Introduction
On 13 December 2023, the UK Payment Systems Regulator (PSR) published an interim report on its market review into UK-EEA consumer cross-border interchange fees. The review focuses on interchange fees for card-not-present (CNP) transactions between the United Kingdom and the European Economic Area (EEA). The consultation feedback window is open until 31 January 2024.
‘Interchange fees’ (IFs) are fees that acquirers (i.e., payment service providers acting on behalf of merchants) pay to issuers (i.e., payment service providers acting on behalf of cardholders) each time a card is used to buy goods or services. This is a per-transaction fee and is usually levied as a percentage of the transaction value.
Transactions where the card was issued in a different country to the merchant’s location are typically referred to as ‘cross-border transactions’. The respective interchange fees for these transactions are in turn known as ‘cross-border interchange fees’.
Regulation of interchange fees in the UK
Prior to the UK’s departure from the EU, the European Interchange Fee Regulation (EU IFR) applied to the UK. The EU IFR capped both UK domestic IFs and cross-border IFs within the EEA (including those between the UK and the EEA) at 0.2% of the transaction for debit card transactions and 0.3% for credit transactions respectively. Following the UK’s withdrawal from the EU, the UK Interchange Fee regulation (UK IFR) came into force on 31 December 2020.
The UK IFR caps the level of interchange fees on domestic consumer debit and credit card transactions at 0.2% and 0.3% of the value of the transaction respectively. The UK IFR makes no distinction between card present and CNP transactions. However, the UK IFR does not regulate cross-border interchange fees for payments made at UK merchants using cards issued outside the UK (i.e., UK cross-border interchange fees).
Background to the PSR’s consultation
As discussed above, following the UK’s withdrawal from the EU, the EU IFR caps on UK-EEA transactions no longer applied and the UK IFR did not impose a cap on UK-EEA cross-border IFs either. As a result of this, the main card scheme operators decided to increase the levels of interchange fees for CNP transactions from 0.2% (debit) and 0.3% (credit) to 1.15% and 1.5% respectively.
The PSR had been examining this increase to the levels of the IFs to understand whether these indicate, either in isolation or in conjunction with other factors, that the relevant market is not working well for consumers in the UK.
What action is the PSR now proposing?
Subject to the PSR’s final report and further consultation on potential remedies, the PSR is proposing to introduce a price cap on the levels of cross-border IFs. According to the PSR, this could happen in two stages:
- An initial time-limited cap of 0.2% for UK- EEA consumer debit transactions and 0.3% for consumer credit transactions (where the transactions are made online at UK businesses); and
- A lasting cap on these interchange fees in the future, once further analysis has been carried out to establish an appropriate level.
Who does the consultation apply to?
The PSR is keen to receive feedback on its provisional findings from anybody with an interest in online retail payments between the UK and the EEA, and particularly from card scheme operators, card issuers and acquirers as well as wider businesses and consumer associations representing cardholders.
What are the next steps?
The consultation is open until the 31 January 2024 with a final report due by the end of Q1 2024.
If the PSR finds in its final report that the market is not working well and requires intervention, it will open a consultation as to the draft remedies package in the first half of 2024.
Our Payment Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments regarding the PSR’s market review into UK-EEA consumer cross-border interchange fees.
For further information, please contact:
Gavin Punia, Partner, Bird & Bird
gavin.punia@twobirds.com
