions for providers to offer additional benefits.
The proposal is also unclear in relation to its scope and application. The proposed legislative text states that credit must not be offered on better terms (i.e. with additional benefits) ‘than the consumer would otherwise receive’. This could be interpreted to include, for example, payments with cash, where benefits would need to be provided by merchants. Practically, this is impossible to implement – issuers and lenders have control over additional benefits offered as part of card products, but have no control or connection to benefits that may be offered by merchants. The only possible outcome is therefore that additional benefits cease to be offered across all payment types.
The proposals will result in consumers being disadvantaged
Consumers benefit from a dynamic environment with a diverse mix of digital payment solutions that each bring unique features and value propositions. Consumers need different things from their payments in different scenarios – such as the level of security, protections, speed and value added services. This is particularly relevant when considering additional benefits – for example, consumers need travel insurance when booking holidays but not for everyday spending. The market should be free to tailor solutions for consumer needs; forcing an artificially homogenous offering is likely to result in a lower quality of products overall, and consumers’ needs not being met.
Consumers will also continue to have legitimate need of credit products, however the proposal is likely to result in fewer credit products available, with less or no additional benefits. Different consumer credit products involve varying degrees of risk, consumer protection and costs to the consumer. Credit cards, for example, offer advanced security and consumer protection, and when making a purchase the consumer is acting in line with previously assessed affordability checks with no incremental risk being created. The proposals may encourage consumers towards forms of credit and non-credit payments that carry fewer protections and security, as well as fewer benefits, such as buy-now-pay-later and high interest, short term loans.
A shift of spending from credit to debit cards also leads to fewer protections for consumers. According to Norges Bank’s 2021 payment statistics, 63% of debit card transactions are made using BankAxept, which offers significantly lower consumer protections than international (debit or credit) cards. When using an international card, consumers are protected if they do not receive the goods or services they paid for, including in scenarios where the merchant goes out of business. Consumers are also always protected against any unauthorised use of their Visa card. These protections are particularly important for the kind of purchases that are more likely to be made with a credit card, such as travel or event bookings and other large and/or online purchases.
The majority of debit cards in Norway are ‘co-badged’, where two payment brands – specifically BankAxept and an international scheme (Visa or Mastercard) - are combined onto the same card. European Interchange Fee Regulation requires that consumers must be able to choose which scheme to pay with when using a co-badged card. Merchants can make a default scheme pre-selection, but cardholders must be able to override this and have the ultimate choice. However, research commissioned Visa shows that choice continues to be seriously limited, due to terminals not being updated to comply with the regulation. In Norway specifically, we found that consumers are only able to make a choice 34% of the time for chip & pin transactions, and 17% of the time for contactless transactions. Therefore, a shift from credit to debit cards will result in consumers generally being prevented from accessing the features and protections offered by international schemes, leading to clear consumer detriment. Independently of the proposal relating to additional benefits, we call on European and National authorities to monitor implementation practices and enforce consumer choice.
As detailed above, we are concerned that the proposal will lead to a number of unintended consequences, all of which will be detrimental to consumers and competition. We would therefore strongly recommend that the proposal is not progressed, and that no action in this space is taken without analysis and evidence into consumer behavior and the potential impact of the proposals. We would recommend dialogue with industry to identify what risks or issues, if any, are present in relation to credit in Norway and discuss how best to address these. We would be very happy to participate in this.
We would be happy to discuss any questions or comments you have on any aspect of this response.