Navigating the Cross-Border Transaction Landscape: PSR's Market Review on Interchange Fees

The PSR has released its interim report on the market review of interchange fees for UK-EEA consumer cross-border transactions. Here is an overview:

Introduction:

'Interchange fees' (IFs) refer to fees paid by acquirers (payment service providers representing merchants) to issuers (payment service providers representing cardholders) each time a card is used for purchasing goods or services. These fees are transaction-based and are commonly calculated as a percentage of the transaction value.

Transactions where the card is issued in a different country than the merchant's location are termed 'cross-border transactions.' The interchange fees specific to these transactions are known as 'cross-border interchange fees.'

Regulation of interchange fees in the UK:

Before the UK's departure from the EU, the European Interchange Fee Regulation (EU IFR) governed the UK, capping both domestic and cross-border interchange fees at 0.2% for debit card transactions and 0.3% for credit transactions within the EEA. Post-Brexit, the UK Interchange Fee Regulation (UK IFR) took effect on December 31, 2020.

The UK IFR limits interchange fees for domestic consumer debit and credit card transactions at 0.2% and 0.3%, respectively, without distinguishing between card-present and card-not-present (CNP) transactions. However, the UK IFR does not regulate cross-border interchange fees for payments made at UK merchants using cards issued outside the UK (UK cross-border interchange fees).

Background to the PSR’s consultation:

Following the UK's withdrawal from the EU, the EU IFR caps on UK-EEA transactions were no longer applicable, and the UK IFR did not impose a cap on UK-EEA cross-border interchange fees. Consequently, major card scheme operators raised interchange fees for CNP transactions from 0.2% (debit) and 0.3% (credit) to 1.15% and 1.5%, respectively.

The PSR conducted an examination to assess whether these fee increases, either individually or in conjunction with other factors, suggest that the relevant market is not functioning well for UK consumers.

Proposed actions by the PSR:

Pending the PSR's final report and additional consultation on potential remedies, the PSR suggests implementing a price cap on cross-border interchange fees, possibly in two stages:

1. An initial time-limited cap of 0.2% for UK-EEA consumer debit transactions and 0.3% for consumer credit transactions (specifically for online transactions at UK businesses).

2. A permanent cap on these interchange fees in the future, following further analysis to determine an appropriate level.

Applicability of the consultation:

The PSR invites feedback on its provisional findings from all parties interested in online retail payments between the UK and the EEA. This includes card scheme operators, card issuers, acquirers, as well as broader businesses and consumer associations representing cardholders.

Next steps:

The consultation period extends until January 31, 2024, with the final report expected by the end of Q1 2024. If the PSR determines that the market requires intervention due to inadequate functioning, a consultation on the draft remedies package is anticipated in the first half of 2024.