A cap on interchange fees for both debit and credit card-based payment transactions was introduced in all Member States as of 9 December 2015, under Regulation (EU) 2015/751 (the "Regulation"). The Regulation is expected to impact directly the retail sector throughout the European Union.
Against the background of the intensive growth of electronic commerce, the security and competitiveness of electronic payment systems has become crucial for consumers and traders. One of the main objectives of the Regulation is the elimination of the internal market fragmentation, caused by the application of various regulatory measures and the existence of a large variety of interchange fees on national levels. Stimulating the transition from cash payments towards card-based payments with much lower interchange fees is expected to encourage fair competition and entry of new card operators on the market.
Which payments the cap applies to
The Regulation's requirements apply to all card-based payment transactions carried out within the EU, where both the payer's payment service provider and the payee's payment service provider are located therein.
What are interchange fees
Interchange fees are fees paid by card-acquiring payment service providers (usually the merchant's bank) to card-issuing payment service providers (usually the client's bank), which are eventually borne by the client. In practice, interchange fees are charged the following way:
- In the so-called 'four-party payment schemes, the client pays by card the price of a good or a service. The merchant, however, does not receive the entire sum, as a 'x' part of it is send to the financial institution which acquires the card-payment. The card-acquiring payment financial institution sends part (usually more than half) of the amount 'x' to the card-issuing payment financial institution. The card-acquiring payment financial institution The withholds the rest in order to cover its costs related to the transaction. Visa and MasterCard operates under schemes;
- It is possible that the card-issuing payment service providers and the card-acquiring payment service providers are the same person (so-called 'three-party payment schemes). In such case, the entire amount withheld from the price shall remain for the financial institution acquiring and issuing the card payment. For instance, Diners and American Express approach is based on such schemes.
Maximum amounts of interchange fees
According to the Regulation, as of 9 December 2015 interchange fees for both debit and credit card-based payment transactions are capped as follows:
Interchange fees for debit card-based payment transactions may not exceed 0.2% of the transaction's value. Member States may define a per transaction percentage interchange fee cap lower than 0.2%, or may allow payment service providers to apply a per transaction interchange fee of no more than EUR 0.05. Within a transition period until 9 December 2020, Member States may allow payment service providers to apply a weighted average interchange fee of no more than the equivalent of 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme.
Interchange fees for credit card transactions may not exceed 0.3% of the value of the transaction. Once again, Member States may define a lower per transaction interchange fee cap with regard to domestic credit card transactions.
Currently, in Bulgaria, there is no strict national regulation with regard to interchange fees for domestic debit and credit card-based payment transactions. Thus, the caps provided for in the Regulation shall be applied.
Which transactions the interchange fee caps do not apply to
Interchange fee caps do not apply to cash withdrawals at automatic teller machines or at the counter of a payment service provider, if a card is used for the transaction. Moreover, the caps do not apply to transactions with commercial cards - issued to undertakings or public sector entities or self-employed natural persons, when limited in use for business expenses. Last, interchange fee caps do not apply to transactions under the three-party payment schemes, where the card is issued and the transaction is processed under such scheme.
By 9 June 2016, all Member States shall lay down rules on penalties applicable to infringements of the Regulation and, by 9 June 2017, all Member States shall designate or, establish a new body in charge of the settlement of disputes arising under this Regulation.
Expected effect on businesses
Above all, merchants are expected to benefit from the lower interchange fees, which in turn will generate large amount of savings. For instance, studies regarding the British market have shown that the expected savings for merchants there add up to approx. GBP 500 million per year. There are no official forecast statistics for Bulgaria yet, but our inquiry amongst retailers shows that the effect of the reduction of interchange fees is appreciable. The cost reduction for merchants due to lower interchange fees does not entail any obligation for them to reduce end prices. It provides them, however, with the possibility to be more competitive in price formation and theoretically, thus may result in the improvement of the competitive environment on various retail markets in the country.