PSD2: The European Payments Revolution? Part 3: Surcharging
One of the stated benefits of further developing an integrated market for electronic payments under the Second Payment Services Directive (PSD2) was greater choice and transparency for consumers and merchants (Directive (EU) 2015/2366, recital 5).
As a way of introducing the former, a ban on surcharging certain payment methods was proposed as part of PSD2.
This would effectively prohibit retailers from levying a fee on customers for using certain payment methods. This blog post, our fifth in a six-part series, continues our review of PSD2 with a focus on the surcharging ban.
What was the surcharging ban and what does it include?
PSD2 banned (Directive (EU) 2015/2366, article 62(4)) merchants from charging consumers for the use of card payments for which interchange was regulated under the Interchange Fee Regulation of 2015 (IFR) (Regulation (EU) 2015/751) as well as SEPA direct debit transactions and SEPA credit transfers (Payment services to which Regulation (EU) No 260/2012 applies). This effectively included consumer debit and credit card transactions issued under a four-party card model (e.g. Visa and Mastercard) and excluded commercial cards as well as cards issued under a three-party model (e.g. American Express and Discover) and inter-regional transactions. Furthermore, any fee levied on payment methods not included in the ban was prohibited from exceeding the direct costs borne by the merchant in accepting that payment instrument (Directive (EU) 2015/2366, article 62(3)). The regulation did allow member states to exercise a certain level of discretion in that they would have the right to prohibit merchants from surcharging payment instruments beyond those banned under PSD2 (Directive (EU) 2015/2366, article 62(5)).
These new rules relating to surcharging applied from the 13th January 2018.
European Fragmentation of Rules
One of the reasons why a surcharging ban was introduced as part of PSD2 was to homogenise surcharging rules across Europe. Merchants located in Member States where surcharging was allowed would offer services to consumers in Member States where surcharging rules differed, creating confusion for consumers (Directive (EU) 2015/2366, recital 66). However, Article 62(5) of PSD2 effectively permits Member States to extend the scope of the surcharging ban to cover more payment methods. This has led to differing surcharging rules across Member States.
Table 1 outlines the differences in surcharging rules adopted by the UK and a sample of EU countries.
Table 1: Surcharging Rules - EU Sample Countries
Figure 1: Average MSC across Europe on Consumer Domestic Transactions (CMSPI & Zephyre estimates)
Table 1: Surcharging rules in various EU Member States and the UK
(Based on information published by the Commission as part of the obligation of member states to provide the Commission with details under article 107(2). This can be accessed here. Furthermore, specific details can be found in regulation used by member states to transpose PSD2 into domestic law.)
Not only is this potentially confusing for consumers, but it also makes payments compliance more difficult for multinational retailers operating across multiple European countries. Furthermore, a varied approach to surcharging across Member States is contrary to one of the supposed aims of the Directive.
Interchange Caps No Longer Justify Surcharging Ban
Another justification provided for the inclusion of a surcharging ban was that interchange fees, a component of the overall cost merchants face in accepting card payments, are capped as part of the IFR. The logic was as follows: given that interchange fees constituted the majority of fees paid by merchants in relation to card payments, the capping of interchange would significantly reduce the costs merchants face in accepting card payments. Therefore, in theory, surcharging would no longer be needed on cards for which interchange fees are capped (Directive (EU) 2015/2366, recital 66).
What is the Merchant Service Charge?
- The MSC is the name given to the fees merchants pay when accepting card payments. It consists of:
- Interchange fees – fees paid by the merchant acquirer to the card issuer and ultimately passed on to the merchant
Scheme fees – fees paid by the merchant acquirer to the card scheme and ultimately passed on to the merchant
Acquirer margin – fees paid by the merchant to their acquirer
However, while interchange fees for consumer cards have been capped, unregulated fees have continued to increase. Our data suggests that annual card scheme fees paid by European merchants have increased by €1.46 billion between 2015 and 2021. Furthermore, estimates (CMSPI & Zephyre estimates) suggest that nearly all savings produced by the Interchange Fee Regulation have been eroded as a result of increases to card scheme fees (domestic and intra-regional) and acquirer margin (figure 1). If we factor in the increases to commercial card interchange fees and inter-regional scheme fees, we estimate the savings from regulation of interchange are fully eroded (Figure 2).
Figure 2: Average MSC on Card Transactions Across Europe (This extends the estimates in Figure 1 to include increases to commercial card interchange fees as well as inter-regional fee increases).
Figure 2: Average MSC on Card Transactions Across Europe
The only remaining reason for introducing a ban on surcharging (as outlined in Directive (EU) 2015/2366, recital 66) was to ensure retailers were not charging consumers more than the cost they incurred in accepting a particular payment method. However, simply prohibiting retailers from charging a fee in excess of what they pay would be sufficient to meet this objective without the need to place a ban on all forms of surcharging.
While the ban on surcharging payment instruments instituted by the Interchange Fee Regulation was well intentioned, some believe, given the reasons presented in this article, that the ban on surcharging under PSD2 can no longer be justified in the context of the current payment landscape. Unregulated card fees have continued to increase over time, resulting in greater acceptance costs for European merchants. Furthermore, the application of the surcharging ban has resulted in a fragmented approach, making compliance for multinational retailers more difficult and creating confusion for consumers purchasing from retailers across different Member States. Although some retailers ultimately won’t introduce surcharging, removing the ban on surcharging would afford merchants the choice.