Interchange Fee Regulation: Good things come to those who wait?

PayTechLaw already had a look at the Interchange Fee Regulation last year. Back then, I looked into queer cards and universal cards. This entry will also deal with the Interchange Fee Regulation but this time it will examine the differences between debit card and credit card transactions; an important topic as there are subtle but very relevant distinctions for the cardholder.

If you are one of those people who does not yet pay exclusively with their mobile phone, it is worth taking a look at the “old-fashioned” plastic payment card in your wallet. If this is not a really old card, you will usually find the word “debit” or “credit” printed on the card (less common: “commercial” or “prepaid”). With this, your card-issuing bank (“issuer”) indicates that the card issued to consumers has been classed as a debit or credit card in accordance with the EU Interchange Fee Regulation  (IFR 2015). This distinction is important as the IFR has imposed different upper limits for the IF income of your card issuer: a maximum of 0.3% for credit card transactions and a maximum of 0.2% for debit card transactions with consumer cards.

And it is not just visually that your card has been assigned to one of the categories, but also with a data field in the chip of the card. This begs the question as to why and for whom this information is relevant? In the past, card accepting merchants were obliged to accept all cards of a certain card brand (e.g. Visa or Mastercard) according to the rules of the card systems (the so-called honour-all-cards-rule; HACR). According to the IFR, which came into force several years ago, merchants are now able to differentiate here. For example, they may only accept the cheaper debit and prepaid cards of a card system (0.2% IF) and reject the more expensive credit cards (0.3% IF) or the even more expensive company cards (“commercial card” without an upper IF limit imposed by law).

Although this was a clever idea of the European Commission in terms of competition theory, this is actually mere theory and it looks very different in practice. Most retailers do not want to annoy their customers by rejecting specific cards from the same “brand”. Merchants would also have to clearly indicate at the checkout that, for example, they accept Visa debit cards but not Visa credit cards or company cards. From a customer’s point of view this would be an incomprehensible discrimination. For the issuer, however, the classification is important since they receive 50% more IF income for a payment with a card classed as a “credit” card than for a payment with a debit card. The IFR therefore contains clear rules for the issuer as to when they may mark the card issued by them or the transactions with such card as “credit”, “debit” or “commercial”.

So what is a debit card?

Let’s start with the debit card as the most widely used card. What characterises a debit card? The answer is simple: a card which causes payments to be debited directly from a current account. But what does “directly” mean? Is a day’s delay still direct? Does it have to be a current account? Does it have to be an account with a bank? Could it also be a savings account? Does the card issuer have to be the same as the account-providing institution? Does the account have to be in credit? This shows that the answer does not seem to be that simple after all. In the first proposal of the IFR in 2013, the Commission proposed the following definition (Art. 2 No. 4):

A debit card transaction means a:

card payment transaction included with prepaid cards linked to a current or deposit access account to which a transaction is debited in less than or 48 hours after the transaction has been authorised/initiated.

In accordance with this, if the account is debited more than 48 hours later, this then constitutes a credit card transaction. The Commission’s proposal led to an interesting discussion as to whether the decisive characteristic should be the delay. A delay in the settlement of one minute could increase the issuer’s IF income by 50%: an open invitation for circumventions. What should we do? If a regulator or legislator does not manage to get the object of desire under control by way of a definition, the definition is dispensed with and it is simply turned into a catch-all provision. Then there is no escape from this conglomeration. In the final version of the IFR (2015), the dilemma was solved in a similar way. All payments that are not credit card transactions were simply declared to constitute debit card payments (Art. 2 No. 4). It would appear that credit cards were easier to capture in a definition than debit cards. The following definitions were finally agreed upon (Art. 2 No. 5 or 4):

A credit card transaction means a card-based payment transaction:

where the amount of the transaction is debited in full or in part at a pre agreed specific calendar month date to the payer, in line with a prearranged credit facility, with or without interest.

A debit card transaction means a card-based payment transaction:

including those with prepaid cards that is not a credit card transaction.

The card experts among you will know exactly what the Commission wants to achieve: transactions with charge cards (delayed debit), which are due cumulatively and in full (100%) on a set monthly date and which are generally debited from a payment account by way of direct debit, as well as transactions with “real” credit cards (revolving credit), which are converted into an interest-bearing loan as of a specified calendar day, are considered “credit card transactions”. This also becomes clear when reading Recital 17:

There are two main types of credit cards available on the market. With deferred debit cards, the total amount of transactions is debited from the cardholder account at a pre-agreed specific date, usually once a month, without interest to be paid. With other credit cards, the cardholder can use a credit facility in order to reimburse part of the amounts due at a later date than specified, together with interest or other costs.

 

Insufficient definition of a credit card transaction

However, the definition of a credit card transaction contained in Art. 2 No. 5 is not very precise and does not accurately and sufficiently cover the existing market conditions. Let us take a closer look at the legal definition contained in the IFR.

