Accourt Payments Specialists » Payment Scheme Compliance

The impact of the interchange fee regulation – a card scheme view

Alex Rolfe — Thu, 29 Oct 2015 14:27:25 +0000

European payments are being hit by several disruptive forces, including heightened levels of innovation, competition and regulation.

One of the more significant changes is the European Union Regulation on the Interchange

The impact of the interchange fee regulation – a card scheme view

Fee for card based transactions, also known as the IFR. This article will not describe what is in the Regulation as plenty of literature on the topic is widely available. Instead, it will focus on the commercial implications as well as pointing out some critical issues that it creates.

In this article, which first appeared in the EPC newsletter, Marc Temmerman, Director European Affairs at Visa Europe, outlines the impact the IFR will have on card issuers (who will need to re-assess their card portfolios) and acquirers (the IFR will lead to a broader acceptance of credit cards, especially in areas where acceptance had been limited so far). He also focuses on the issues card schemes will need to deal with, raised for instance by the IFR definitions of ‘commercial cards’ and ‘cross-border payment’.

The Interchange Fee Regulation (IFR) is much more than a few articles capping interchange fees for debit and credit cards. The regulators have included a series of ‘business rules’ dealing with a variety of issues.

The net effect of the IFR is a redistribution of revenues and costs which will have a major impact on issuers and acquirers.

Impact on issuers

It goes without saying that interchange fee caps have a direct effect on issuers’ bottom line which forces them to re-assess their card portfolios. Depending on the country, issues to be considered will include:

Pricing strategies for portfolios where the majority of accounts are non-revolving credit cards (transactors).
Triggers for migrating transactors to revolvers.
Rationalisation of multiple credit card holding by consumers.
Pricing and benefits of premium card programs.
Potential new value added services.
Options to increase card usage and move cash payments to card (helped by increased acceptance in those markets where there is still a gap between debit card and credit card acceptance levels or gaps in some merchant sectors).
Migrate direct debit to deferred usage for selected transaction types or for consumers with higher fraud concerns.
The overall pricing model for current accounts.

Of course, there will also be opportunities to further reduce costs by rationalising selected parts of the delivery chain, including processing, card personalisation and optimising fraud and risk policies. All in all, there will be longer term benefits for issuers who fundamentally reconsider their business. Exploiting evolving technology and innovation opportunities will be necessary to keep meeting end-users’ needs and expectations.

Impact on acquirers

Narrowing the gap between interchange fees for debit and credit creates an opportunity to increase acceptance in areas where for credit cards, it has, so far, been limited. For instance, there are already clear indications from markets like Germany that retailers, who have not yet seen a business case to accept credit cards, have suddenly become interested in doing so. Other factors that will increase acceptance include:

The continuing increase in e-commerce’s share of consumer purchases.
The expansion of on-line commerce into mobile.
The availability of cheaper acceptance devices or solutions for smaller merchants or selected segments (e.g. smart phone- or tablet-based).

However, competition in the acquiring market is likely to increase, due to the improved ability for acquirers to operate cross-border (though a major anomaly may prevent them from doing so as explained below) and the increased transparency of merchant pricing (imposed through articles 9 and 12 of the IFR). More competition will increase margin pressure and may result in further consolidation.

‘Big data’ is often hailed as a new revenue generating opportunity in the card business. The extent to which acquirers will be able to create revenue opportunities by providing new information based products and services remains to be seen. The ability to provide such services may become the entry ticket required to be able to bid for the merchant’s business, especially with larger merchants.

There is no doubt that adjusting to the ‘new normal’ will not be an easy task for issuers and acquirers. In fact, the regulators have drastically changed core components of the business model. Nevertheless, it has been proven on many occasions that industries and businesses have the ability to reinvent themselves and those who dare to think out-of-the-box often come out stronger. In a few years, we will be able to assess how successfully the industry has done this.

Dealing with the anomalies

The Regulation has also left us with a few issues which seem to defy its original purpose. These are the definition of commercial cards, interchange rates applicable to cross-border acquired transactions and, for payment systems, the deadlines imposed for separating scheme and processing.

Commercial cards

For many years, Visa Europe has argued that commercial cards constitute a completely different market than consumer cards, with different end-user requirements and competitive dynamics (e.g. three party schemes leading in certain market segments). As such, the exemption of commercial cards from the rate cap provisions is, in itself, excellent news.

