All change for interchange: new legislation takes effect

The UK’s Payment Card Interchange Fee Regulations 2015 (“PCIFRs”), which implement the EU Interchange Fee Regulations (“MIF Regulation”) in the UK, came into force on 9 December. As part of that regulatory change, the UK’s Payment Systems Regulator (“PSR”) has been undertaking research into the value of the UK’s domestic card-based payment market. In this article, Clare Burman and Poppy Pite of Osborne Clarke’s Payments team, look at the PSR’s information request and how that information is being applied going forward.

This article was originally published in ‘E-Finance & Payments Law & Policy’ (December 2015)

Recap on the basic EU caps

One of the key objectives of the MIF Regulation, which was published in the Official Journal of the European Union on 19 May 2015 and came into force 20 days later on 8 June 2015, was to introduce a pan-European cap on interchange fees. The European Commission’s hope is that capping the level of such fees will result, eventually, in savings for merchants that will be passed onto their customers. 

The MIF Regulation is directly applicable and its provisions take effect on different dates, but the interchange fee caps came into effect on 9 December 2015. From that date:

• Interchange fees have generally been capped at 0.2% of transaction value for cross-border debit card transactions, and 0.3% for cross-border credit card transactions.
• For domestic transactions, Member States are permitted to set lower caps or allow a fixed fee of no more than five euro cents, which can be combined with the 0.2% or 0.3% fee cap.
• For domestic so-called ‘universal card’ payment transactions, i.e. those that are not distinguishable as debit or credit card transactions, the debit card cap applies.

Three-party card scheme exemption 

There are some key exemptions to the new interchange fee caps, including for three-party card schemes. The more common four-party card scheme usually involves the acquirer bank paying an interchange fee to the issuer bank every time a transaction is made. In the case of three-party card schemes, the issuer and the acquirer are the same entity. Given that the card is both issued and processed within the scheme, there are no explicit interchange fees and thus three-party card schemes are generally exempted from the fee caps. 

There are instances where three-party card schemes use payment service providers to issue cards, or to acquire cards on their behalf (or both). Such an arrangement is deemed by the MIF Regulation to equate to a four-party payment card scheme, and so the normal caps under the MIF Regulation will apply to such structures. However, under Article 1(5) of the MIF Regulation, Member States have discretion to grant a three year, time-limited exemption from domestic interchange fee caps to three-party schemes which:

• operate with licensee issuers and acquirers; or
• issue cards with a co-branding partner or through an agent. 

In each case provided that the card scheme’s payment transactions made in that Member State do not exceed 3% of marketshare across all domestic card transactions. 

UK implementation 

As noted above, the MIF Regulation is directly effective; the PCIFRs therefore contain the UK Government’s response to the various discretions granted to the Member States:

• Within the UK, HM Treasury has capped domestic interchange fees for UK credit card transactions at 0.3% and for UK debit card transactions at a weighted average of 0.2%, meaning the cap will be 0.2% of the average value of all UK debit card transactions from the previous year.
• The UK Government has also decided to allow three-party card systems that use issuers and acquirers to take advantage of the three year time-limited exemption from domestic fee caps. The stated rationale is to provide a transitional period in which these schemes can adjust their business models (for example, it will provide a period in which the schemes can renegotiate the fees that underpin the licensing agreements they hold with issuers and acquirers).

The PCIFRs also designate the PSR as the competent authority responsible for the supervision and enforcement of the MIF Regulation. To this end, the PCIFRs grant the PSR new statutory powers in connection with this role, including:

• Information gathering and investigatory powers: Regulation 14 of the PCIFRs extends the PSR’s usual information and investigation powers to apply for the purposes of the PSR’s functions under the MIF Regulation.
• Issuing directions: these directions are to be for the purpose of obtaining information, remedying/preventing noncompliance, and providing redress or compensation. A direction may require or prohibit the taking of a specified action. All such directions must be published by the PSR.
• Enforcement: by publishing compliance failures, imposing penalties and applying to the Court for injunctions where necessary. 

