Interchange fees for card-based payments within the EU will soon be capped, following the publication of Regulation 2015/751 on interchange fees for card-based payment transactions ("Interchange Fee Regulation") in the EU's Official Journal on 19 May 2015. Broadly, interchange fees are the fees paid between banks for the acceptance of card-based transactions. In essence, the Interchange Fee Regulation limits interchange fees to 0.2% of the transaction value for consumer debit cards and 0.3% for consumer credit cards. It also increases the transparency of fees charged as well as seeking to enhance competition for card payment schemes by addressing licensing issues and other restrictive business rules.
The Interchange Fee Regulation includes a number of discretions relating to both its scope and the fee caps that it imposes. On 20 May 2015, the Department of Finance published a consultation paper soliciting views on how these discretions should be applied.
Why Regulate Interchange Fees?
Interchange fees are on an-going subject of controversy both within the EU and internationally. According to card providers and others, these fees are necessary to compensate for the costs associated with billing and administering payments cards, developing innovative new payment card products and rewards programs, and investing in security and fraud prevention technology. As against this, competition authorities and bank regulators believe that interchange fees restrict price competition, lead to inflated prices and inhibit the emergence of new products in the payments markets. According to the European Commission ("Commission"), service providers offering payment solutions that could challenge the payment model based on interchange fees, including for example online-banking-based payments, encounter serious problems in entering the payments market as they have difficulty in convincing issuing banks to support these solutions. Interchange fees have been the subject of a number of competition law investigations both at EU level and domestically. Recently, on 11 September 2014, the European Court of Justice confirmed that MasterCard's payment card interchange fees infringed EU competition rules.
Overview of the Interchange Fee Regulation
The Interchange Fee Regulation lays down uniform technical and business requirements for card-based payment transactions carried out within the EU. Together with the Commission's proposal for a revised Payment Services Directive, it forms part of a legislative package which seeks to create a single payments market in the EU with the overall objective of lowering costs for users, facilitating innovation and removing obstacles to cross-border payments. The two key elements of the Interchange Fee Regulation are its provisions on interchange fees, which are set out in Chapter II of the Regulation, and those on business rules, which are contained in Chapter III.
Scope and Definitions
The Interchange Fee Regulation applies to card-based payment transactions carried out within the EU, where the payer's and the payee's payment services providers ("PSPs") are both in the EU. However, services based on specific payment instruments that can be used only in a limited way are excluded from its scope, once they fulfil certain conditions.
A PSP may be an acquirer, an issuer, or both. An "acquirer" is the PSP that contracts with a payee to accept and process card-based payment transactions which result in a transfer of funds to the payee. An "issuer" is the PSP that contracts to provide the payer with a payment instrument to initiate and process the payer's card-based payment transactions.
Restrictions on Interchange Fees
The Interchange Fee Regulation restricts interchange fees for both consumer debit and consumer credit card transactions. These restrictions do not apply to transactions with commercial cards or cash withdrawals at ATMs or at a PSP's counter. Neither do they apply to payment cards issued by a three-party payment scheme, unless that scheme licenses other PSPs as issuers or acquirers: such schemes are considered as four-party payment schemes for the purposes of the Interchange Fee Regulation. However, Member States may exempt these latter types of schemes from the Regulation's scope until 9 December 2018.
The Interchange Fee Regulation caps interchange fees at 0.2% of the value of the transaction of any consumer debit card transaction. Regarding domestic debit card transactions, Member States have the option of specifying lower percentage caps and/or imposing maximum fee amounts. Member States may also allow PSPs to apply the cap on a weighted average basis for a five-year period, until 9 December 2020.
In the case of consumer credit card transactions, the interchange fee is capped at 0.3% of the value of the transaction. Again, Member States have the option of defining a lower cap for domestic credit card transactions.
The Interchange Fee Regulation contains a series of measures designed to enhance effective market functioning. For the most part, these rules apply to all types of payment cards.
The chapter on business rules prohibits intra-EU territorial restrictions in licensing agreements or in payment card scheme rules as well as requirements to obtain a country-specific permission to operate on a cross-border basis. Other rules relate to: the separation of payment card schemes and processing entities; co-badging; unblending; the "Honour All Cards" rule; and steering.
Separation: four-party payment card schemes and processing entities must be separated. This includes being independent in terms of accounting, organisation and decision-making processes and is designed to ensure that all processors have an equal opportunity to compete for a scheme's customers.
Co-badging: payment card scheme rules or rules in licensing agreements must not prevent an issuer from including two or more payment brands or payment applications of the same brand on the same card-based payment instrument.
Unblending: the Merchant Service Charge ("MSC") must be individually specified for different categories and different brands of payment cards with different interchange fee levels unless the payee requests blended MSCs. The MSC is the fee paid by the payee to the acquirer in relation to card-based payment transactions.
Honour All Cards: payees cannot be obliged to accept all cards or other payment instruments of a payment card scheme, although they may be required to accept cards that are subject to the same regulated interchange fee if issued within the same brand and of the same category (prepaid card, debit card, or credit card).
Steering rules: payees may not be prohibited from steering consumers to the use of any payment instrument or from treating card-based payment instruments of a given card scheme more or less favourably than others. Payees must also be allowed to inform payers about interchange fees and MSCs.
The Interchange Fee Regulation also requires the payee's PSP to provide the payee with specified information following the execution of an individual card-based payment transaction. This information includes, in particular, information regarding any charges for the transaction, indicating separately the MSC and the interchange fee.
As is clear from the above, the Interchange Fee Regulation contains a number of optional provisions regarding its scope and the caps on domestic card transactions. In its consultation, the Department of Finance is seeking views on:
- whether third party payment card schemes which license other PSPs as issuers, acquirers or both should be exempted from the interchange fee caps applicable to domestic payment transactions until 9 December 2018;
- how Ireland should exercise its options relating to the cap on domestic debit card transactions and in particular whether it should opt for a per-transaction fee cap, a combination fee cap or a weighted average fee cap; and
- whether Ireland should impose a per-transaction fee cap of lower than 0.3% for domestic credit card transactions.
The consultation closes on 3 June 2015.
Comment and Next Steps
This latest Regulation is coming at a time of remarkable growth in the volume and value of card payments both in Ireland and in the EU. According to Banking & Payments Federation Ireland, this year the value of debit card transactions is likely for the first time to exceed the amount withdrawn from ATMs.
Simultaneously, the popularity of payment instruments based on the use of mobile phones and the Internet is also growing quickly, driven largely by expanding consumer demand for payment instruments that are more secure, efficient and convenient.
Given that the payments market is in a fast-paced stage of evolution, it is difficult to determine at this stage whether and to what extent the Interchange Fee Regulation will succeed in its twin aims of promoting cross-border retail and encouraging the emergence of new pan-Union payment instruments. Nevertheless, the Regulation clearly represents a game-changer for all participants in card-based payment schemes.
It will also be interesting to see how the Interchange Fee Regulation interacts with s. 149 of the Consumer Credit Act 1995. That section currently requires credit institutions (and others) to make a submission to the Central Bank if they wish to introduce any new customer charges or increase any existing customer charges in respect of certain services, including the processing of payments by debit or credit card. The Central Bank may direct the institution not to impose the new or increased charge or it may approve the charge or approve it at a lower level than requested by the institution. Given that interchange fees will soon be subject to fee caps and that, as a result, the banking sector will no longer have unfettered price setting power with regard to such fees, the question arises as to whether the requirements of s. 149 should continue to apply to the charges for payments using debit/credit cards.
The provisions on fee caps, licensing and payee information will apply from 9 December 2015 and the other business rules will apply from 9 June 2016.
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