More problematic is the fact that during the final phase of the trilogue negotiations between the European Commission (the Commission), the European Parliament and the Member States, the definition of commercial cards was altered, creating major consequences for many issuers.

Up to the day of the ultimate negotiations, a commercial card was defined as “…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 or indirectly to the account of the undertaking or public sector entity or self-employed natural person”.

During the negotiations some concerns were raised about the risk that some issuers might in reality provide such cards to consumers or allow mixed usage of the cards (personal and business expenses). It was therefore suggested that in order to prevent this, only direct charging to the account of the undertaking should be permitted.

However, whether cards are individually billed to the cardholder (who will then be reimbursed by his employer) or directly billed to the account of the business itself, does not alter the nature of a genuine commercial card. Moreover, scheme rules clearly require that commercial cards can only be used for business expenses and issuers’ terms and conditions reflect this requirement as well. As such, there should not be any circumvention concerns if individually billed cards are excluded from the rate cap provisions, as originally proposed by the Commission.

Given that a very substantial part of corporate cards are based on individual billing, mostly combined with joint and several liability between cardholder and employer, many issuers will re-assess the business case for continuing to offer such cards and the additional services (e.g. reporting) they require. Indirectly this would impact their corporate customers who may have no other choice but to seek three party scheme-based alternatives.

The IFR may generate an unlevel cross-border acquiring playing field

Recital 1 of the IFR states that “… Eliminating direct and indirect obstacles to the proper functioning and completion of an integrated market for electronic payments, with no distinction between national and cross-border payments, is necessary for the proper functioning of the internal market.”. Moreover, in Recital 13, it is clearly pointed out that payment service providers should be able to provide their services on a cross-border basis.

This ambition has been a key driver of many recent regulatory initiatives and is to be supported as there are clear market level benefits to be gained from reduced fragmentation and hurdles to market entry. The increasing importance of cross-border acquiring is evidence of this market trend and is fully aligned with the internal market concept.

Cross-border acquiring is not explicitly covered in the IFR but indirectly caught via the definition of cross-border payment: “… a card based transaction where the issuer and the acquirer are located in different Member States or where the card-based payment instrument is issued by an issuer located in a Member State different from that of the point of sale.” All other transactions are considered as domestic transactions.

The first half of the cross-border definition implicitly covers cross-border acquired transactions. Combining this with the fact that Member States can set lower rates for domestic transactions creates an enormous anomaly which seems to fly in the face of the internal market concept itself.

It is Visa’s view that when a card from country A is used at a merchant in country A, domestic interchange rates should apply, regardless of who acquires the transaction. If not, in cases where domestic rates are lower than cross-border rates, the cross-border acquirer would not have access to these lower rates and would therefore be excluded from the market.

It is almost unthinkable that the regulators and the Member States will allow this anomaly to remain as it would distort the acquiring market in a major way.

Separating scheme from processing

Though no impact assessment was ever made concluding that separating scheme management from processing is necessary to ensure truly open competition and to remove hurdles to market entry, the IFR, in one simple sentence in its article 7, does just that: “Payment card schemes and processing entities (a) shall be independent in terms of accounting, organisation and decision-making process”.

Compliance must be achieved by 9 June 2016 and the European Banking Authority (EBA) is expected to develop ‘technical standards’ setting out the separation requirements in detail by 9 December 2015. However, recently, the EBA announced that a first draft may not be available until the end of 2015, after which a public consultation will be held, potentially followed by a public hearing. As a result a final text may not be available until April-May 2016.

It goes without saying that complying with a provision that may not be completely defined until a few weeks before the effective date creates significant compliance and commercial risks to schemes. Delaying implementation activity until the finalised standards are official could prevent us from meeting the 9 June 2016 regulatory deadline. Alternatively, undertaking further pre-emptive implementation activity now by second guessing the finalised standards creates the risk of significant rework.

Visa is urging the EBA and the Commission to acknowledge this issue and work with the schemes to find a pragmatic way to prevent a potentially significant problem.

The post The impact of the interchange fee regulation – a card scheme view appeared first on Accourt Payments Specialists.

Real-time cross-border payments – ISO 20022

Alex Rolfe — Thu, 03 Sep 2015 15:49:59 +0000

Real-time cross-border payments might soon be a reality, thanks to the efforts of a new payments industry group. But is there a business case for adopting the ISO 20022 standard?

