Separation of card schemes and processing entities: What you need to know

The Interchange Fee Regulation (IFR), which came into force on 8 June 2015, is aimed at creating a single EU market for card payments and increasing competition in this area. In particular, the IFR seeks to drive effective competition by the separation of payment card schemes and processing entities.

Separation of functions 

In the latest development to bolster competition in the sector, on 8 December 2015 the European Banking Authority (EBA) launched its consultation on draft regulatory technical standards on the separation of payment card schemes and processing entities. 

As the EBA’s consultation paper notes, the separation into two different units “is aimed at addressing concerns that schemes offering processing services may grant their own processing services beneficial treatment to the detriment of processing competitors, leading to a distortion of competition in this market“. 

 Under the terms of the IFR, the EBA is tasked with developing regulatory technical standards in order to separate the accounting, organisation and decision-making process of payment card schemes and processing entities, to ensure independence. 

What does this mean? 

The current draft regulatory technical standards provide, among other things, that payment card schemes and processing entities must be organised into two different business units and must have:

• accounting processes in place that enable them to produce financial information related to separated balance sheets, profit and loss accounts;
• separate annual operating plans approved by their relevant management bodies; and
• staff who are independent and accommodated in separate workspaces with restricted controlled access. 

Entities must also ensure independence of senior management and management bodies, and have processes in place to ensure any potential conflicts of interest for decision-making processes are appropriately mitigated. They must also, where using shared services, ensure that sharing does not result in the disclosure of sensitive information. 

It remains to be seen how entities will deal with these provisions and achieve the sufficient degree of separation.

What happens next? 

The EBA’s consultation closes on 8 March 2016 and the EBA will publish the final draft standards in Q2 of 2016. 

Once finalised, the standards must be issued by the European Commission, which can amend the rules if it chooses. However, this begs that question – will the standards be ready by 8 June 2016 when the IFR rule requiring the regulatory technical standards takes effect?

Lacuna in the rules creating uncertainty? 

In the consultation paper, the EBA recognises that there may be a lacuna in the rules from the application date of the IFR on 8 June 2016 and the possible later application date when the technical standards actually come into force. 

In such circumstances, the EBA has stated that the IFR will apply from 8 June 2016, even if the EBA’s final standards do not apply from that date. The EBA has stated that card schemes and processing entities must ensure their independence of accounting, organisation and decision-making from 9 June 2015, noting that the final draft standards will provide guidance even if not legally binding.