Multilateral or Bilateral Interchange Fees? – The Good? The Bad? The Ugly?

Multilateral or Bilateral Interchange Fees? – The Good? The Bad? The Ugly?

The regulatory position on interchange fees in Europe over the last 5/10 years has shifted significantly.  Whereas in the 1990’s and as late as 2002 the competition authorities gave the international card schemes clearance when they filed their interchange fee arrangements (albeit the latter one with conditions) now the regulators seem to be very much of the opinion that the Multilateral Interchange fees (MIF) rate setting arrangements of the card schemes are anti-competitive.

So are bilateral ICF rate agreements the answer?  I am told that the Swedish regulators ‘like’ the bilateral ICF rate process that is mandatory under Swedish local country MasterCard rules.  The now defunct Switch Card proprietary debit card scheme in the UK was characterised by all members having to agree bilateral rates between each other.  I understand that some of the Eastern European countries are more and more favouring the bilateral rate setting route.

So let’s dig a little into the pros and cons of MIFs and Bilaterals and then, for bilaterals, consider the principal negotiation strategies scheme member pairs employ.

If I take MIFs first the major plus point is that it creates a level playing field for all players operating in the card issuance and acceptance space and, believe me, that is an important consideration.  MIFs are supported by detailed cost studies either directly conducted for the product rates to be set or are relevant in proxy terms, with appropriate cost/risk adjustments, where different product rates are implemented.  Cost studies calculate the weighted average costs included, exclude outliers with unexplainably high costs and, therefore, provide a robust and fair basepoint (in my view) on which to construct MIFs.  The component parts of interchange fee rates is a subjective and emotive subject but again, in my view, the components elements are appropriate and reasonable.

The only downside I see on MIFs is the expense of, and time consumption of members participating in, the cost studies.

In terms of bilaterals, pros, cons and negotiation strategy;


  • Properly conducted, they satisfy regulatory requirements.
  • Properly or improperly conducted they provide a sense of regulatory comfort to the bilateral parties


  • They are resource intensive
  • Invariably they are highly iterative
  • They are impractical beyond a relatively small number of domestic players
  • They create an uneven playing field that, more often than not, is not based upon real costs
  • Agreement may not be reached, leading to arbitration and the further costs that involves
  • Unless a completely independent arbitrator is used the arbitration process could be flawed, with commercial considerations clouding the judgement of a non independent arbitrator.
  • Market changes require the process to be repeated on a regular basis

Negotiation Strategy

In my experience the single component of the negotiation strategy centres around the size and scale of the parties involved with the larger, higher volume, party expecting to receive a better rate for the proportionately ‘higher value’ they bring.  Is this meritorious or disingenuous?

Individuals will draw their own conclusions but it could be argued that a high volume player will benefit from economies of scale with a contrary position applying to the smaller player and perhaps, therefore, that negotiating on the basis of size and scale is flawed.

An alternative method of determining a fair set of rates might be to consider the relative cost positions of the two parties involved in the negotiation relative to local cost study outputs, where these are available.  If they are not available, and this is increasingly the case as the card schemes keep their member banks disconnected from the interchange fee rate setting process, it does make this strategic approach more difficult ……… but not impossible, and it could be a fairer method of cost apportionment.

So, on balance, I personally lean more towards MIFs as being the better, more efficient approach to interchange fee arrangements.  I think some of the arguments in favour of bilateral rate agreements are specious;  Bilaterals can conceivably operate as a protectionist tool for scheme members.

PayX Business Consulting Service offerings includes an independent, objective review of interchange fees and, secondly, expert support for bilateral interchange fee rate agreement in terms of both the strategic approach to constructing rate proposals, and inter member negotiation strategy.


  • By harin dias

    Ian, as ever, an erudite perspective. Yes, MIF\’s are definitely superior.

    The underlying issue here is that regulators and politicians are in a hurry, so are not necessarily bothered too much by how interchange comes down, except they all want it down across the planet….and fast.

    Let\’s take our industry hats off and ponder objectively why we are potentially facing the wild west again. My sense is that the banks and card schemes, had the opportunity many times over, but failed to sort it out. They used complex arguments and blinded regulators with science at a time when the public generally were positive in relation to banks.

    The situation is dramatically different now as banks are right at the bottom of the pile, not the top as when we started our banking careers. Giving banks a good kicking is considered excellent spectator sport today and the average citizen agrees that they deserve it. Given the origins of the current global economic crisis, can anyone blame them ? This means that even sensible objections and arguments are doomed to fall by the wayside.

    How and why did it all happen is yet another story, but many banks \”not doing the right thing\” and being \”self-centered\” for too long are just a couple of reasons:)

    Let\’s hope the pendulum swings to a point of equilibrium and customers eventually get a better outcome….

  • By James Cranfield

    Nice article, Ian.

    Multilaterals provide a level playing field which new entrants can factor into their business case. These days (most) scheme interchange rates are published on the web and you would not have this level of transparency with a series of bilaterals which are negotiated between the two parties.

    Having worked on the scheme, issuer and acquirer side, I have always thought that there was a case for having default (base) multilateral rates and allowing the market to adjust these rates according to value added.

    The cost based argument for interchange has been well made but it often gets diluted when incentive interchange is introduced to accelerate migration to new technology, or certain products (commercial, premium) command higher rates which are often difficult to justify.

    My own view is that default multilateral rates are not anti-competitive. If they were set at an industry level, possibly. But the market is still free to choose between the various acceptance brands including the new kids on the block. Multilateral rates should be transparent and genuinely cost based and issuers and acquirers should be allowed to deviate from them. That puts in place the structure for the industry without limiting competition.

  • By Collangettes Patrice

    Ian, very interesting analysis on a sensitive subject, which in my opinion jumps over one important consideration : merchant pricing. How do you call a general market agreement between service providers (Issuers/Acquirers) whereby they mutually agree on the cost of a service they are going to mutually re-invoice to other market players (merchants) which cannot discuss even a very small portion of it?

    My personal view is that ‘’Interchange plus’’ looks like a cartel. Therefore bilateral agreements could be a (complex) solution.

    BTW Have you read ‘’Preserving interchange : from explicit to implicit MIF’’ in ECR jan/Fev 2008 by Dr Malte Krueger et Christoph Strauch?

    Harin: I do not see any ‘’fashionable’’ kicking on banks in a case that last for several decades in certain markets and which is totally ignored by the public at large 🙂

  • By Chris Fisher

    I may be missing the point here but surely bilaterals are the only truly defendable market driven approach here. If an acquirer can provide a cost effective system that is based on high volumes why should they not demand a better, lower interchange rate from the issuers? If an issuer can gain more card holders and have the economies of scale that comes with that volume why should they not negotiate a better lower rate from an acquirer? Experience surely shows free market forces should operate to ensure competition is allowed to operate? Acquirers who can get good rates established can the offer lower rates to their merchants and the competition for merchants would drive down the rates the merchants pay, which then can allow the merchants to offer competitive prices for their goods an services. Anything else would seem to be a cartel of price fixing, protecting inefficiency, just like the EU common agricultural policy. If inefficient acquirers or issuers can\’t stand the heat they should get out if the kitchen by getting an efficient out source to run their issuing or acquiring who can get the economies scale.

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