Financial services firms need to make merchant service charges more transparent, says regulator

19/05/2016

The draft guidance sets out how the regulator will monitor and enforce newer elements of the EU Interchange Fee Regulation (IFR) which come into effect in June this year(1). It explains that acquirers – companies that process card transactions on behalf of merchants – must clarify what costs make up the fee for each transaction, known as the Merchant Service Charge (MSC).

The MSC essentially packages up several costs charged for each card transaction and passes them onto the merchant in one fee. However, acquirers are not currently required to explain to a merchant what makes up this charge.

Hannah Nixon, Managing Director of the PSR, said:

The lack of clarity as to what is included in the merchant service charge means that companies find it harder to negotiate on fees and are less likely to see reduced costs passed on to them. In turn, merchants cannot then pass these savings to their customers.”

Today’s draft guidance follows the PSR’s final guidance on the first phase of IFR that were in force by December 2015.(2) Interchange fees charged by UK card schemes (for example, MasterCard and Visa) are now capped in the UK at 0.2% for debit cards, and 0.3% for credit cards (find out more here).

Traditionally the merchant’s acquirer then passes the cost of the interchange fee on to the merchant as part of the MSC. The new cap means that the average credit card interchange fee has fallen by around 70%.

Hannah Nixon, continued:

The interchange fee is only part of what makes up the Merchant Service Charge but we are still being asked by merchants why they are not seeing the cut in the interchange fee being passed on.

“It is up to the individual companies to negotiate on the merchant service charge rate, but we would still expect that acquirers pass on reduced costs to merchants and, in turn, that these are then passed onto consumers.

“The new transparency should allow merchants more clarity when negotiating fees. However, if merchants remain unhappy they should contact their acquirer and consider shopping around to get a better rate.”

Today’s draft guidance also considers the approach to co-badged cards (cards, popular on mainland Europe, that have two or more payment options on the same card) and requirement for electronic and visual identification on all credit and debit cards.

In addition, the draft guidance also explains that all retailers clearly identify at the shop entrance and point of sale which credit and debit cards they accept, in order to give increased clarity to customers.

Today’s draft guidance on the IFR can be found on the PSR website. The PSR is requesting feedback on the consultation to be submitted by 5.00pm on Friday 8 July 2016.

Notes to editors

  1. The Treasury confirmed the PSR as lead UK regulator fo