Full paper (Hebrew)

The Governor of the Bank of Israel today announced her intention to reduce the interchange fee for deferred debit cards by approximately 30 percent, from today’s 0.7 percent of the transaction value to 0.5 percent over three stages, in the coming years.


This reduction is expected to decrease the fees paid by businesses in Israel by approximately a half billion shekels per year.


The final decision regarding the size of the fee will be published after considering the public’s comments. The public is requested to send any comments by February 1, 2018, to ICF@boi.org.il.


The merchant fee is the fee paid by a merchant to the acquiring payment card company. This fee is made up of an interchange fee, paid by the merchant acquirer to the payment card issuer, and an additional component, reflecting the acquirer’s cost vis-à-vis the merchant (operating cost and risk compensation). The total merchant fee can be negotiated between the merchant and the acquirer, and is impacted by the level of competition in the market. However, the interchange fee component is not negotiable and thus is set through regulatory intervention.


The interchange fee reflects the payment in respect of the guarantee by the entity that provided the customer with a payment card (the issuer) to pay the merchant, even in a case where the payment cannot be collected from the cardholder, because, for example, the cardholder deviated from the credit facility extended or because the card was stolen or forged. This obligation is the basis for businesses’ willingness to honor payment card transactions.


The amount of the interchange fee under the new framework is calculated based on methodology approved in 2006 by the Antitrust Tribunal. This methodology served as a basis for setting the size of the interchange fee in the economy in recent years. In accordance with Bank of Israel calculations, the size of the fee derived from the methodology is approximately 0.6 percent of the total of transactions via deferred debit and approximately 0.3 percent of the total of transactions using (immediate) debit cards. Reducing the amount of the deferred debit card fee will be carried out in several stages over the coming years, even more than determined by the methodology noted above. This is based on a forward looking view of increased efficiency and increase in transaction volume, which will lead to a reduction of the costs for which the interchange fee is paid by businesses.


The outline of the reduction:

·         January 1, 2019—the end of the current arrangement, a reduction from 0.7 percent to 0.6 percent

·         January 1, 2021— a reduction from 0.6 percent to 0.55 percent

·         January 1, 2024— a reduction from 0.55 percent to 0.5 percent


To the extent that there are material changes in the structure of the acquiring market structure, costs, or acquiring mechanism, the need to revise the size of the fee will be examined.


An examination of the amount of the interchange fee in countries where there is regulatory intervention in the size of the fee, indicates that there is considerable variance among them. The size of the new fee set in Israel is markedly lower than in the US, Canada and New Zealand, is similar to that in Australia, and is higher than in the EU. However, it is important to emphasize that this comparison is limited as there are notable difference in market characteristics and products in different countries, in the methodology by which the fee is calculated, in the combination of the fee’s variable and fixed components, and in other dimensions. As the interchange fee is only part of an acquirer’s revenue, it is found worldwide that the lower it is—particularly when it doesn’t cover the acquirer’s costs in respect of ensuring payment—the higher the costs imposed on cardholders (such as interest and card fees). Thus, for example, the interest rate on credit cards is markedly higher in Europe than in Israel.


Interchange fee rate: Development in recent years and outline of future reductions


Governor of the Bank of Israel Dr. Karnit Flug said, “As merchants that honor payment cards are not able to negotiate the size of the interchange fee, regulatory intervention is needed in setting the fee. After professional examination and in accordance with the methodology recognized by the Antitrust Tribunal, we concluded that there is room to reduce the interchange fee, in the framework we announced today. Based on past experience, the interchange fee reduction is expected to lead to reduced fees that businesses pay by hundreds of millions of shekels per year.”


Supervisor of Banks Dr. Hedva Ber said, “Setting the interchange fee framework for the coming years will benefit businesses, and will also provide regulatory certainty that will make possible the sale of two credit card companies and their change into independent and competitive financial entities. These steps are intended to enhance competition in the acquiring and other financial sectors, in accordance with the Strum Committee conclusions and the Promotion of Competition Law.”