The IFR has brought major changes to the way card payment systems operate in Europe, most notably by introducing caps on interchange fees. Each EU Member State is given local discretion as to the level at which the caps are set within the bands specified in the IFR.
In the UK, the Treasury has set the caps at 0.2% of the value of a transaction for debit cards, and 0.3% for credit cards.(2) The caps came into effect across Europe in December 2015.
Interchange fees are often paid by the bank of a merchant (such as a supermarket) to the bank of the card user (such as somebody doing a weekly shop when card payments are made). Traditionally the merchant’s bank passes the cost of these fees on to the merchant as part of the ‘merchant service charge’.(3)
Before the IFR was introduced, the average interchange fee charged by UK card schemes (for example, MasterCard and Visa) was around 0.8% for credit card transactions. Some premium cards were charged at an even higher rate. The new cap means that the average credit card interchange fee will fall by around 70%.
Hannah Nixon, Managing Director of the PSR, said:
"The intention of the IFR, as well as providing savings to consumers by reducing interchange fees, is to boost transparency and remove barriers so others can enter the market and compete. We will be watching with interest to see how the industry adapts to the regulation.
"We know that businesses are keen to see the fee caps reflected in their merchant service charges. Our guidance clarifies the IFR for the UK card payments industry and we would expect to see the benefits passed on to merchants in the fees that they pay. However, if merchants remain unhappy they should contact their acquirer and consider shopping around to get a better rate."
As well as the interchange fee caps, the guidance published today also considers which card schemes the IFR applies to, the PSR’s approach to monitoring compliance, its powers and procedures under the regulation, and penalties for non-compliance. The guidance is part of on-going work to provide clarity on the IFR and the PSR will consult on further guidance relating to business rules later this year.
Separately, but relevant to this guidance, the PSR has also published a final determination which confirms which card schemes operating in the UK are captured by the IFR interchange fee caps.(4)
Today’s final guidance on the IFR can be found on the PSR website.
Notes to editors
- The Treasury confirmed the PSR as lead UK regulator for the IFR on 17 November 2015. Read our consultation, published 2 December 2015.
- Treasury has set fee caps for credit and debit card transactions in the UK. There will be a cap of 0.3% for credit card transactions. For UK debit card transactions the Treasury has chosen a weighted average of 0.2%, meaning the cap will be 0.2% of the average value of all UK debit card transactions from the previous year. The Treasury will keep the level of the caps under review, with support from the PSR and the other relevant UK regulators as required.
- This does not apply to transactions within three-party schemes. Three-party scheme transactions involve only a joint issuer and acquirer, the cardholder and the merchant. Three-party schemes are regulated under the IFR, but are not covered by the capping of the interchange fees payable between the acquirer and the issuer, or the provisions of Article 7 on the separation of scheme and processing activities
- UK card schemes captured by IFR interchange fee caps include; MasterCard, Visa Europe, American Express, Diners Club International, JCB International and UnionPay International.
- The PSR was incorporated on 1 April 2014 and became fully operational on 1 April 2015.
- The PSR is the regulator and concurrent competition authority for payment systems in the UK and all participants in payment systems (payment service providers, operators and infrastructure providers to those payment systems).
- The PSR has three statutory objectives: to promote effective competition in the markets for payment systems and for services provided by those systems, including between operators, payment service providers and also infrastructure providers, in the interest of service-users; to promote the development of innovation in payment systems, in particular the infrastructure used to operate payment systems, in the interest of service-users; and to ensure that payment systems are operated and developed in a way that considers and promotes the interests of service-users.
- The PSR website.