With multiple countries implementing real-time payments initiatives around the globe, interoperability between

ISO 20022

systems is key. Therefore, the ISO Real Time Payments Group (RTPG), a collection of payments experts brought together by Payments UK, has published a first draft of ISO 20022 usage guidelines for cross-border real-time payments – according to an article in AFP.

Barry Kislingbury, senior principal solution consultant at ACI Worldwide, one of the companies that contributed to the first draft, identified some of the gaps in ISO 20022 and explained why this new “rule book” was needed. “Most countries, especially in the Western world, are looking at how they would implement real-time payments,” he said.

“ISO 20022 has become the standard for sending financial transactions—not just the value but the transactional data as well. But it wasn’t designed for real-time. It was designed to be sent and cleared tomorrow or the day after.”interoperability between systems is key. Therefore, the ISO Real Time Payments Group (RTPG), a collection of payments experts brought together by Payments UK, has published a first draft of ISO 20022 usage guidelines for cross-border real-time payments – according to an article in AFP.

Kislingbury explained that ISO 20022 currently lacks certain items that would allow for a real-time payments environment, such as confirmation messages that assure that payments have been made. “That’s something we’re going to have to design from scratch basically in this working group,” he said.

Additionally, there may be missing data that would be needed for real-time, such as e-invoicing. “You may well want to attach a document to a message that says, ‘Here is your invoice.’ Well, attaching a JPEG to a financial message isn’t necessarily the right thing to do because it makes the message massive. With instant payments, time and speed are very important. You want to be making these payments in seconds and not hours.”

Furthermore, with entities all over the world like the Clearing House and the European Payments Council wanting to use ISO 20022 as the messaging standard behind their real-time payments initiatives, the standard has to be uniform. “The problem is, if you’ve got another 40 countries implementing payments schemes and there are gaps in the standards, they’re all going to implement them slightly differently,” Kislingbury said.

This is one concern that Magnus Carlsson, AFP’s manager of treasury and payments, has had since ISO 20022 was first implemented. “We are already seeing some variances in the standard where it is implemented,” he said. “If these differences become more substantial, some of the information in the messages may be lost if the recipient doesn’t have the same version of the standard.”

Therefore, RTPG is seeking to ensure that ISO 20022 is cohesive for all parties involved. “In five to 10 years’ time, we will have interoperable real-time payments globally,” Kislingbury said. “But if everybody is still trying to make it their own way without talking to each other, that would make interoperability much harder. So that was what the working group got together to achieve—to take the current ISO 20022 standard and agree on what messages get used in which scenarios. That wasn’t always clear with ISO 20022, because some of the messages are very similar. We don’t want people using different types of messages for the same thing. So we agreed what the basic flows are for real-time payments, and what messages would be used in those flows.”

The draft is currently being reviewed across the payments industry, ahead of RTPG’s meeting at Sibos 2015 in Singapore this October.

Barriers to ISO 20022 adoption

Carlsson has some concerns about ISO 20022 adoption, primarily that in the U.S. at least, there is a lack of understanding around it. “Obviously, in the U.S., we have the issue of getting to even using ISO 20022, especially on a corporate level,” he said. “Quite frankly, most organizations are not even aware of it.”

Carlsson noted that the U.S. stakeholder group has been very active in reaching out to the corporate world and spreading the benefits of the standard. “The problem is, they haven’t found a pure financial business case for a corporate to adopt it,” he said. “It’s more of a strategic case for the U.S. as a nation to move to ISO 20022. The problem with that is, you’re never going to see a mandate to adopt it like you saw with [the Single Euro Payments Area (SEPA)] in Europe.”

As a former corporate project manager for SEPA implementation, Carlsson knows that it will be difficult to convince businesses to adopt ISO 20022 without a similar mandate. “Just seeing, form a corporate level, the resistance to make any kind of changes, the business case you have to present will have to be so substantial that corporates will see some real benefits to it, or it’s not going to happen,” he said. “We’re talking about a country where 50 percent of the B2B transactions are still done by paper checks.”

Carlsson applauded RTPG’s efforts and noted that U.S. corporates do show interest in using ISO 20022. “We hear corporates say, ‘This is very interesting.’ But then it stops there,” he said. “We need to find a way to show there are real efficiency benefits and cost saving opportunities with ISO 20022. Without a mandate, that’s how you can reach broader implementation.”

