The Interchange Fee Regulation: The fee cap is now in force

As we have previously written, on 29 April 2015 the European Parliament and the Council adopted the Interchange Fee Regulation (IFR). Whilst the IFR’s provisions take effect on different dates, arguably the biggest change, the interchange fee cap, came into effect on 9 December 2015.

Interchange fees are paid from the merchant acquirer (the merchant’s bank) to the card issuer (the cardholder’s bank), as a percentage of each transaction made by the card-holder. These fees are set by the card scheme, such as Visa or MasterCard. 

From 9 December 2015, the interchange fees cannot exceed 0.2% for debit cards and 0.3% for credit cards, which the British Retail Consortium estimates will save UK merchants an estimated £480 million every year. 

The IFR cap must also be read in conjunction with the second Payment Services Directive which, when transposed into national law, will prohibit surcharging for the use of payment instruments which are subject to the caps. The cost savings from the fee caps should therefore be passed on to merchants and consumers.

The provisions relating to business rules mostly come into force on 9 June 2016. 

Who will enforce the IFR in the UK? 

Under the IFR, all EU Member States must designate a competent authority to supervise the IFR and which is granted the necessary investigatory and enforcement powers to do so. HM Treasury confirmed on 17 November 2015 that this would be the Payment Systems Regulator (PSR) in the UK. 

The UK government has also assigned a role to the Financial Conduct Authority where certain provisions of the IFR overlap with its existing remit, such as under the UK Payment Services Regulations 2009. 

Scope of IFR: what’s in and what’s out? 

The IFR imposes obligations on payment card schemes, issuing and acquiring payment service providers (PSPs), processing entities, other technical service providers and, in limited circumstances, merchants. There are some notable exceptions. In particular, the IFR does not apply to transactions with commercial cards or cash withdrawals at ATMs. Also, while the IFR cap applies to four-party schemes (such as Visa and MasterCard), transactions with payment cards issued by three-party schemes (where there is a joint issuer and acquirer) are not caught. 

However, when a three party payment card scheme licenses other PSPs for the issuance of card-based payment instruments or the acquiring of card-based payment transactions, or both, or issues card-based payment instruments with a co-branding partner or through an agent, it is considered to be a four party payment card scheme and will be caught by the IFR cap, as is the case for Amex.

That said, we understand that, in the UK, HM Treasury is granting an exemption from the interchange fees for certain three party schemes. Until 9 December 2018, three party schemes caught by the IFR (as explained above) will be exempt from the domestic interchange fee cap if they are within the market share safe harbour; namely, if the value of their annual UK card-based payment transactions is no more than 3% of all UK domestic card-based payment transactions. However, this de minimis exemption is time limited and only applies to transactions in which the issuer, merchant and acquirer are all in the UK.

PSR’s guidance on enforcement 

On 2 December, the PSR published its consultation on draft guidance for monitoring compliance with the IFR. This consultation is the first of two consultations, and covers the parts of the IFR which came into force on 9 December 2015, including:

• classification of schemes for IFR purposes;
• details on the caps and exemptions;
• business rules which take effect from 9 December 2015;
• PSR’s approach to monitoring compliance;
• PSR’s powers and procedures; and
• penalties which can be imposed for breach.

PSR’s monitoring and enforcement powers 

The draft PSR guidance states that the PSR will monitor compliance with the interchange fee caps by requiring schemes and issuing and acquiring PSPs to provide evidence to the PSR under the IFR information-gathering powers. In particular, the PSR will gather initial compliance reports and seek data to demonstrate compliance with the caps.

The PSR will also consider complaints received in relation to compliance with the IFR, and act on them as appropriate. 

The PSR has the power to:

• give directions, e.g. requiring or prohibiting specific action, or to remedy or prevent non-compliance;
• enforce its directions and the obligations or prohibitions imposed by the IFR on parties who do not comply;
• gather information and conduct investigations;
• impose a financial penalty for non-compliance; and
• seek an injunction to bring the compliance failure to an end, remedy the non-compliance or restrain dealing with assets. 

Certain decisions by the PSR are appealable to the UK’s specific competition tribunal: the Competition Appeal Tribunal. 

What happens next?

The first consultation closes on 29 January 2016, with the PSR publishing its final approach in Spring 2016. The consultation notes that the PSR “will require certain stakeholders to submit data and information to the PSR as part of its approach to monitoring compliance with the IFR” and that the first requests will be sent shortly after 9 December 2015. 

The PSR announced that its second consultation, on the remaining IFR provisions which come into force on 9 June 2016, will be issued in 2016.