THE EUROPEAN COMMISSION PROPOSES TO REGULATE INTERCHANGE FEES

On 24 July 2013, the European Commission adopted a package of proposed legislative measures to improve the current payment services framework. Alongside a new Payment Services Directive (PSD), the package includes a proposal for a Regulation on interchange fees.

Interchange fees are fees paid by a merchant’s bank (the acquiring bank) to the cardholder’s bank (the issuing bank) for card-based payment transactions. Even though the fees can be agreed bilaterally between individual banks, it is common that they are collectively set by the banks through a payment card scheme or organisation. These are the so-called Multilateral Interchange Fees (“MIFs”). Interchange fees paid to the issuing bank are recouped by the acquiring bank from the merchant as part of the fee they charge for processing their card payment transactions.

Background

Over the last 15 years, the European Commission and many national competition authorities have investigated the card payments market and found that the level of MIFs set by card schemes, in combination with certain of their business rules, restrict competition between acquiring banks and hinder market entry and market integration in the European Union. Moreover, MIFs ultimately lead to higher retail prices for all consumers (including those who do not pay with a card), who tend to be unaware of the fees paid by the merchants for accepting payment cards and are, at the same time, incentivised through reward programs to use the cards generating the highest fees for issuing banks.

These adverse effects were confirmed by the public consultation following the Commission’s 2012 Green Paper “Towards an integrated European market for cards, internet and mobile payments”, after which both the Commission and the European Parliament agreed on the need to tackle these problems through ex ante regulation. Once adopted, the Regulation will be directly applicable across the EU.

The Commission’s proposal

The proposed Regulation will apply to interchange fees associated with payment card transactions carried out within the EU when both the payer’s and the payee’s payment service providers are established in the EU. However, it will not apply to cards that can be used only within a limited network.

Interchange fees

The Chapter on Interchange Fees does not apply to transactions with commercial cards (payment cards that are limited in use for business expenses of employees or self-employed natural persons), cash withdrawals at automated teller machines and transactions with cards issued by three party payment card schemes, such as American Express or Diners, unless they license the issuance or acquiring of payment cards to third payment service providers.

The Regulation introduces maximum levels of interchange fees for transactions based on consumer cards. Caps are set at 0.2% of the value of the transaction for debit cards and 0.3% for credit cards. These levels are based on the “Merchant Indifference Test” (i.e., an estimate of the fee level at which a merchant would be indifferent between being paid by card or in cash) and have already been accepted by competition authorities for a number of transactions with cards branded MasterCard, Visa or Cartes Bancaires.

Initially, the caps will only apply to cross-border transactions (i.e., where the acquiring and the issuing banks are established in different Member States). After a transitional period of two years, the caps will also apply to domestic transactions. The cap levels will be revised four years after the Regulation enters into force.

Business rules

The Chapter in the Regulation on business rules will apply to all categories of card-based payment transactions (including those carried out with commercial cards and three party scheme cards). The proposed measures introduce limits on certain business rules.

• Licensing: card schemes licensing to issuing or acquiring entities should not restrict licences to a specific territory but licences should cover the entire European Union.
• Separation of payment card scheme and processing entities: card scheme and processing entities should be independent in terms of legal form, organisation and decision making. Discrimination in processing rules is prohibited and processing entities’ systems must be technically interoperable.
• Co-badging and choice of application: the issuer of the payment card cannot be prevented from co-badging different brands in the same payment instrument but this decision must not be discriminatory and any difference in treatment must be objectively justified. The consumer will remain free choose the payment application, which must not be pre-selected by the issuer through automatic mechanisms.
• Unblending: acquiring banks must not impose a single price but charge merchants individually for the different categories and brands of payment cards.
• Honour All Cards Rule: a merchant cannot be obliged to accept all cards of the same brand or category unless it is subject to the same regulated interchange fees.
• Steering rules: merchants may not be prevented from informing consumers about the cost of a particular payment method or from steering them towards the use of specific payment instruments. This is without prejudice to the rules on surcharges under the PSD according to which merchants must not charge fees for the use of a given means of payment that exceed the cost associated with the use of such means.

Enforcement

Finally, the proposed Regulation mandates Member States to designate competent authorities responsible for its application to establish rules on sanctions for breaches and their notification to the Commission, as well as out-of-court complaint and redress procedures.

Next steps

The two proposals (the Regulation and the Directive) will have to be adopted by the European Parliament and the Council under the ordinary legislative procedure. The proposals have been referred to the Economic and Monetary Affairs Parliamentary Committee for examination of its substance. On 10 September 2013 the Committee’s Vice-Chair, MP Pablo Zalba Bidegain (European People’s Party Group) was appointed rapporteur for the MIF Regulation, and MPs Bas Eickhout (Greens/European Free Alliance Group) and Ashley Fox (European Conservatives and Reformists Group) were appointed shadow rapporteurs. The Parliament’s first reading under this procedure has no time-limit, so it is unclear when the proposed regulation will be adopted. However, according to the Parliament’s forecasts, on 20 February 2014 the report on the proposal will be voted in the Committee and the indicative plenary sitting date is 2 April 2014. The European Commission currently expects that key political agreement will be reached before the European Parliament elections due in May 2014.