What is Interchange?
Interchange is the fee paid by the retailer's card acceptance provider (acquirer) to the card issuer each time a card payment transaction occurs. It is an important means to balance the costs of operating a global card payment system across all the users of the system - including retailers, who enjoy many benefits from card acceptance, including security, guaranteed payment, fraud protection and efficiency of payment.
When a transaction takes place the acquirer will pay the retailer the value of that transaction after deduction of a Merchant Service Charge (MSC) that will include a number of components including interchange, processing costs, terminal rental etc. The MSC charge is negotiated directly between the acquirer and retailer.
What is the issue?
On 24 July 2013, the European Commission published a proposal for regulation of interchange fees. The most significant feature of this was the proposal for caps on interchange fees - 0.2% (of the value of the transaction) for consumer debit card transactions and 0.3% for consumer credit card transactions. This was a result of various competition law reviews into interchange fees by the Commission and national regulators over many years.
The subsequent Interchange Fee Regulation (IFR) was adopted on 29 April 2015 and came into effect in the UK on 8 June 2015. The IFR requirements can be split into two phases. Phase 1 introduces caps on interchange fees for card transactions, which came into force on 9 December 2015. HM Treasury consulted on how the interchange fee caps should be implemented in the UK and on 8 October published a response stating that:
- The interchange fee cap for domestic credit card transactions would be 0.3%, in line with the default caps set out in the IFR.
- The card schemes will be allowed the flexibility to set a weighted average rate for domestic debit transactions. This means that interchange fees cannot exceed more than the equivalent of 0.2% of the annual overall transaction value of all domestic debit card transactions within each payment card scheme. This is permitted for a period of five years.
- Certain cards will be exempt from the interchange fee caps, including:
- Those issued and acquired by three party schemes.
- Commercial cards – cards that are used for business purposes only.
Phase 2 introduces some wider requirements that come into force on 9 June 2016, which will have an impact on retailers as well as card issuers and acquirers. The Payment Systems Regulator is currently consulting on guidance for these wider requirements.
What we think
We are reassured that the government has taken into account the card payments industry’s views on how it should implement the new EU rules on interchange fees, including introducing a weighted average cap for debit card transactions.
As the UK is the largest card market in Europe, we welcome the government’s measured application of the regulations and echo its calls for any savings to be passed on to consumers in the form of lower prices.
What we are doing?
We are working with issuers, acquirers and card schemes to ensure a consistent approach to the IFR from the industry. We will also be responding to the PSR consultation document.