The European Commission has recently adopted supplementary requirements for the Interchange Fees Regulation[1] aiming to achieve independent functioning of the card payment market. Payment card schemes and processors are now, according to the new technical standards, under obligation to operate independently in terms of accounting, organisation and decision-making process.
The Regulation entered into force on 7 February 2018.
The Developments in European Electronic Payments Industry
It has been almost two decades since the European institutions had first embarked on creating competitive payment markets in Europe. The European Parliament and the Council welcomed the millennium, although a year later, with a warm hand-shake: The Regulation (EC) No. 2560/2001[2] which has broken down the barriers between the charges for national and cross-border payments (up to 50 000 EUR) was adopted. It has effectively reduced charges levied by banks on cross-border electronic payment transactions in euro to a national level. In 2009, the European Parliament and the Council adopted the Regulation (EC) no. 924/2009[3], which repealed the former, amended a set of definitions provided therein and extended its scope.
Having achieved the foundation of Union-wide infrastructure in the electronic payments industry at initial stage, the European institutions grew interest on building single euro payments area (SEPA). Since the Europe 2020 strategy pursues a goal based on innovation and effective allocation of resources, the success of SEPA is of great importance Union’s economy and politics. To that end, The European Parliament and the Council jointly issued the Regulation (EU) No. 260/2012[4], which has enabled credit transfers and direct debits denominated in euro for intra-Union transactions. The regulation also included the concept of reachability. For the purpose of the regulation, the term “reachability” implies all payee and payer payment accounts being reachable for credit transfers and direct debits, with no distinction between national transactions and transactions executed by the payer via payment service provider (PSP) throughout the Union. However, the regulation left card-based payments intact.
In an attempt to enhance competition in the industry, the Commission brought forward a proposal for a regulation on interchange fees on card payments[5] in 2014. In 2015, the European Parliament and the Council adopted the Regulation (EU) 2015/751[6] consecutively. The regulation laid down rate ceiling for all debit cards and credit cards.
Despite all regulatory movements, the electronic payments market was still short of being complete. On the one hand, new pan-Union undertakings confronted hindrance to entry the market, on the other hand, many payment systems failed to overreach operations at domestic level. The European market integration was impeded by a broad range of divergent and high-level interchange fees.
To overcome fragmented internal market problem, the Commission adopted regulatory technical standards (Regulation (EU) 2018/72)[7] which impose obligation to operate independently on processors and card payment schemes. The Regulation thus promotes robust competition in processing card payment to the benefit of retailers and consumers.
What does Compliance with the New Requirements Call for?
The supplementing Regulation sets out certain criteria in order to ensure independence in accounting, organisation and decision-making related operations. According to the new requirements, payment card schemes and processors must restructure their internal setup, thereby achieving separation in few areas.
First of all, payment card schemes and processing entities must have their own profit and loss accounts to be audited annually. Financial information that will be produced based on these accounts must provide an allocation of expenses and revenues between processing entities and payment card schemes. Additionally, they must compile an explanatory note to the financial information documenting any transfers of financial resources between them.
Secondly, they must complete functional and physical separation. The former concerns processing entities and payment card schemes that do not operate as separate legal persons. They will be allowed to continue their activities provided that they are organised in separate internal business units. The latter, on the other hand, relates to them working in separated establishments equipped with restricted and controlled access.
Not only does compliance with the most recent standards necessitate the separation of units or of entities[8], but it also prohibits exchanges of strategic information between payment card schemes and processing entities. The competitive advantage provided by exchange to the benefit of competitors is considered in assessing the nature of such information. Furthermore, payment card schemes are hereafter precluded from adopting a common remuneration policy that may encourage their staff to provide preferential treatment for processing entities, and vice versa.
Last but not least, either entity must ensure the autonomous decision-making process through independent senior management, management bodies and staff. The staff of payment card schemes will be allowed to carry out duties exhaustedly related to design, update and implementation of processing services if specific conditions are satisfied. Either of entities must be self-governed by their own senior management. However, the Regulation enables the directorship by the same person on the condition that both entities ensure avoidance conflict of interest. Apart from that, annual operating plans must be submitted to the management body of either entity for approval so as to ensure independence of financial matters in the decision-making process.
[1] Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions
[2] Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border payments in euro
[3] Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community and repealing Regulation (EC) No 2560/2001
[4] Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009
[5] Proposal for a Regulation of the European Parliament and of the Council on interchange fees for card-based payment transactions
[6] Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions
[7] Commission Delegated Regulation (EU) 2018/72 of 4 October 2017 supplementing Regulation (EU) 2015/751 of the European Parliament and of the Council on interchange fees for card-based payment transactions with regard to regulatory technical standards establishing the requirements to be complied with by payment card schemes and processing entities to ensure the application of independence requirements in terms of accounting, organisation and decision-making process
[8] It will depend on whether or not payment card schemes and processing entities are established as two legal persons. The term “unit” refers to situations where they do not operate separately, while the term “entity” connotes payment card schemes and processors having been established as different legal persons. For the purpose of this article, the term “entity” willhereinafter stand for “unit(s) and/or entity(ies)” where either term is concerned.