European Commission Announces Agreement To Cap Interchange Fees For Card-Based Payments

A View from Constantine Cannon’s London Office

By Yulia Tosheva and James Ashe-Taylor

The European Commission has announced that the European Parliament and the European Council have reached a long-awaited political agreement on the Commission’s proposal for a Regulation on Interchange Fees for Card-based Payment Transactions.

The Regulation will introduce maximum fees for four-party card schemes’ consumer debit and credit cards, prevent card schemes from forcing retailers to accept all types of cards regardless of their fees, and establish transparency rules for all transactions. The Commission has already ruled that interchange fees set by MasterCard are in violation of EU antitrust laws and, after a seven-year court battle, MasterCard lost its final appeal before the European Court of Justice in September 2014.

Interchange fees represent about 70% of the approximately 13 billion euros a year retailers pay banks to handle payment card transactions. The Regulation is expected to have a profound impact on the card industry as a whole but its effect is likely to be particularly felt in markets such as Germany, where average credit card rates stand at 1.8%, and Poland, where average debit card charges are 1.6%.

For credit card transactions, both cross-border and domestic, the fee will be capped at 0.3% of the transaction value. For cross-border debit card transactions the cap will be 0.2% of the transaction value. For domestic debit card transactions, however, it has been agreed that Member States can apply the cap of 0.2% to the annual weighted average transaction value of all domestic transactions within the card scheme. This option will apply for only five years, as a transition period to allow for a smooth adaptation by domestic card schemes to the new rules. Thereafter, interchange fees for domestic debit card transactions will be subject to a cap of 0.2% of the transaction value, or set at a fixed fee of at most five cents per transaction. The caps will take effect six months after the effective date of the legislation, which is anticipated to be in early 2015. This means the caps could be applicable as early as autumn of this year.

The Parliament and Council have agreed that the new rules should not apply to three-party card schemes such as Diners and American Express, provided the card is both issued and processed as part of the same scheme. Commercial cards used only for business expenses will also be exempt from the new rules. However, after three years the rules will also apply to three-party card scheme that license other parties to issue cards, and thereby operate as four-party schemes, in order to avoid unfair competition in the long run.

The Regulation is also designed to enhance harmonization by defining business rules and standards applicable throughout the EU. It increases competition by ensuring that retailers will be free to choose which cards to accept, unless they are subject to the same interchange fee. The Regulation also provides for organisational separation between card schemes and processing entities and increases the choice of the most efficient payment solutions by giving consumers the possibility of having more brands on the same card.

Margrethe Vestager, the Commissioner for Competition praised the Regulation, stating: “This legislation is good for consumers, good for business, and good for Europe. It will lead to lower prices and visibility of costs for consumers. It reduces a ‘tax’ levied on business by banks in the form of interchange fees, and releases the brakes that have so far held back innovation.”

The legal text of the draft Regulation still needs to be formally approved by the Parliament and Council, which is expected in early 2015. Once adopted and published, the Regulation will apply to all EU Member States.

– Edited by Gary J. Malone