In July 2013, the European Commission (EC) issued a proposal to regulate interchange (IC) fees on cards. The regulation is also known as Interchange Fee Regulation (IFR). The proposal was part of the ‘payments package’ also comprising the updated
Payment Services Directive (PSD2)
– although the two have since been negotiated separately, with PSD2 still continuing its journey.
Interchange fee is a term used in the payment card industry to describe a fee paid between banks and the card schemes in connection with card-based transactions. The IFR’s ultimate objective is to push for greater acceptance of cards by both merchants and consumers. The Commission also hopes that lower IC will reduce final costs to consumers.
Key Elements of the Cards Rules: Interchange and more…
All rules within the final regulation apply to transactions where both the issuing and acquiring banks/payment service providers (PSPs) are located in the European Union (EU).
A central theme of the rules, the IFR cap, has been finalised as follows:
For all consumer debit card transactions, both domestic and cross-border, the IC fee is limited to 0.2% of the value of the transaction. EU member states are also permitted to define a lower cap than that or impose a fixed fee amount in line with this maximum percentage. For example, one of the compromise results was that PSPs are permitted at national level to apply a maximum per transaction IC fee of five eurocents. At the same time they may not exceed the 0.2% maximum IC fee of the annual transaction value of the domestic debit card transactions within each payment card scheme.
To make things even more complex, EU member states have also been given the option for five years from the date of application of this regulation, to allow PSPs to apply a weighted average IC fee to transaction in their domestic debit card scheme. Here again, this cannot exceed the equivalent of a 0.2% IC fee based on the annual average transaction value of all domestic debit card transactions within each payment card scheme.
Specific rules as to how these IC fee levels – in terms of a member state’s choice – should be calculated are also outlined in more detail.
If all this sounds complicated, that’s because it is a classic result of political compromise.
However, moving on the IFR also defines maximum IC fees for any consumer credit card transaction, which are set at 0.3%. Here too, member states have the ability to define lower caps in the case of pure domestic consumer credit card transactions.
All IC fee caps will need to be in place within six months of this regulation taking effect, while the weighted average IC fee member state option for consumer debit cards can apply for a further five years following the date of entry into force of this law.
The outlined IC fee caps are envisaged to only apply to four-party-schemes such as the global Visa and MasterCard schemes, as well as the additional eight European domestic schemes (for example, Card Bancaire in France). Third party card schemes have been excluded from the IC fee cap, while third party schemes that use other banks to act as acquirers or issuers (and thus effectively behave like a four-party-scheme) have been proposed for inclusion.
This approach is expected to establish a level playing field within this sector. The segment of commercial cards used by corporates, small and medium enterprises (SMEs) and governments is not included under the IC fee cap provisions. This would otherwise have created potential level playing field concerns, given that pure third party scheme offerings in this space would not have been captured by the IC fee cap.
Other aspects also worth mentioning include the ‘honour all cards’ rule (HACR), which normally means that if a merchant displays a Visa or MasterCard sign, that he accepts all cards from that brand. HACR is now more limited. It still applies to consumer debit and credit card transactions that are subject to the IC fee caps of this regulation. However for all other cards merchants are no longer obliged to accept these, but need to clearly and visibly indicate this to their customers.
Payment card schemes will also need to more clearly separate themselves from processing entities and scheme rules, while licensing agreements cannot limit issuers from co-badging different payment brands on one card. Acquirers will have to offer transparent and unbundled charging to their merchant customers, unless they have a written request from their merchant customers to be charged a blended fee.
Card schemes or licensing agreements are also not permitted to apply any rules that prevent payees (merchants) from steering consumers to the use of a preferred payment instrument, i.e. for example to provide a rebate or surcharge. More specifically, rebates and surcharges will be regulated under the second Payment Services Directive, which is still being negotiated. The current proposal is to prohibit merchant surcharging in case of cards that are regulated under IC Fee cap as well as SEPA transactions.
What can we Expect from these Measures?
Clearly these measures will be good news for merchants; particularly in those countries where IC fees have traditionally been higher than the caps set by this regulation. The ability of national approaches to lower IC fee caps serves as an additional opportunity for further welcoming results for merchants. On the flip side, banks/PSPs and card schemes will be challenged by the regulation.
The question as to whether consumers will benefit is as yet unanswered. Experience in countries where IC fees have been capped by legislation show that reduced fees hasn’t necessarily resulted in merchants passing on these savings to consumers. Instead, larger merchants were able to use legislative measures in this field to their benefit while smaller merchants saw their banking charges increase. At the same time consumers experienced higher banking charges across the board as a consequence of these measures.
For the European card IC fee regulation to be successful it will be important that merchants pass on the savings to consumers and it becomes the consumer benefit envisaged by the EC.
Following the endorsement of the regulation text by the responsible parliamentary committee on economic and monetary affairs (ECON) committee in January, the final stage in this process is for the plenary of the European Parliament (EP) to approve the text (which is expected during Q1 of 2015).
Hopefully we will have a legal-linguist review of the whole piece before it gets issued in the
Official Journal of the European Union
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