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Update on changes to the new Payment Services Directive (PSD2)

Jamie Merritt — Thu, 30 Jul 2015 10:46:44 +0000

The arrival of the new Payment Services Directive (PSD2) in the internal market repealing the current Payment Services Directive 2007/64/EC (PSD1) has been a closely monitored development since the publication of the European Commission’s (the Commission) Green Paper on Card, Internet and Mobile Payments (COM (2011) 941) in January 2012.

On 2 June 2015 the final compromise text of PSD2 was released. The updated PSD2

Update on changes to the new Payment Services Directive (PSD2)

broadens the scope of PSD1, captures a wider range of payment transactions, and also addresses some of the concerns raised during the legislative process regarding questions of liability.

Payment service providers (PSPs) will have to ensure that they comply with its provisions by the transposition date around end-2017. In this article, which first appeared in the EPC website, Maria Troullinou of Clifford Chance LLP looks at the key changes that PSD2 will introduce and at how the text has evolved since the initial Commission proposal was published in the summer of 2013.

A similar structure, a much broader scope

The new Payment Services Directive (PSD2) retains the same basic structure as the original Payment Services Directive (PSD1). PSD2 is divided into six titles, each of which focuses on a different subject-matter. Accordingly, title I covers scope and definitions, title II deals with the authorisation and regulation of payment service providers (PSPs), title III focuses on transparency, title IV establishes the respective rights and obligations of payment service users (PSUs) and PSPs and titles V and VI set out provisions on delegated acts and implementation. In addition, the different categories of payment service are set out in the Annex.

Despite retaining the same basic structure, the reach of PSD2 is broader than its predecessor. This is because of the expansion of the territorial scope provisions and the simultaneous narrowing down of the exemptions (commonly known as the ‘negative scope provisions’).

Territorial scope

Most provisions of title III and title IV of PSD2 will now apply to a broader range of payment transactions. Specifically, transactions in non-European currencies where both the payer’s and the payee’s PSP (or the sole PSP in the transaction) are located in the European Union (EU) will be caught, as will ’one leg out’ payment transactions in all currencies (i.e. where only one PSP is located in the EU).

‘One leg out’ transactions were outside the scope of PSD1, but PSD2 now brings them in scope “in respect of those parts of the payment transaction which are carried out in the Union”. This wording operates as a limit to the reach of PSD2 and seeks to offer some comfort to PSPs who would not be able to fulfil their obligations in respect of transactions (or components thereof) taking place outside of the EU over which they have no control (e.g, because these are subject to foreign systems and rules). PSPs will need to carry out an impact analysis and assess which parts of each transaction qualify as having been “carried out in the Union”; in the absence of guidance as to the precise meaning of this wording, this may not be a straightforward exercise.

Negative scope

PSD2 amends some of the exemptions established under PSD1. Changes to the “commercial agent” exemption attempt to address the divergent interpretations taken by some EU Member States, making clear that the exemption applies when agents act only on behalf of the payer or payee (not both).

Where agents act on behalf of both parties (e.g. in respect of e-commerce platforms) the exemption will only apply in cases where the agent does not come into possession, or have control of, clients’ funds.

Moreover, it will no longer be possible to use the same payment instrument within more than one limited network, or to acquire an unlimited range of goods and services and therefore the “limited network” exemption will now only be available to genuinely small networks. PSD2 also limits the scope of the mobile device content exemption to individual payments that do not exceed 50 euros and, on a monthly basis, transactions not exceeding 300 euros in aggregate per subscriber.

The Automated Teller Machine (ATM) exemption set out in Article 3(o) of PSD1 which was removed from the European Commission’s (the Commission) original PSD2 proposal, has now been reinstated. ATM operators will be subject to obligations to provide customers with information on withdrawal charges — both prior to the transaction and on the customer’s receipt — aiming to enhance transparency.

PSD2 seeks to minimise divergent interpretations around the application of certain exemptions. In certain cases, PSPs pursuant to PSD2 will have to notify competent authorities, so that an assessment can be made as to whether the requirements of an exemption have been met.

Expanding the market

PSD2 creates two new types of PSP, commonly referred to as ‘third party payment service providers‘ (TPPs) and attempts to strike a balance between opening up the payments market and maintaining appropriate security standards for online payments.

