2015 Payments Trends – Regulation – all change interchange

The fifth and final trend in my earlier blog on the top 5 payments trends in 2015 was another regulatory push, this time from the EU and with the goal of making card processing fees more standard and transparent by putting caps on the fees payable by merchant acquirers to issuers and by ending some market practices.

During 2015 the EU introduced the Interchange Fee Regulation (IFR). As with many EU regulations, this, in addition to regulating the fees on interchange, delivered a couple of other presents. Interestingly, the changes apply only to consumer card transactions and not commercial cards.

Firstly the cap on the fee payable to an issuer directly or indirectly by a merchant acquirer was capped for credit and debit cards at 0.3% and 0.2% respectively. This it the percentage of a transaction that can be charged as part of processing and, arguably,  is used to fund loyalty programmes and offset fraud losses. While this has changed the structure by which fees are charged it does not seem to have lowered the overall costs to most merchants. Previously debit card transactions attracted a fixed fee irrespective of transaction value – this brings debit and credit transactions much closed together.

This variation in pricing is particularly true for lower value transactions, say under £35, where the merchant fees may even have increased. As a consequence issuer business models have adapted and this has had a knock on effect on some consumer benefits, for example there has been a reduction in benefits to customers who participate in loyalty schemes, particularly those schemes that offer cashback or points on purchases.

In addition to capping fees, the regulation allows merchants to decline individual payment card types and to impose differential pricing for more expensive payment mechanisms as laid out in the Payment Systems Regulator’s draft guidance[1]. This may result in consumers being able to use a debit card but not a credit card from the same issuer. The Payment Services Directive 2 imposes limits on surcharging for transactions which come under IFR and so it’s vital to read both pieces of legislation in context.

Finally the IFR also removes any territorial restrictions on issuing cards or acquiring card transactions which may have a significant effect on where cards can effectively be used.

There may be unintended consequences for some of the changes and certainly some issuers will find that it is difficult to continue their loyalty programmes in the same way but one thing is clear: regulator are increasingly viewing self-regulation as incapable of delivering the benefits to consumers and businesses which are demanded.

[1] Guidance on the PSR’s approach as a competent authority for the EU Interchange Fee Regulation, Payment Systems Regulator.