On March 24th, the United Kingdom’s Payment Systems Regulator (PSR) issued final guidance establishing interchange fee caps on credit and debit card transactions where the point of sale is located in the United Kingdom. The guidance was issued pursuant to European Union legislation adopted in 2015 known as the Interchange Fee Regulation and sets forth the PSR’s approach to implementing the EU Interchange Fee Regulation in the UK. In addition to establishing the interchange fee caps in the UK as required by the Interchange Fee Regulation, the PSR’s guidance clarifies to whom the interchange fee caps apply and explains the procedures the PSR will take to monitor and enforce the requirements of the Interchange Fee Regulation in the UK.
What Are the Interchange Fee Caps?
The PSR has set the interchange fee caps in the UK as follows:
- Credit card transactions: Thirty basis points (0.30%) of the transaction value.
- Domestic debit card transactions: Twenty basis points (0.20%) of the average value of all domestic debit card transactions made within the payment card network for the prior year. A debit card transaction is domestic if the issuer, acquirer and point of sale are each located in the UK. This approach allows the payment card network to set different interchange rates for different types of domestic debit card transactions, some of which could be greater than twenty basis points, so long as the weighted average interchange fee for all domestic debit card transactions on the payment card network for the year does not exceed twenty basis points.
- Cross-border debit card transactions: Twenty basis points (0.20%) of the transaction value. A debit card transaction is cross-border if the point of sale is located in the UK but the acquirer and/or the issuer is located in another European Economic Area (EEA) member state.
The Interchange Fee Regulation defines the location of the merchant’s point of sale as the merchant’s fixed place of business. In the case of e-commerce transactions, the point of sale is defined as the address of the merchant’s fixed place of business, regardless of the location of its computer servers. If the merchant does not have a fixed place of business, then the point of sale is the address on the merchant’s business license, or if it does not have a business license, the address used by the merchant for tax correspondence.
The guidance also addresses anti-circumvention rules present in the Interchange Fee Regulation that are similar to the anti-circumvention rules under U.S. debit interchange regulations, including the concept that net compensation received by card issuers for transactions should not exceed the applicable interchange fee cap.
To Whom Do the Interchange Fee Caps Apply?
The Interchange Fee Regulation and the PSR’s guidance identify two different types of payment card schemes: (i) four-party schemes where the issuer and acquirer are different entities and connected by a payment card network, and (ii) three-party schemes, where there is a joint issuer and acquirer.1 The guidance provides that the interchange fee caps apply to four-party schemes, but generally do not apply to three-party schemes. However, the guidance recognizes that some three-party schemes license issuing or acquiring activities to third parties, and these three-party schemes will be treated as four-party schemes for purposes of the Interchange Fee Regulation and the interchange fee caps.2 The PSR has specifically identified Visa Europe, MasterCard, American Express, Diners Club International, JCB International, and UnionPay International as payment card networks that are subject to the UK interchange fee caps.
The interchange fee caps apply only to consumer card transactions. The interchange fee caps do not apply to (i) transactions for which either, or both of, the acquirer and the issuer are located outside the EEA, (ii) cards that can only be used to buy a limited set of goods or services such as fuel cards, (iii) ATM cash withdrawals, or (iv) commercial card transactions.
How Will the PSR Monitor and Enforce the Interchange Fee Caps?
In order to monitor compliance with the interchange fee provisions of the Interchange Fee Regulation, the PSR explains that it will require payment card networks, acquirers and issuers to provide the PSR with evidence of compliance with the interchange fee caps on an annual basis. The guidance does not indicate what specific information will be required but states that the PSR will engage separately with the networks, issuers and acquirers to discuss information and data requirements. The PSR will have the authority to seek injunctive relief against, and impose fines on, violators of the Interchange Fee Regulation. The guidance does not give a range or cap for the fines, but explains that penalties will be determined based on the principles of disgorgement, discipline, and deterrence. The PSR may also step in to resolve disagreements between merchants and networks or issuers relating to the Interchange Fee Regulation after the parties have attempted to resolve the disagreements through other forms of alternative dispute resolution such as mediation.