The National Bank of Georgia (NBG) has announced plans to cap the merchant service fee at 0.5%. It is still a draft law and at first glance, this looks like good news for businesses, especially small retailers who often feel the weight of card acceptance costs, but the effects of this move will go far beyond merchants. It will reshape incentives for banks, FinTechs, and even consumers.
Understanding the Core Concepts
To see why, let’s unpack the key building blocks of card payment economics:
- Interchange Fee – Paid by the acquirer bank to the issuer bank, set by the card network for supporting card program.
- Merchant Discount Rate (MDR) – The fee a merchant pays the acquirer for card acceptance (also known as the Merchant Service Fee).
- Network Assessment Fee – Charged by global networks (Visa, Mastercard) to both issuers and acquirers for processing transactions.
In short:
MDR = Interchange Fee + Acquirer Markup
Acquirer markup typically covers network fees and processing costs (local processors, third parties). Interchange, meanwhile, funds much of the issuing side: loyalty campaigns, cashback programs, card innovation, and infrastructure.
What is international experience?
By EU law (Interchange Fees Regulation, IFR):
• Interchange fees for consumer debit cards are capped at 0.2% of the transaction value.
• Interchange fees for consumer credit cards are capped at 0.3% of the transaction value.
• Member States may set lower caps for domestic transactions or lower rates, but these are about the interchange portion.
While MDR isn’t directly capped by EU regulation, there are some indirect constraints or local practices:
- National Laws or Rules
Some EU countries have or may enact regulations or competitive practices that limit how high MDRs can practically go (through competition or consumer protection laws). For instance, some countries ban surcharging customers for card payments, which limits the ability of merchants to pass on high MDR or “cover” through price differentials. - Transparency / Contract Requirements
Under the IFR, merchants must be informed of the breakdown of fees (interchange vs other fees) so they can see how much they’re paying and negotiate or compare. This transparency can indirectly pressure acquirers / processors to keep MDRs reasonable. - Competitive Pressure
Because merchants can often negotiate, especially large merchants or those with high volumes, acquirers and payment processors often compete by offering lower markup on top of the regulated interchange. So, in many cases MDR ends up being close to the regulated floor + modest additional fees.
Global Examples of MDR Regulation
– India has explicit caps on MDR (for debit cards), depending on merchant size and transaction amount. E.g. small merchants or digital POS may have MDR capped around ~0.25–0.40% for some transactions.
– In some US states / via Visa & Mastercard surcharging rules, there are caps on what merchants may surcharge customers (which relates to MDR). For example, Visa’s cap on merchant surcharge is set at certain levels (e.g. 3%) so even if MDR is higher, the surcharge that can be passed on has a limit.
There is no universal global standard. MDR levels depend on local regulation, market structure, and competitive dynamics.
What is Low Interchange Fee Program (LIFP) and how can this help?
The Low Interchange Fee Program (LIFP), also sometimes referred to in payments industry circles is a pricing structure or special rate program offered by some card networks (like Visa or Mastercard) that allows merchants to qualify for lower interchange fees under specific conditions.
This is not a formal EU-wide regulation, but rather a scheme-defined program typically found in regions like the U.S., Canada, and some other markets, including sometimes in developing markets or for certain types of merchants.
These programs:
- Apply to particular sectors like charities, utilities, public transport, or education.
- Encourage electronic payments adoption.
- Lower interchange, but not necessarily MDR, since MDR still includes acquirer margins, scheme fees, and processing costs.
LIFP is not the same as an MDR cap, though competition often pushes MDR down further for eligible merchants.
Georgia’s Current Landscape
In Georgia, interchange fees average 1.6–1.7% on domestic transactions. This revenue has fueled:
- Growth in card portfolios
- Loyalty and cashback programs
- Investment in digital payment solutions
If interchange is slashed to European levels, issuers will lose a major income stream. Possible consequences include:
- Reduced loyalty programs – fewer points, miles, and cashback.
- Less innovation – weaker incentive to invest in digital products.
- Market imbalance – large banks with strong acquiring arms may adapt, but smaller banks and fintechs could see issuing become unprofitable.
For merchants, especially SMEs, a 0.5% MDR looks like a win – making acceptance cheaper and potentially boosting adoption. But critical questions remain:
- Should LIFP-style incentives target specific sectors rather than apply blanket caps?
- Will acquirers introduce or increase fixed monthly fees for POS terminals to offset lost revenue?
- Could surcharges emerge, passing costs back to consumers?
- Will savings actually reach micro and small businesses?
The NBG’s proposal is well-intentioned: lower costs for merchants and faster cashless adoption. But in practice, it shifts value within the payment’s ecosystem. Merchants may benefit, but issuers, acquirers, and ultimately consumers will bear the cost in reduced rewards, higher fixed fees, or slower innovation.
The policy’s real test will be whether it broadens acceptance among Georgia’s smallest businesses or simply reshuffles who pays in the end.
Capping MDR at 0.5% may seem technical, but it has wide-reaching consequences from banks and FinTechs to merchants, and even consumers chasing rewards.
Author: Mariam Gogia