Interchange Fee Regulation: gender-specific universal cards

Universal Cards | PayTechLaw

The current debate concerning gender-political correctness would appear to suggest that there are not just women and men but many different variants in between. One variant is the circumstantial or time-dependent dominance of the respective gender of a human being. Terms like bi-gender, gender-fluid or simply gender-queer try to describe the phenomenon. It may come as surprise to you but such chameleons also exist in the world of payment cards (queer cards / universal cards).

With the same card, the cardholder can trigger debit and credit card transactions as he or she pleases. According to the European Interchange Fee Regulation (EU/2015/751 or IFR), the credit card transaction may be priced with an issuer fee of a maximum of 0.3%, while the debit card transaction may only be priced with a maximum of 0.2%. So, what does this mean in practice?

Queer cards

Let’s call such cards, which are neither debit nor credit cards, simply “queer cards”, or somewhat old-fashioned “hybrid cards”. There are numerous examples of such cards. In Finland, for example, Nordea Bank issues a card (“combination card”) with which the cardholder can decide at the touch of a button at the terminal whether the transaction should be debited directly from his account (debit) or treated as credit from his bank (credit). For the acquirer, the case is clear. One transaction is labelled with the Debitcard-IF, the other with the Creditcard-IF.

In Germany there is an innovative hybrid card from the German Fidor Bank. The card has two brands: one brand for credit card transactions (Mastercard), the other (Maestro) for debit card transactions. In this case, too, each transaction can be marked with the correct IF – due to the selection of the respective brand at the POS. The only problem for the issuer is the correct optical designation of the card (debit or credit?), since the IFR in Art. 10 No. 5 does not actually provide for this type of card. Fidor Bank has elegantly solved the problem with the card imprint “credit/debit”.

Universal cards

However, it is not always possible to identify the type of transaction (debit or credit) at the POS. It might be, for example, that the cardholder only informs the issuer (e.g. via app) after the transaction has been completed how the transaction should be booked: direct or delayed debit, or as a credit. Which IF should be used to flag the transaction in the clearing process? And how can a trader reject these transactions if it only accepts one of the two categories of cards? At France’s behest, a regulation for such transactions was introduced in Article 16 of the IFR just before the deadline under the heading “universal cards”:

For the purposes of this Regulation, in relation to domestic payment transactions that are not distinguishable as debit or credit card transactions by the payment card scheme, the provisions on debit cards or debit card transactions are applied.

Recital 25 states:

The choices made by the cardholder are unknown to the payment card scheme and to the acquirer; as a consequence, the payment card scheme does not have the possibility of applying the different caps imposed by this Regulation for debit and credit card transactions, which are distinguishable on the basis of the timing agreed for the debiting of the payment transactions.

So in the category of queer cards there is a sub-category “universal cards”, all of whose domestic purchase transactions are to be evaluated as debit card transactions (max. 0.2% IF) for IF purposes. Looking at the article more closely, the following questions spring to mind:

  • Why only domestic transactions? Why does the issuer possibly have the choice to mark cross-border transactions with a credit IF even if the transaction is debited directly from the account?
  • Why is the respective card scheme all of a sudden responsible for compliance with the correct IF? In the IFR, according to Articles 3 and 4 (which impose the respective caps), the obligors are the “payment service providers” and not the “schemes”.

When things are done last-minute, even legislators can make mistakes. It is likely that the text proposed by France was simply adopted. From this perspective, the text is comprehensible again. In the French card scheme “Cartes Bancaires”, there was a single IF (without differentiation between debit and credit) at the time the IFR entered into force, which was determined by the scheme CB. Cross-border transactions with the CB card are carried out via the co-badged brands (Visa or Mastercard). The adjective “domestic” is therefore nonsensical, as the French banks can clearly define the cross-border transactions, which previously always took place with the international brand, as debit or credit. In order for CB to be able to create the technical prerequisites for an IF differentiation, an additional period of one year (until 9 December 2016) was granted to the French universal card issuers in accordance with Art. 16 No. 2 which was intended to be a transitional rule. According to CB, universal cards no longer exist in France.

Universal cards in Germany

Does this mean that the issue is off the table? Can Article 16 of the IFR as a “Lex France” be deleted without replacement as part of the forthcoming revision (the “review analysis” according to Art. 17 is already under way)?

No, we still need a regulation for transactions that cannot be clearly assigned to an IF category at the POS due to the legal definition. Otherwise, we will either have a loophole or it will limit innovation.

One must point out that it was not only France which had card transactions for which the merchant and the acquirer could not identify at the POS whether the price tag allocated by the IFR was correct. Universal cards are still widely used in Germany today. Many card issuers offer the cardholder the option of crediting the card account in addition to monthly billing (for IF purposes: “credit”). This prepaid option is particularly popular with co-branding cards as well as with cards issued by the “monoline” card issuers, as the cardholder usually maintains a current account with another credit institution. By crediting the card account, the cardholder can get attractive interest rates or increase the credit amount available to him.

Are German card issuers in violation of the IFR?

If the cardholder has paid into the card account (prepaid), the transaction is debited directly from this account (for IF purposes: “debit”). The respective account balance decides whether the transaction is a credit card or a debit card transaction according to the IFR definition. How can the merchant or acquirer know whether I, as the cardholder, transferred sufficient funds to my card account yesterday (“debit”) or whether the transaction is included in the monthly bill (“credit”) in the absence of sufficient funds?

According to Art. 16 No. 1, “the provisions on debit cards or debit card transactions” are applied to the transactions of these universal cards (at least for domestic transactions). However, as far as is known, all transactions of these cards in Germany are settled with the IF for credit cards (0.3%). In my opinion, this would constitute a violation of the IFR by German credit institutions. It is up to BaFin as the competent authority to ensure compliance with the IF Regulation.

It would also be very helpful if BaFin could clarify the following questions at the same time:

  • What optical features do these universal cards have to contain when they are issued? Do they need to be marked as “debit” or as “debit/credit”? According to Art. 16, the provisions for debit cards apply.
  • How should cross-border transactions be assessed for IF purposes? Even if these transactions are offset directly against the credit account, they are still by law debit card transactions, even if Art. 16 No. 1 of the IFR does not provide for this case due to a lack of technical precision. There would be  a solution, however  difficult to digest: the issuer would not be able to settle cross-border transactions against existing credit, but only as part of the monthly billing process.

If the Commission were to abolish the IF differentiation between debit and credit as part of the forthcoming revision of the IFR, universal cards would, of course, be obsolete and the problem solved. In light of the fact that the differentiation as well as the level of the caps are currently difficult to justify by systemic arguments (keyword “merchant indifferent test”), this would be a logical step.

But that is another topic for another time. Until then, one thing is abundantly clear: we definitely need a regulation.


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