Opportunities following the new changes in European Interchange Fees
The new European Regulation on interchange fees
On 19 May 2015, the regulation on interchange fees for card-based payment transactions (the Regulation) was published in the Official Journal of the EU. The Regulation will have a significant impact on industry participants, not just in respect of interchange fees, but also with respect to PCS rules and existing agreements, particularly those that include any of the restrictions that are now prohibited by the Regulation. In order to minimise the impact of the Regulation industry participants may wish to make full use of the exemptions and transitional provisions available.
The information below sets out the key requirements and exemptions the Regulation:
Prior to these Regulations specific rules applied by the payment card schemes required the application of the interchange fee of the ‘point of sale’ (based on the country of the merchant) for each payment transaction, on the basis of their territorial licensing policies. The new Regulation covers card based transactions where the payer's payment service provider and the payee's payment service provider are located in the EU and therefore remove the application of fees based on the merchant POS.
The new Regulation has already had a number of major impact on the European payments landscape:
- Some issuers have withdrawn loyalty/bonus card schemes whilst many others are restructuring their services and fees to take account of the changes.
- A previous draft of the Regulation required the merchant (payee) and its PSP to be within the EU however the final Regulation removes this requirement. This means that there is an even more compelling competitive reason for international PSP’s to have a European presence since they can have non-EU merchants (e.g North America, Asia) who will now benefit be able to benefit from the interchange caps on their EU sales.
- Whilst corporate expense programs are exempt from the interchange caps, in practice the new low interchange fee caps for consumers cards have also lowered the interchange applicable to such corporate programs in order to help ensure such cards continue to be accepted by acquirers and merchants.
- We are likely to see even stronger competitive pressures on interchange for those card schemes that are not currently in scope (e.g. Amex) and who traditionally apply even higher merchant transaction acquiring fees.
- The changes also represent a welcome lowering of entry costs for those issuers who wish to become members of MasterCard and Visa for European-wide card programs, previously issuers needed to apply for SEPA licences from the card schemes at a higher initial cost.
If you would like more information or support please contact our e-payments team: Peter Howitt, John Pauley and David Borge: firstname.lastname@example.org
The EU Commission concluded that interchange fees promote high inter-bank fees, impact costs for retailers and ultimately prices for consumers, and impede competition. It consequently developed the Regulation in order to address these concerns. The Regulation has now been adopted.
While the Regulation comes into force on 8 June 2015, some of its key provisions will not come into effect until 9 December 2015 and some from 9 June 2016.
The Regulation imposes new requirements in relation to payment cards that will have a significant impact on industry participants, namely it:
- introduces caps of 0.2% and 0.3% for interchange fees on debit (this includes prepaid) and credit cards respectively;
- introduces new licensing rules to prevent industry participants imposing territorial restrictions;
- requires the separation and independence of Payment Card Schemes (PCSs) and processing entities;
- prohibits rules preventing or hindering co-branding of payment instruments;
- prohibits blending of service charges by acquirers unless merchants request it;
- prevents PCSs and Payment Service Providers (PSPs) obliging payees to accept payments from particular issuers;
- prohibits PCSs and acquirers preventing payees from steering customers to its preferred means of payment and providing them with information about interchange fees and merchant service charges;
- imposes additional transparency and information requirements on PSPs.
There are various exemptions to this Regulation, namely:
- the Regulation does not apply to:
- payment instruments allowing holder to acquire goods or services only in the premises of the issuer or within a limited network;
- payment instruments which can be used only to acquire a very limited range of goods and services; and
- payment instruments valid only in a single MS that are regulated by a national or regional public authority for specific social or tax purposes.
- Chapter II (on interchange fees) does not apply to
- transactions with commercial expense cards;
- cash withdrawals at ATMs or at the counter of a PSP; and
- transactions with payment cards issued by three party PCSs.
- Article 7 (on separation of PCSs and processing entities) does not generally apply to three party PCSs (see section Overview of exemptions below for further details).
The Regulation includes transitional provisions as well as exemptions, which industry participants may wish to avail themselves of whilst they are available.
Overview of requirements effective from 9 December 2015 and earlier
The Regulation introduces caps on interchange fees for debit, prepaid and credit cards of 0.2% and 0.3% per transaction respectively.
For domestic credit card transactions, i.e. credit card transactions within a particular Member State (MS), MSs can impose a lower cap.
For domestic debit card transactions, i.e. debit card transactions within a particular MS, MSs can either:
- impose a lower percentage and a fixed maximum fee on the amount resulting from the applicable cap, i.e. either 2% or the lower rate imposed by the MS; or
- allow PSPs to apply a per transaction interchange fee of €0.05, or equivalent in relevant currency on 8 June 2015 (this amount shall be revised every five years or whenever there is a significant variation in exchange rates). This can be combined with a maximum fee percentage of no more than 0.2% provided that the total interchange fee charged does not exceed 0.2% of the total domestic debit card transactions within each PCS.
Until 9 December 2020, MS’s may allow PSPs to apply a weighted average interchange fee of now more than 0.2% of the annual average transaction value of all domestic debit card transactions within each PCS. MSs are permitted to impose a lower weighted average cap if they so wish.
