The proposed Interchange Fee Regulation for card-based payment transactions

The European Commission in the second semester of 2013 adopted a legislative proposal package on the European Union Payments Framework, which comprises a revised Payments Services Directive¹ and a Regulation on Interchange Fees (IF Regulation)². The pending proposed package introduces several changes on payment services in the European Union and, in accordance with the European Commission, seeks to improve competition by opening up payment markets to new entrants, thus fostering greater efficiency and cost-reduction³.

One of the measures, comprised in the proposed IF Regulation, is the imposition of caps for interchange fees for the most frequently used debit and credit cards (except for the “three-party” card schemes such as American Express and commercial cards), as follows: 0.2% per transaction for debit cards and 0.3% per transaction for credit cards. These price caps are identical to those previously proposed by MasterCard⁴ and Visa Europe⁵ to cap their EU cross-board payment transactions in previous antitrust proceedings related with interchange fees and, in accordance with the European Commission, are based on an estimate of the fee at which a merchant would be indifferent between being paid by card or in cash⁶.

The interchange fees caps foreseen in the proposed IF Regulation shall apply to debit and credit card transactions in a two-phase period. In the first phase, two months after the entry into force of the proposed Regulation, the caps will apply to cross-border payment transactions, idus est a payment transaction initiated by a payer or by a payee where the payers’ payment service provider and the payees’ payment service provider are established in different Member-States or where the payment card is issued by an issuing payment service provider established in a different Member-State than that of the point of sale⁷.

In a second phase, two years after the entry into force of the proposed IF Regulation, the caps shall also be applicable to domestic payment transactions within each EU Member State⁸.

According to the European Commission, the reasoning behind this legislative proposal is the need to attend the fragmentation of the EU market in connection with the interchange fees, having regard that there are apparently considerable differences in the fees applied in Member States and to create a level playing field in order to facilitate market entry of new players⁹. In addition, the EU institution considers that regulating interchange fees will benefit consumers and retailers, in particular in Member States where such fees are higher than the proposed caps.

The proposed IF Regulation also introduces some restrictions on the so-called Honour All Card Rules. Article 10 of the proposal states that merchants are not obliged by the payment schemes and payment service providers to accept cards or other payment instruments if such cards or payment instruments are not subject to the same regulated interchange fee. It should also be noted that merchants will not be allowed to surcharge consumers for using their card or other payment instruments, having regard that the reduction of the value of the fees will no longer justify such action by merchants for the interchange fee regulated cards, which, in accordance with the European Commission, represent circa 95% of all card payments in the EU¹⁰.

Another relevant measure comprised in the proposed IF Regulation is related with the choice of the payment instrument and card brands when performing a payment transaction. Pursuant to Article 8(5) of the proposal, where a payment device offers the choice between different brands of payment instruments, it is up to the payer at the point of sale to choose the brand applied to the payment transaction at issue. As a consequence, the proposed Article 8(6) provides that payment card schemes, issuers, acquirers and payment card handling infrastructure providers shall be prohibited from programming the order of priority of payment applications in payment instrument or at equipment applied at the point of sale which may limit the choice of application by the payer when using a co-branded payment instrument. In accordance with the European Commission¹¹, this measure aims to prevent the apparent automatic selection of the most expensive brand for the payment.

The rules on the sanctions applicable to infringements of the provisions of the proposed IF Regulation shall be laid down and enforced by the Member States. In addition, Member States shall designate competent authorities to ensure enforcement of this regulation and shall establish adequate and effective out-of-court complaint procedures for the settlement of disputes arising under the proposed Regulation.

The European Commission expects that an inter institutional legislative agreement is reached on the proposal of the IF Regulation in the spring of 2014 by the European Parliament and the Council.

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