On 7 February 2018, the CJEU handed down two important judgments interpreting the EU Interchange Fee Regulation (IFR) and PSD2. More precisely, in one judgment the CJEU confirmed the applicability of the IFR interchange fee (IF) caps to three-party scheme (3PS) cards/transactions that involve an "agent" or a "co-branding partner"; and in the other provided clarity on the extent to which 3PS (such as American Express (Amex), for example) are subject to Article 35 PSD2 on "access to payment systems". We provide below a short summary and analysis of these two important judgments.
The IFR Judgment
When the European Commission (EC) proposed the draft IFR in July 2013, it proposed the imposition of IF caps not only on consumers cards bearing the logo of the traditional four-party schemes (4PS) such as Visa, Mastercard and the domestic debit card schemes that exist in a few EU countries1, but also on any 3PS consumer card where the 3PS scheme "licenses other payment service providers for the issuance of card-based payment instruments or the acquiring of card-based payment transactions, or both". By this inclusion, the EC sought to ensure a level-playing field between traditional 4PS and 3PS operating de facto as 4PS, such as, for example, the Amex "GNS" model under which Amex relies on third party players to issue the cards to consumers (and sometimes to acquire transactions at merchants). The objective was to ensure that card issuers would not be financially incentivised by uncapped IF to issue 3PS cards instead of traditional 4PS ones.
During the IFR adoption process, two other concepts were added: the concept of "agent" and the concept of "co-branding partner".
After these additions, the relevant section of the final text of the IFR reads as follows:
"When a three party payment card scheme licenses other payment service providers for the issuance of card-based payment instruments or the acquiring of card-based payment transactions, or both, or issues card-based payment instruments with a co-branding partner or through an agent, it is considered to be a four party payment card scheme."2
Before turning to the legal challenge that Amex introduced in the UK and EU courts, it is worth noting that the above article can be interpreted in two different ways – something that was not addressed in the legal proceedings. In particular, it can be read as saying either:
It is fair to say that the first interpretation is probably what the EU legislators had in mind when they adopted the IFR, and it is the way in which national regulators seem to understand the IFR (e.g. the UK Payment Systems Regulator (PSR)'s Guidance on the IFR, paragraph 2.18: "The interchange fee caps do not apply to transactions where the scheme is both the card‑issuer and the acquirer"). However, the second interpretation is actually a more natural reading of the text. In the rest of this article, we use interpretation 1 as our working assumption.
Now returning to the Amex court proceedings, these were initiated in the London High Court in relation to the concept of an agent and co-branding partner, and the High Court referred the issues to the CJEU for interpretation. Amex's argumentation was that the IF caps should only be applicable when the agent or the co-branding partner was the issuer-of-record of the card (i.e. the issuing PSP). If instead the issuer-of-record of the card was someone else than that agent or the co-branding (e.g. the 3PS itself acting at the issuer-of-record of the card), the IF caps should not apply.
In typical arrangements, agents and co-branding partners are in practice never the issuer-of-record of the cards (this normally being the 3PS), and therefore Amex's argument, if successful, would effectively have amounted to having the references to agent and co-branding partner de facto removed from the text of the IFR. Therefore, national regulators would not have had the power to scrutinise financial arrangements under 3PS involving an agent or a co-branding partner.
The CJEU rejected Amex's interpretation and concluded that the IF caps should apply to all 3PS cards/transactions involving an agent (e.g. a bank interacting with a consumer to place a 3PS card in the consumer's wallet) or a co-branding partner (e.g. an airline), irrespective of the identity of the card issuer (i.e. even if the card issuer is the 3PS itself).
Some of the consequences of the CJEU judgment include the following:
All these questions will now need to be analysed by the various stakeholders.
The PSD2 Judgment
PSD1 subjected traditional 4PS to an "access" requirement, meaning that those schemes had to grant licenses to PSPs to issue cards and/or acquire transactions on "objective, non-discriminatory and proportionate" conditions3. 3PS were not subject to this access requirement4, meaning that a 3PS was free to decide which, if any, third party PSPs would be allowed to participate in any part of its scheme. For example, it allowed a 3PS to decide to operate in way which was quite similar to a 4PS in some EU countries (e.g. by working with one or more other PSPs), while operating in a purely closed manner in others.
In PSD2, the EU legislator decided to subject 3PS to the same "access to payment systems" requirement as 4PS, except for "payment systems composed exclusively of payment service providers belonging to a group"5. Recital 52 sought to provide more clarity on when a 3PS should not be considered as "composed exclusively of PSPs belonging to a group" by referring to the same concepts of licensee, agent and co-branding partner as in the IFR: "Such systems include three-party schemes, such as three-party card schemes, to the extent that they never operate as de facto four-party card schemes, for example by relying upon licensees, agents or co-brand partners".
Amex sought to persuade the CJEU to rule that even when a 3PS relies upon agents and/or co-branding partners, it nonetheless remains "composed exclusively of payment service providers belonging to a group", and so exempt from the access requirement (Amex did not raise the same challenge in relation to situations where a 3PS works with one or more licensees).
As regards agents, the CJEU disagreed with Amex, concluding that as soon as a 3PS works with one or more "agents", it no longer qualifies as a scheme "composed exclusively of payment service providers belonging to a group" and is therefore subject to the access requirement.
As regards co-branding partners, the CJEU agreed in part with Amex's argument. The CJEU stated that a 3PS working with a co-branding partner is "composed exclusively of payment service providers belonging to a group" (and therefore not subject to the access requirement) as long as the co-branding partner is not a PSP. However if the co-branding partner is a PSP, then the 3PS is subject to the access requirement (the ECJ added "even though that partner does not itself provide, within the framework of that agreement, any payment service with respect to the co-branded products"6).
The practical consequence of the judgment is that as soon as 3PS operates with at least one licensee or agent or co-branding partner regulated as a PSP, that scheme becomes subject to the access requirement, and therefore is required to give access to its scheme to PSPs on "objective, non-discriminatory and proportionate" conditions.
This judgment confirms that PSPs have the following rights:
Note that on this issue of 3PS being subject to the PSD2 access requirement, the CJEU is taking the view that, as soon as it works with an agent or a co-branding partner that is regulated as a PSP (or, of course, with a licensee), the 3PS as a whole is subject to the access requirement. As mentioned above, the CJEU seems to be taking the same view in relation to Article 7 IFR (i.e. as soon as a 3PS works with a licensee, an agent or a co-branding partner, the 3PS as a whole is subject to the separation of scheme and processing). This therefore begs again the question whether, for consistency sake, as far as IF caps are concerned, Interpretation 2 above would not be more logical/consistent than Interpretation 1?
All of the views expressed by the author in this article are his own independent views. They do not necessarily represent the views of clients of Bird & Bird. The author is grateful to Trystan Tether (Bird & Bird, London) for his comments on a draft version of this article.