Interchange Rules ‘Not Fit For Purpose’ Ahead Of EU Review

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European retail organisations have called on authorities to expand the scope of interchange fee controls to tackle other “stupendous” charges imposed by card schemes, as new rules banning merchants from recovering costs from consumers enter into force.

The European Commission is set to review the effectiveness of the Interchange Fees Regulation (IFR) over the next year, evaluating whether the reforms have successfully lowered cost of card acceptance across the EU.

However, retailers have long argued that any savings supposed to have been brought about through the caps have been eroded by a rise in scheme fees paid by acquirers, which have in turn been passed down through merchant service charges.

Andrew Cregan, policy advisor for payments and consumer credit at the British Retail Consortium, said the review should be an opportunity for regulators to analyse the card fee structure more widely.

“At an economic level you can argue that there has been circumvention of the IFR taking place, but if regulators are not going to address the increasing scheme fees from that angle, then they should be addressing it from abusing dominant market position under competition laws,” Cregan said.

Tensions over fees have been inflamed by incoming rules under the revised Payment Services Directive (PSD2) that prohibit merchants from applying surcharges at the checkout process to cover some of the card acceptance costs.

According to Cregan, although the introduction of the surcharge ban was “logical”, it did not anticipate that the revenue lost by capping interchange fees could effectively be offset via another charging mechanism.

“It was thought that the excessive fees and charges associated with card payments would have been tackled by the time PSD2 kicked in by the interchange fee regulation,” said Andrew Cregan of the British Retail Consortium.

Article 62(4) of PSD2 bans surcharging for payment methods regulated by the IFR, but the UK has expanded the scope so that other providers, such as PayPal, are also caught.

The aim is to “level the playing field” between various types of competing payment and e-money institutions.

Although merchants can continue to pass on costs to customers by other mechanisms, including increasing the overall price of goods and services or adding an additional overall service charge, such options are not available to all.

In the UK, tax watchdog HM Revenue & Customs announced last month it will stop accepting credit card payments after PSD2 has taken effect — a direct result of the surcharging ban.

Paul Rodgers, chairperson and founder of London-based industry group Vendorcom, said the high-profile nature of that case would likely raise the scheme fee issue higher up the political agenda.

HM Treasury has previously acknowledged the fee increases and has committed to continuing to review the effectiveness of the IFR, but Rodgers said the “fixation” on only interchange fees “demonstrates the lack of understanding of the charging mechanisms”.

He argued that regulators should make a bigger effort to understand the clear relationship between the scheme fees, the interchange fees, issuers’ interest rates, the acquirers’ merchant service charges and the fees imposed by retailers.

Failure to do so would “demonstrate how disengaged and irrelevant the regulators are at making changes given the lack of correct focus”, he said.

“At a time when the regulator is trying to ensure fairness for all, surely we have to doubt the wisdom of European interchange fee regulations,” said Paul Rodgers of Vendorcom. “It can be no accident that credit card interest rates are now at the highest level in over ten years, thereby pushing the cost onto those least able to pay it — namely those unable to pay their credit card bills in full every month.”

Retail sectors that deal in high-value payments are expected to be hardest hit by the surcharging ban, particularly those that have been adversely affected by the shift from a hard interchange cap to the 0.2 and 0.3 percent under the IFR.

Luke Purser, principal consultant at PSE Consulting, expects this could lead to more action taken by retailers to claim back costs for “several years of high charges”.

An attempt by the European Commission to tackle scheme fees could also be on the cards, he suggested. Merchants will still be able to surcharge for commercial cards under PSD2, but Purser pointed out it is not always easy to distinguish between the different payment products at the point of sale.

“[The surcharging ban] is going to cause so many problems, as they need to identify the card number during the checkout process so it can be surcharged,” said Luke Purser of PSE Consulting. “This is impossible if a gateway supports the payment process for an online merchant and is therefore outside their control.”

Those that are able to configure an arrangement with their gateway, Purser added, will likely do so to the detriment of the customer service experience — as the surcharge would be added after the user has entered their card details and clicked pay.

“Online travel retailers have complained to regulators on this point as there is a clash between PCI compliance and surcharging rules,” he said, referring to rules set out by the Payment Card Industry (PCI) Security Standards Council.

“Merchants want to avoid storing the card number [due to] PCI, but need the card number to identify if they can surcharge.”

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