EU adopts Regulation capping interchange fees for card-based payments

On 20 April 2015 the Council of the European Union formally adopted the Regulation on interchange fees for card-based payment transactions. The full text can be read here. We summarise below the key provisions in two broad groups – interchange fees and business rules. The stated aim of the EU Council is to reduce costs for both retailers and consumers, to help create an EU-wide payments market and to help users make more informed choices about payment instruments.

The Regulation will come into force 20 days following publication in the Official Journal, with the interchange fee caps becoming effective six months later, which is expected to be October 2015. As a Regulation, its provisions become effective immediately: they do not need to be transposed into local law. 

Interchange fee caps

• The Regulation sets interchange fee caps 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. Also, during the first five years of application, Member States may apply the caps calculated as an annual weighted average of all domestic debit or credit card transactions within each payment card scheme.
• 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. Again, there is a Member State derogation, but applying only for the first year of application of the caps.
• There are some key exemptions to the new interchange fee caps including for: three-party card schemes such as Diner’s and American Express (provided the card is both issued and processed within the same scheme); commercial cards used only to pay business expenses; and ATM cash withdrawals.
• There are also some key anti-avoidance rules providing that any agreed remuneration, including net compensation, with an equivalent object or effect of the interchange fee will be treated as part of the interchange fee for the purposes of the fee caps.

Business rules

In addition to the interchange fee caps, the Regulation includes a series of measures that govern card-based payment transactions which can be broadly grouped as follows:

Payment card schemes and processing entities

Key business rules here include:

• a prohibition on territorial restrictions in licensing agreements or payment card scheme rules for issuing payment cards or acquiring card-based payment transactions within the EU;
• a requirement for payment card schemes and processing entities to be independent in terms of accounting, organisation and decision-making processes;
• a prohibition on presenting bundled prices for payment card scheme and processing activities, cross-subsidising such activities, and making the provision of any services conditional on the acceptance of any other service;
• an obligation on processing entities to ensure that their systems are interoperable with other systems of processing entities;
• a prohibition on any measures that hinder or prevent an issuer from co-badging two or more different payment brands of applications or payment applications on a card-based payment instrument; and
• a requirement that any differences in the treatment of issuers or acquiring payment service providers must be objectively justified and applied in a non-discriminatory manner. 

Acquirers

The key new business rule for acquirers is that they must offer and charge their merchant clients merchant service charges as individually specified fees (for different categories of payment cards with different interchange fee levels) unless such merchants make a written request for blended merchant service charges. 

Merchants

For merchants, the key new business rules (aside the flip-side of the blending prohibition) are:

• the introduction of a qualification on the “honour all cards” rule, so that merchants are only obliged to accept cards within a scheme where they are subject to the interchange fee-capping rules; and
• a ban on rules in licensing agreements, scheme rules, and agreements between card acquirers and merchants preventing merchants from steering consumers to the use of any payment instrument preferred by the merchant. 

The industry response to the Regulation has been less than enthusiastic, with the UK Cards Association predicting a future card payment system that “looks and feels very different” with potentially less investment in “fraud prevention, innovation and competitive offers to consumers“. 

The concern that ‘plastic perks’ may be reconsidered in light of the new legislation seems borne out by reports that both Capital One and Royal Bank of Scotland are scrapping reward and cash back schemes as a direct result of the interchange fee caps. In a statement, Capital One said that “following the European Parliament’s resolution… the implications of significantly lower interchange revenue has meant… several (products) are no longer sustainable under current market conditions“. 

The relevant competent authority in the UK for the Interchange Fees Regulation will be the FCA and the newly operational Payment Systems Regulator (PSR). As interchange fees will interact with other types of card fees, the PSR has stated its intention to develop its policy position on all card fees.