UK Government proposes amends to the Interchange Fee Regulation in the UK

Consultation on regulatory technical standards open until 17 December 2018.

Please see links to the tracked versions of the EU IFR and Payment Card Interchange Fee Regulations 2015 which we have amended to reflect the changes as currently proposed under the IFRA Regulations[1].

EU IFR

The EU IFR became applicable partly in June 2015, partly in December 2015 (e.g. the interchange fee caps), and in part in June 2016 (e.g. separation of scheme and processing). The interchange fees applicable on card transactions are capped at 0.2% of the transaction value for Intra-EEA and EEA domestic consumer debit and prepaid card transactions, and 0.3% of transaction value for consumer credit card transactions.

The EU IFR also imposes a number of rules on card schemes, card issuers, acquirers and merchants. These rules include requiring the separation of the card schemes and processing businesses; allowing merchants to decide what kind of cards they want to accept (relaxation of the card schemes' Honour All Cards Rules (HACR)); and limiting “blending” of the Merchant Services Charges (MSCs), the practice by acquirers of charging merchants a single price for various brands of card transactions (e.g. same MSCs for Mastercard-branded and Visa-branded card transactions).

Proposed changes under UK regime – interchange fees

The draft IFRA Regulations are part of the wider work the UK government is undertaking to prepare for the UK's withdrawal from the EU. The UK Government has stated that the draft IFRA Regulations are not intended to make policy changes, other than to reflect the UK's new position outside the EU, and to smooth the transition.

Once the UK leaves the EU, the scope of the EU IFR will no longer include the UK, and card schemes will therefore be able to set higher interchange fees than the caps set out in the EU IFR.

Therefore, the UK government is proposing that transactions which take place solely within the UK would continue to be covered by the EU IFR. Although in the Explanatory Information the PSR defines a UK domestic transaction as a transaction where the issuer and the acquirer are located in the UK, it is clear from the draft IFRA Regulations that the interchange fees would only apply if the merchant ("point of sale") is also located in the UK. Scoping a transaction as to whether it is a cross-border or domestic transaction based on the location of the point of sale is consistent with existing UK regulatory guidance on the EU IFR.

Also, under the IFRA Regulations, the UK government will be able to set lower caps on UK consumer debit card/prepaid and consumer credit card transactions. Although this mirrors the current position in the EU IFR, such changes would need to be introduced through another statutory instrument.

However, the UK would be considered a non-EU/non-EEA Member State for the purpose of cross-border transactions. Therefore cross-border card payments where either the issuer or the acquirer is located in the UK will be considered as interregional transactions, not subject to the interchange fee caps. The UK card issuer would therefore be permitted to receive interchange fees in excess of the fee caps; and a UK acquirer may be required to pay interchange fees to the foreign card issuers that are higher than the fee caps.

Proposed changes under UK regime – separation of card scheme and processing

Under the EU IFR, the EC adopted regulatory technical standards (RTS) for the separation of card schemes and processing businesses[2].

The power to adopt RTS for the separation of schemes and processing and for fixing possible deficiencies in the RTS made under the EU IFR will transfer from the European Commission (EC) to the UK Payment Systems Regulator (PSR).

Potential impact – interchange fees

The UK government concedes that the reduction in the scope of the EU IFR could lead to higher costs for UK acquirers, and ultimately UK merchants, participating in UK-EEA cross-border transactions, since these transactions will no longer be subject to the interchange fee caps.

In its Explanatory Memorandum, the UK government indicated that "Higher interchange fees could be passed on to consumers, either directly or indirectly":

• We presume that the reference to "indirectly" is a reference to the fact that UK merchants may increase their retail prices in order to recoup the increase in interchange fees.
• The reference to "directly" would seem to be a reference to surcharging. However it is not clear to us how this would be possible since the Consumer Rights (Payment Surcharges) Regulations 2012 prohibit merchants from surcharging consumer cards altogether (whether in relation to transactions that are subject to interchange fees caps, or not).

It is worth nothing that the EC is currently running competition law investigations against Visa and Mastercard in relation to EEA-inbound interregional interchange fees, e.g. the interchange fees paid by an acquirer located in the EEA to a card issuer located outside of the EEA (e.g. a US card issuer). The outcome of those competition law investigations is still uncertain, but if they were to result in a reduction of those interregional interchange fees, it is doubtful that UK acquirers would benefit from this reduction since they would no longer be located in the EEA.

Potential impact – separation of scheme and processing

It makes sense to transfer responsibility for setting the RTS for the separation of scheme and processing to the PSR given its current responsibility for monitoring and enforcing compliance with the EU IFR in the UK and for regulation of the UK payment systems industry, and therefore it is likely to have the appropriate technical expertise to take responsibility for these RTS.

Potential impact – other

The proposed change to Article 6 of the EU IFR means that card schemes would be allowed to grant licenses to UK issuers and UK acquirers which only allow them to issue/acquire in the UK (as opposed to the pan-EEA licences that the card schemes are expected to grant today to issuers and acquirers located in the EEA).

There are no changes currently being proposed to Article 8 of the EU IFR which relates to co-badged cards, and the choice of merchant and ultimately cardholders, to choose which brand on the card to use to make a payment. As far as we know, there are no co-badged cards being issued in the UK today, and therefore Article 8 of the EU IFR has no practical significance in the UK.

There are no changes currently being proposed to rules around acquirers offering unblended MSCs to merchants and transparency requirements on scheme fees and interchange fees (Article 9 of the EU IFR), as well as minimum monthly reporting on transactions (Article 12 of the EU IFR).

It is proposed to keep Article 10 of the EU IFR, dealing essentially with the relaxation of the HACR and the visual and electronic identification of cards, unchanged.

It is also proposed to keep Article 11 of the EU IFR unchanged. This provision allows merchants to steer customers towards the merchant's preferred means of payments, e.g. by giving discounts for cash or consumer debit cards (versus consumer credit cards or commercial cards), setting a minimum amount under which cards are not accepted, etc

Oddly enough, it is proposed to keep the article on "universal cards" under the UK regime – however this article is not relevant to the UK. It is relevant to a situation where consumer credit cards and consumer debit cards are "not distinguishable", which we understand applied exclusively (or at least primarily) in France. It is not currently clear why keeping the provision on "universal cards" in the UK would serve any purpose and this is not addressed in the Explanatory Memorandum.

Next steps

The UK government intends to pass the IFRA Regulations through Parliament before the UK's exit from the EU.

The PSR is also consulting until 17 December 2018 on changes to regulatory technical standards made under the EU IFR and changes to its current IFR guidance as a result of the IFRA Regulations.

The Bird & Bird payments teams has unequalled knowledge of the EU IFR (in particular due to the number of ex-inhouse lawyers at payments companies that are part of the Bird & Bird payments team), and would be delighted to assist you in the preparation of your comments on the consultation by the PSR, or more generally with any questions that you may have in relation to the IFR.