Regulators in Member States are given the power to request information from PCS and PSPs in order to be able to validate that this Regulation has been implemented correctly.
Prohibition of circumvention (Article 5)
The Regulation also makes it clear that any agreed remuneration, including net compensation with an equivalent object or effect of the interchange fee, received by an issuer shall be treated as part of the interchange fee. This is in order to prevent industry participants effectively continuing existing practice but through a different mechanism.
Licensing (Article 6)
In respect of PCS rules for issuing payment cards or acquiring card-based payment transactions, the Regulation prohibits territorial restrictions within the EU, or any rules with equivalent effect in licensing agreements, and specifically prohibits imposing requirements to obtain country specific licences or authorisation to operate on a cross-border basis.
Overview of requirements effective from 9 June 2016
Separation of PCS and processing entities (Article 7)
The Regulation will also require PCSs and processing entities to:
- be independent;
- not bundle pricing (for PCS and processing activities);
- not cross subsidise PCS and processing activities;
- not discriminate in any way between their subsidiaries or shareholders on one hand and users of payment card schemes and other contractual parties on the other hand; and
- not make the provision of any service conditional on the acceptance by their contractual partner of any other service they offer.
Territorial discrimination in payment card scheme processing rules is prohibited.
Processing entities are obliged to ensure that their systems can be used with other systems of processing entities within the EU and shall not restrict such interoperability.
Co-badging and choice of payment brand or payment application (Article 8)
The Regulation introduces new rules in relation co-badging and choice of payment brands or applications. PCS rules that prevent or hinder issuers from co-badging two or more different payment brands or payment applications on cards are prohibited.
The Regulation also introduces rules to prevent payment service users (PSUs) effectively being forced to use particular payment brands or applications which the card defaults to and also increases transparency for PSUs by ensuring they are informed of the costs associated with any or all of the payment brands or applications available to them.
Unblending (Article 9)
The Regulation requires acquirers to offer and charge its payee merchants service charges that are individually specified for different categories and brands of payment cards with different interchange fee levels, and include details of the same in the agreement with the payees, unless payees request, in writing, to charge blended merchant service charges.
‘Honour All Cards’ rule (Article 10)
The Regulation provides that PCSs and PSPs cannot apply any rules that oblige payees accepting a card-based payment instrument issued by one issuer to also accept other card-based payment instruments issued within the framework of the same PCS. However, this does not apply to consumer card-based payment instruments of the same brand and of the same category of prepaid card, debit card, or credit card subject to interchange fees as detailed in section Overview of requirements effective from 9 December 2015.
It also obliges payees to inform consumers of what payment methods they do and do not accept, while obliging issuers to ensure that payment instruments they issue make it clear to payees and payers alike which brands and categories of prepaid card, debit cards, credit cards and commercial cards are chosen by the payer.
Steering (Article 11)
Effective from 8 June 2015, Article 11 of the Regulation prohibits licensing agreements, scheme rules and agreements between acquirers and payees from preventing payees from:
- steering customers to the use of payment instrument(s) preferred by the payee; and
- informing payers about interchange fees and merchant service charges.
Information to the payee on individual card-based payment transactions (Article 12)
Effective from 8 June 2015, Article 12 of the Regulation requires the payee’s PSP to provide the payee with certain information, namely:
- a reference enabling the payee to identify the card-based payment transaction;
- the amount of the payment transaction in the currency in which the payee’s payment account is credited; and
- the amount of any charges for the card-based payment transaction, indicating separately the merchant service charge and the amount of the interchange fee.
This information may be aggregated by brand, application, payment instrument categories and rates of interchange fees applicable to the transaction with prior and explicit consent from the payee.
Universal cards (Article 16)
Effective from 8 June 2015, this provides that domestic transactions that are not distinguishable as debit or credit card transactions by the PCS, the provisions on debit card transactions shall be applied. A derogation from this is available until 9 December 2016 whereby MSs may define a share of no more than 30% of the domestic payment transactions that are considered to be credit card transactions to which the interchange cap fee referred to above will apply.
Overview of exemptions
Article 1 of the Regulation provides that certain payment instruments that can only be used in a specific way are exempt from the regulation, namely:
- instruments allowing holder to acquire goods or services only in the premises of the issuer or within a limited network;
- instruments which can be used only to acquire a very limited range of goods and services; and
- instruments valid only in a single MS that are regulated by a national or regional public authority for specific social or tax purposes.
Article 1 provides that Chapter II (on interchange fees) of the Regulation does not apply to:
- transactions with commercial cards (business expenses);
- cash withdrawals at ATMs or at the counter of a PSP; and
- transactions with payment cards issued by three party PCSs.
Article 1 also provides that Article 7 (Separation of payment card scheme and processing entities) does not apply to three party PCSs but states that when a three party PCS licenses other PSPs for issuance or acquiring purposes it is to be treated as a four party scheme. It also provides that domestic payment transactions through three party PCSs may be exempted from the provisions of Chapter II (on interchange fees) until 9 December 2018, provided that the card-based payment transactions made in a MS under such a scheme do not exceed on a yearly basis 3% of the value of all card-based payment transactions made in that MS.