PSD2: Getting Ready for the Next Generation of Payment Services (Part 2)
The EU Commission's long-awaited proposals for a new Payment Services Directive (PSD2) contain much for existing providers of payment services to consider. This is in addition to the changes which will bring many new players into the regulatory sphere for the first time (as highlighted in Part 1 of our commentary on PSD2).
The Commission's assessment of the 2007 Payment Services Directive (PSD) was that it was generally fit for purpose but that there was much more that could be done in order to improve European payment systems. It has 5 main objectives:
- to achieve a more integrated and efficient European payments market
- to create a more level playing field for payment services providers
- to ensure high standards of consumer protection
- to encourage lower prices for payments and
- to facilitate the emergence of common technical standards and interoperability.
The Commission is proposing a dual approach: PSD will be repealed and replaced by PSD2; and new regulations will be introduced covering interchange fees for card-based payment transactions (IF Regulations). Key points include:
Controls on interchange fees and surcharging
- Interchange fees (where a retailer's bank pays a fee to the customer's bank when a credit or debit card is used to make payment) will be capped at 0.2% for most debit cards and 0.3% for most credit cards. The Commission's concern with interchange fees is threefold:
- These fees are passed back by the retailer's bank to the retailer and reflected in higher retail prices which, the Commission noted, are borne by all customers, and not just those paying by card.
- The level of fees varies significantly between member states which leads to consumer confusion where goods are being bought in one state with a card registered in another and consequential fragmentation of the internal market.
- High interchange fees stifle competition and creativity in the payment services sector since new and innovative providers and low fee domestic operators cannot expand as banks expect to receive at least the same high revenues from them as from existing card payment schemes.
The capping will be phased in, applying to cross-border payments as soon as PSD2 and the IF Regulations come into force, and applying to domestic card payments after 2 years.
- Merchants will be able to surcharge, or refuse to accept, any cards which are not subject to the cap on interchange fees. The level of any surcharge must not exceed the real cost of using that card. Commercial cards and those 3-party card schemes which use issuers (81% of Amex cards, but 0% of Diners' cards) will be outside the cap, so could be surcharged or refused by merchants.
- Non-transparent pricing methods by payment service providers will be prohibited and full information on costs must be given to users in advance. This aims to ensure that payment service users can select cheaper options for making payment, merchants can set compliant surcharges, and acquirers are prevented from offering a blended service charge for all categories of card.
- The Commission will bring in supporting measures to ensure that the controls on interchange fees and surcharges are not circumvented. Barriers will be removed which currently prevent large merchants from shopping around to use cheaper acquirers in other member states. Merchant acquirers will no longer be able to include certain "Honour All Cards Rules" which require a merchant to accept all cards issued by a particular brand, regardless of the different costs of those cards (although the merchant may not refuse to accept the relevant card if it is subject to the same regulated interchange fee).
Other significant proposals
- For the first time, "one-leg" transactions (i.e. where the payment service provider of either the payer or the payee is outside the EEA) and transactions in any currency (not just in the currencies of EU member states) will be subject to regulations relating to transparency and the supply of information to users. This is one area where Member States were inconsistent in their implementation of PSD and the Commission's aim here is to ensure that users receive equal protection regardless of where in the EU they are located. Providers with products which previously relied on the one-leg transaction rule to avoid regulation will need to reassess their regulatory status and product features if they are to avoid non-compliance.
- The ATM exemption, which allowed operators of independent ATMs to avoid regulation, is being removed. The Commission noted the unintended consequences which had flowed from this exemption: far from benefiting consumers by encouraging operators to open ATMs in more diverse locations, it incentivised the ATM industry to restructure and charge consumers higher fees.
- In an attempt to avoid the inconsistent implementation of PSD2 by Member States which resulted in the fragmentation of the payments services market along national borders, the Commission will introduce mechanisms to ensure greater homogeneity. Service providers seeking to rely on an exemption will have to notify their activities to local regulators in order to ensure that rules are being interpreted consistently across the EU. A new web portal will also be introduced connecting all national registers of payment services providers so that it will be easier to check who is registered, where and what activities their registration allows.
Although the controls on interchange fees have been grabbing all the headlines, this is not a new development. The European Commission has engaged in competition enforcement proceedings against both MasterCard and Visa and had indicated in its 2006 Report into Payment Cards that the removal of interchange fees would not preclude the profitability of card-issuing in 20 out of the (then) 25 Member States. Certain Member States (such as Denmark) operate without interchange fees and these Member States tend to have the highest level of card acceptance. 14 Member States have already banned surcharging entirely, one Member State prohibited it for credit cards and another Member State banned surcharges for debit cards. In addition, the Consumer Rights Directive (211/83/EC) will be limiting the rights to surcharge from mid-2014.