The first thing to note is that the translation of the English source text into the German version is imprecise. The English version states that:

The amount of the transaction is debited in full or in part at a pre-agreed specific calendar month date to the payer…

But the German version only refers to a specified calendar day. The English wording would suggest, particularly through the insertion of the word “month”, that reference is not made to a specific calendar day but to a monthly recurring calendar day, as is also common practice in the card business. In accordance with this, a specific monthly calendar day would need to be agreed between the cardholder and the issuer (e.g. the 15^th calendar day of each month). However, we assume that the source text prevails.

As stated above, the requirement is that on a pre-agreed monthly calendar day, the full amount or part thereof is “debited to the payer”. What happens then if there is no debit on this calendar day but if instead, 100% of the accumulated amount is converted into a revolving credit? Would this mean that this card payment does not constitute a credit card payment? Or what happens if the (partial) amount is not debited from the payer in accordance with the definition, but from a third party (e.g. a son has provided his father’s account for any debits relating to his credit card payments)? Or what happens if a cardholder transfers the amount owed to the issuer in cash (this option actually existed in the past, for example, if a cardholder paid a visit to strip club and accidentally paid by credit card and, understandably, did not want this transaction to appear on the bank statement).

In practice, there would therefore be plenty of credit card transactions (0.3% IF) that do not meet the definition criteria contained in Art. 2 No. 5 of the IFR. Strictly speaking, these transactions would then fall under the catch-all provision that is debit card transactions (0.2% IF). It can, of course, be assumed that this consequence, which is due to the inadequate definition of what constitutes a credit card payment, was not intended by the Commission.

In spite of the uncertain definitions, it is clear that following two criteria must be fulfilled for there to be a credit card transaction: (i) a credit facility (from the date the transaction is booked) and (ii) a specific calendar month day for the (partial) payment obligation of the cardholder. Both must be agreed in advance (i.e. before the transaction) between the issuer and the cardholder. Everything else falls into the “debit” category.

The three-day debit card

A concrete example: Is it possible to class a card transaction that is, in accordance with the general terms and conditions of the issuer (which is not an insignificant credit institution), “valued 3 days after the date of receipt (booking date) at the bank in the current account” as a credit card transaction? The criterion “credit facility” is fulfilled (3 days). Is there a specific calendar month date for the debit? It could, of course, be argued that “3 days after booking date” is specific. According to this logic, any transactions that are, for example, valued on the booking date (with crediting taking place within a few hours) could also be considered to constitute credit card transactions. This would make the catch-all provision of the “debit card” meaningless as there would then only be credit card transactions. In my opinion, the requirement of there being a “debit on a specific calendar day” in order for a payment to constitute a credit card payment is not fulfilled. Apparently, the bank in this case took its guidance from the draft of the IFR from 2013, which refers to a delay of at least 48 hours. The bank has recently transformed this alleged “credit card” (under the general terms and conditions) into a debit card. All transactions are now booked to the current account on the day of receipt. However, all old debit cards which still have the word “credit” printed on them, will not be exchanged. This could now mean that such an incorrectly labelled card is rejected by a merchant who only accepts payments with a debit card of this card system as the card (incorrectly) appears to be a credit card. As I mentioned before, this is all mere theory as I, at least, don’t know of any merchant in Germany who uses this discretion provided by the IFR.

The unconventional company card

It appears that the definitions of the individual card types in the IFR encourage “unconventional” interpretations. I would like to add one final example. The so-called company or commercial cards are excluded from the upper limits imposed on IF. According to Art. 2 No. 6, a commercial card is:

any card-based payment instrument issued to undertakings or public sector entities or self-employed natural persons which is limited in use for business expenses where the payments made with such cards are charged directly to the account of the undertaking or public sector entity or self-employed natural person.

The definition unequivocally states that in the case the card is issued to a company, any payments with this card must be debited “directly from the undertaking’s account”. In Germany, several issuers now issue company cards (visually and electronically branded as “commercial”), which, however, are not debited from the company’s account but from the private account of the respective company employee (cardholder). At the same time, the company accepts liability for the settlement with the issuer. There are even suitable liability exclusion insurance policies available to companies in order to minimise this risk. Allegedly, this practice is tolerated or has even been approved by BaFin, which is responsible for compliance with the IFR. However, the IFR is a regulation which applies throughout the EU and not an EU directive with national scope for interpretation. In Great Britain, for example, this “interpretation” of the definition of company cards is expressly prohibited. It would appear that with the IFR we have a regulation that is not applied uniformly throughout Europe. This is certainly not the purpose of a regulation and may lead to distortions of competition.

There is yet another problem. Despite the fact that the IFR has now been in force for almost four years, the European Central Bank still uses definitions of credit and debit cards for its payment statistics which differ from those contained in the IFR. These different definitions may lead to issuers correctly classing the transactions of a card under the IFR as “credit card payments” but reporting the same transactions – also correctly – as debit card transactions to the ECB to be included in the ECB’s statistics (or vice versa). However, this topic would take us too far at this point. For those of you interested, I refer to the PaySys Report No. 4-5 dated July 2018. All this goes to show is that precise and uniform definitions are a delicate undertaking, but still rather important.

Cover picture: Copyright © PayTechLaw / Godschalk