Why is the PSR acting now? 

The PSR, a subsidiary of the Financial Conduct Authority, is the first dedicated direct regulator of payment systems in the world and, since 1 April, has served as the new economic regulator for the £75 trillion UK payment systems industry. On 2 December 2015, the PSR published draft guidance setting out how it plans to regulate the MIF Regulation. This draft guidance was informed by a Call for Input published earlier in the year to gather views. The PSR’s draft guidance prioritises those parts of the MIF Regulation that took effect from 9 December 2015. In particular, the draft guidance therefore includes commentary on:

• to whom the MIF Regulation applies;
• fee caps and who may be exempt;
• the PSR’s approach to monitoring compliance with the MIF Regulation; and
• the PSR’s powers and penalties under the MIF Regulation. 

The information request 

The PSR conducts regular horizon-scanning of the UK payments market using various powers and so is well-placed to monitor the marketshare of UK card schemes and to assess whether any three-party card scheme exceeds a 3% share of the market. If any three-party card scheme has moved over this threshold, it will be subject to the interchange fee caps. 

HM Treasury therefore asked the PSR to calculate the marketshare of those three-party card schemes that might benefit from the three year exemption. As set out in Article 1(5) of the MIF Regulation, the marketshare calculation should be based on value rather than the number of card purchase transactions. To this end, the PSR contacted six card schemes by way of an information request to obtain internal data on the value of UK domestic card-based payment transactions. 

The information request, published in the interests of transparency, was addressed to American Express, Diners Club International, JCB International, MasterCard, UnionPay International and Visa Europe. The information request asked each recipient to: ‘provide data on the total value of all card-based payment transactions made under the [relevant] scheme in the UK for the period 9 September 2014 to 8 September 2015 inclusive.’ By way of explanation:

• For a transaction to be made ‘in the UK’ means that the issuer, acquirer and merchant are all located in the UK.
• Card-based payment transactions include transactions using traditional plastic cards, contactless wearables, virtual cards and cards stored within virtual wallets on mobiles.
• Data is required in respect of transactions on credit, charge, deferred debit, immediate debit and prepaid cards, as well as for consumer and commercial cards.
• The phrase, ‘made under the scheme’ means transactions on cards carrying the scheme brand and governed by the scheme’s rules, irrespective of the identity of the issuer and the acquirer. Transactions where the issuer and the acquirer are the same entity, and transactions where the issuer and the acquirer are separate entities, are both to be counted, although in each case the value is to be counted only once. 

Recipients were asked to respond by 3 December 2015. The PSR then used the information received to calculate the marketshare of any schemes that might qualify for an exemption from the domestic fee caps. The PSR is treating the information received as if it had been gathered under PCIFRs powers, so that it is designated confidential and need not be disclosed further by the PSR. 

The provisional conclusion

The PSR’s provisional view, published on 8 December 2015, is that American Express’ market share for the period under consideration was likely to have exceeded the 3% threshold. In consequence, the PSR’s provisional conclusion is that American Express and payment services providers participating in the American Express card scheme cannot benefit from the exemption and so the interchange fee caps on UK domestic transactions will apply to them until 31 March 2016. By implication, other three-party card schemes which use licensee issuers and acquirers or issue cards with a co-branding partner or through an agent appear not to have exceeded that threshold and so would appear to be able to benefit from the exemption, although this was not made explicit by the PSR. 

The PSR’s conclusion is only provisional at the moment and it is continuing its analysis with a view to making a final determination once it has:

(a) received confirmation (following 9 December) that the information it holds is correct; and

(b) completed its consultation on the draft guidance on regulating the MIF Regulation. 

The PSR’s final statement confirming which three-party card schemes are exempt from the domestic interchange fee caps is therefore not anticipated until the PSR publishes its final guidance.