The Interchange Regulation and its future effect on surcharging

22 May 2015

Oliver Irons, Trystan Tether

Implementation of the Interchange Regulation

Regulation 2015/751 on interchange fees for card-based payment transactions (the "Interchange Regulation"), was published in the Official Journal of the EU on 19 May 2015 and will come into force 20 days later on 8 June.

The idea behind the Interchange Regulation is that interchange fees on those credit and debit card transactions to which it relates will be capped at 0.3% and 0.2% respectively. In contrast to earlier drafts, there is now very little distinction in the adopted text between the fee caps introduced for domestic and cross-border card transactions. For domestic debit card transactions however, Member States will be permitted to either define a lower per transaction percentage fee cap or to allow payment service providers ("PSPs") to apply a per- transaction charge of no more than EUR 0.05 (or the local currency equivalent) in combination with the interchange fee, provided always that the sum of interchange fees of the relevant payment card scheme does not exceed 0.2% of the aggregate transaction value of all the domestic payments processed . Until 9 December 2020, Member States may also allow PSPs to apply a weighted average interchange fee of no more than the equivalent of 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme.

Interchange Regulation at a glance

Being a "Regulation", in the specialist EU sense of that word, the Interchange Regulation will have direct effect as law in all Member States (by contrast to the two year local state implementation period for a directive such as the impending second Payment Services Directive). The provisions relating to the caps for both credit and debit cards will not apply until 9 December 2015, 6 months after the date of the Regulation coming into force.

The Interchange Regulation does not apply to all card transactions. It does, however, apply to those made using consumer credit and debit cards. Transactions made using "commercial cards" and withdrawals from cash machines/ATMs are outside of its scope.

Impact on surcharging for use of payment cards

Surcharging by merchants who accept card payments has always been used as a way of off-setting the costs of interchange fees passed on to them by their banks. For some, the ability to surcharge has become a useful and valuable source of income, especially for airlines who are forced to accept the withholding as collateral of substantial amounts of revenue from card payments by their merchant acquirers.

The Interchange Regulation does not in itself alter the position with regard to surcharging for the use of payment cards. It is, however, intended that it will indirectly have profound effect on this in future.

As a matter of English law, businesses are currently entitled to make surcharges in respect of payments made using any particular payment instrument – whether a credit or a debit card. This is by virtue of Regulation 54(3) of the Payment Services Regulations 2009 (SI2009 No. 209) (the "Surcharge Right"). This was the UK's implementation of Article 52(3) of the Payment Services Directive, which gave EU member states the right to take different approaches on this point. Unlike the UK, some member states took the approach that all surcharges should be prohibited under the same provision. The UK's approach overrides any prohibition sought to be imposed by any Card Scheme (e.g. MasterCard or Visa) or purported to be imposed by any merchant services agreement. In any case, in merchant services agreement provisions which seek to prohibit surcharging typically state that they are subject to any contrary provision of local law. It should therefore be noted that Visa's purported prohibition on surcharging for debit card use is not effective under English law.

The Surcharge Right is subject to the Consumer Protection (Payment Surcharges) Regulations 2012 (the "Surcharge Limit Regulations") which provide that the amount of any surcharge for the use of any particular payment instrument may not exceed the costs borne by the payee for the use of that instrument. There is further guidance available on what may be included as "additional costs".

The European Commission has published a proposal for a second Payment Services Directive (generally called PSD2) which should be read alongside the Interchange Regulation. If implemented in its current form, the effect of PSD2 on surcharging will be to:

  1. Prohibit surcharging altogether in relation to payment cards for which the interchange fees are controlled by the Interchange Regulation. The logic here is that the additional cost of accepting payment using these cards is (following the reduction of the interchange fee) so low that it would be unreasonable for merchants to be able to charge their customers for using them to make payment; and
  2. Require that all Member States adopt the same approach as the UK and permit any other surcharging for the use of particular forms of payment instrument (subject to other restrictions on the amount of additional charge that can be levied).

The result of this is that, as and when PSD2 is implemented, surcharging for payment card transactions within its scope will be prohibited. The implementation of PSD2 is, however, not imminent. Although the draft directive is making its way through the legislative process, it is not yet finalised. As mentioned above, it also has a 2 year implementation period built into its terms so no immediate action with regard to surcharging is required at this stage.