Regulatory overview: PSD 2 and European Interchange Fees reg will change card and payments market

The European Commission (EC) published its PSD 2 proposal this summer to replace and repeal the existing Payment Services Directive (Directive 2007/64/EC, commonly known as PSD 1). At the same time, the EC published its proposal for a new regulation on interchange fees for consumer card transactions (the ‘Interchange Fees Regulation’). This blog from John …

October 8, 2013 | bobsguide

The European Commission (EC) published its PSD 2 proposal this summer to replace and repeal the existing Payment Services Directive (Directive 2007/64/EC, commonly known as PSD 1). At the same time, the EC published its proposal for a new regulation on interchange fees for consumer card transactions (the ‘Interchange Fees Regulation’). This blog from John Casanova, a partner at the law firm Sidley Austin LLP, examines the likely regulatory and market impacts on the card and payments sector, and provides the necessary detail about the new regulations.

Earlier this year on the 25 July the EC announced it was to cap card fees in order encourage a better, more competitive single market that would address the “fragmented” European market for cards, Internet and mobile payments, following earlier US action on fees. The day before the PSD 2 regulation was released to support a single market. Combined with the Interchange Fees Regulation also released over the summer it is obvious the EC has big plans for the European card and payments market, with its stated aim being to mutually reinforce the harmonisation of rules and encourage a better, freer single market that is more open to newcomers to enhance competition.

Cards and payments regulation in Europe is set to undergo a transformation, therefore, but before embarking on any compliance activities or getting too excited about new market opportunities for new technology, bank or other payment providers, it is as well to understand the rules.

PSD 2

PSD 2 is a response to many of the criticisms, suggestions and issues that have been raised in respect of PSD 1 and the wider regulation of payments in the EU. Many of these issues have already been set out for public debate in the EC’s November 2012 green paper entitled ‘Towards an integrated European market for card, internet and mobile payments’ and in the European Central Bank (ECB) January 2013 paper called ‘Recommendations for the security of internet payments’ (also known as SecuRe Pay), plus the proposed ‘Directive on Payment Accounts’ published in May 2013. Much of the PSD 2 regulation has, therefore, already been trialled and anticipated by the payments industry.

Like PSD 1, the second iteration regulates virtually all payment services within the EU including debiting and crediting of payment accounts, money transmittal and card issuing and acquiring. However, the EC hopes that PSD 2 will promote more competition, efficiency and innovation by further developing an integrated European-wide market for payments across all channels, including the internet and mobile devices. In this respect, PSD 2 attempts to improve legal clarity and level the playing field for market participants while ensuring transparent and secure services for customers. In comparison to its predecessor PSD 1, PSD 2 has a wider scope of application with fewer and narrower exemptions, and promotes greater harmonisation across EU member states. This legislation is intended to support the EU’s transition towards a fully integrated digital economy.

The basic scope of the second Directive has been extended such that transparency and information requirements, which only applied previously to transactions executed wholly within the EU, now apply to payment transactions involving third countries in any currency, as long as one of the payment service providers is located within the EU. Thus, a transfer of US dollars from the UK to a recipient in the US will fall within the ambit of the PSD 2 disclosure requirements. It is though worth noting that many EU-based payment service providers have already been treating such transactions as if they were so regulated under PSD 1. Provisions in respect of rights and obligations of payment service providers (PSPs) and users still only apply to transactions wholly within the EU and denominated in Euro or the currency of an EU member state.

Differences Vis-à-vis PSD 1

In terms of entities that must be authorised by their ‘home’ EU member state, as a bank, e-money institution or payment institution, prior to providing payment services, PSD 1 has several exemptions that are no longer available in PSD 2. The ‘commercial agent’ exemption, which generally precludes those negotiating the sale of goods and services from the authorisation requirements has been amended to limit its application to providers that are acting only for either the payee or the payor but not both. Thus, it will no longer apply to PSPs running e-commerce platforms.

The ‘limited network’ exemption has also been tightened. The exemption for payments executed through mobile phones and other IT devices will no longer be available when the transaction exceeds 50 Euro individually, subject to an overall cap of 200 Euro in any billing month. Finally, the exemption for withdrawal services offered by ATM deployers independent from banks or other PSPs has been removed.

PSD 2 introduces a new regulated payment service that would bring third parties providing data or payment initiation services which access payment accounts held with other PSPs under the scope of the regulation. Such third party service providers would be required to be authorised and supervised as a payment institution. This will make them subject to increased security requirements.

Following their SecuRe Pay recommendations, the ECB will work in conjunction with the European Banking Authority (EBA) to develop security standards and guidelines applicable to all PSPs. The EBA will also issue guidelines and draft regulatory standards, including clarification of the rules on ‘passporting’ across different European countries for payments institutions operating in several EU member states and provide guidance on sufficient security requirements.

In addition, PSD 2 seeks to rectify problems of inconsistency in implementation across EU member states by setting out provisions to harmonise rules in relation to surcharging practices, liability rules for unauthorised transactions and safeguarding measures.

European countries in the EU will have two years from publication in the Official Journal to implement PSD 2 into national law. However, PSD 2 will need to be submitted to both the European Council of national ministers and the European Parliament for debate, and in this respect, there may be further changes yet to consider.

Proposed Interchange Fees Regulation

The proposed Interchange Fees Regulation is reflective of the European Commission’s enforcement and litigation against interchange fees as anti-competitive in recent years [see bobsguide news] and reinforces a pattern of increased investigation, litigation and regulation for both debit and credit card interchange fees.

The European Interchange Fees Regulation would largely codify arrangements the EC has agreed to in the past: 0.2% of transaction value in the case of debit cards and 0.3% in the case of credit cards. The effect of this regulation would be a dramatic reduction in certain interchange fees, especially in some cases where more than 2% of the transaction value has been charged.

The scope of the Interchange Fees Regulation would limit the price cap to four party consumer card schemes, exempting most three party schemes and commercial card providers. However there are special rules that may apply to bring them within the scope of the regulation, such as where a three party scheme licenses card issuing or acquiring in the manner of a four party scheme.

The limitations also appear to apply to so called ‘on-us’ transactions, where the issuer and acquirer are the same entity. However, this remains to be clarified. It is also worth noting that the competition provisions in the proposed regulation would generally apply to three and four party card schemes, as well as commercial card issuers. The Interchange Fees Regulation also addresses other competition issues such as rules on payment method steering by merchants, co-badging, unblending of fees and the honour all cards rule, amongst other stipulations.

Once the regulation has been approved it will, unlike PSD 2 which must be implemented by each separate EU Member State, be directly applicable in each EU country without the need to enact any national legislation.

PSPs, traditional card schemes which could face a disintermediation threat, acquirers, tech firms and processors should all be preparing for the advent of these new European regulations.

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