PSD2 contains provisions requiring EU Member States to ensure that all payment institutions have access to payment account services provided by banks. This is designed to prevent banks from refusing to open and maintain bank accounts for payment institutions. Although the right of a bank to reject account applications on valid grounds (such as anti-money laundering concerns) would not be affected, banks that decline to provide a bank account to another payment institution will have to explain the rejection to the regulator.

Under PSD2, payment initiation service providers (PISPs) are required to be authorised but are subject to a reduced minimum own funds requirement of 50,000 euros. Account information service providers (AISPs) are expressly exempt from authorisation, but are subject to a registration requirement. Both types of entity have to hold professional indemnity insurance or a comparable guarantee in order to ensure that they are able to meet liabilities arising in relation to their activities, as PSD2 aims to achieve a level of supervision commensurate with the risk such new entrants introduce into the system. PISPs that want to provide different payment services involving holding users’ funds will need to obtain full regulatory authorisation.

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Can you turn regulatory and payment scheme compliance into a competitive advantage?

Jamie Merritt — Wed, 22 Apr 2015 07:51:52 +0000

Regulatory compliance has long been viewed as a mandatory component and a ‘cost’ of doing business as a financial services provider, whether you are an issuer, programme manager or payment services provider.

However, the regulatory landscape has evolved and while compliance remains a primary

Can you turn regulatory and payment scheme compliance into a competitive advantage?

focus, there is now an opportunity to gain a larger foothold in the payments value chain and seize a competitive advantage – writes Jamie Merritt, Partner, Accourt – Payments Specialists.

Historically, the ability to become principal members of the payment schemes has primarily been the domain of the traditional bank players. However, as a result of the Payment Services Directive (PSD) and its driving desire to create a broader competitive landscape, opportunities now exist for smaller, more agile organisations and those with bespoke niche propositions to operate in a space usually occupied by the traditional banks. For example, prepaid issuers and PSPs have been able to apply to the FCA for Payment Institution Licences (PI’s) or E-money Licences and principal membership of the Schemes, dispensing with the need for a traditional banking partner.

The rationale and potential barriers to enter into this space have been both commercial and regulatory, as access requires both principal membership of the payment schemes and a licence from the FCA. Whilst these remain unchanged, the opportunity to gain a stronger foothold in the payments value chain – and ultimately a greater share of the revenue pool – is worth consideration.

Traditional issuing and acquiring models have focused on a number of key players taking clearly defined roles. Both prepaid issuers and acquirer PSPs have changed the landscape here, with additional organisations fulfilling both key operational/regulatory roles whilst providing additional value to the end customer. Consequently, there are a number of points to consider, namely:

The regulators and the European Commission are striving towards both greater competition and transparency on the various fee structures
With greater transparency, the quest for value provision to the consumer is paramount
An increase in the number of constituent parts of the payments value chain, whether from an issuing or acquiring perspective, will ultimately result in increased pricing for the end customer.

Therefore, organisations participating in this space – or those that have an appetite to do so – must have the ability to positively address these points. The key question is: how?

Fundamentally, they need a clear and full understanding of the implications associated with both the Regulator and scheme membership and/or accreditation. These implications fall into three broad categories:

Commercial – How can you build a business case that factors in both incremental revenues and the costs associated with regulator and payment scheme approval and on-going management of the business?
Operational – What infrastructure changes do you need to make to your business to demonstrate an understanding of, and compliance with, both the application and day-to-day management of the regulatory and scheme requirements?
Compliance – How can you demonstrate that the written policy and procedural documents are a living, breathing part of the company’s DNA?

It is also imperative to evaluate how responses to these questions will be viewed by a regulator. The FCA has summarised its role as four key functions:

Regulation – A supervisory role of the overall conduct of regulated companies
Best Practice – Upholding the highest operational and ethical standards
Protection – Ensuring customer protection
Enforcement -Taking the required punitive action against organisations who fail to meet these standards

The FCA’s overall objective is to drive better consumer protection, greater integrity of the payments system and enhanced customer experience by increasing competition. Consequently you will need to demonstrate regulatory compliance in line with all the JMLSG guidelines and all legal requirements through both the application phase and on-going management of the day to day business.

A similar level of due diligence is also required to support principal membership applications with the individual payment schemes, either as an acquirer or an issuer. The development of the supporting business case is key, both from the perspective of potential collateral requirements and in demonstrating a comprehensive understanding of the compliance obligations and fee structures.

Once you understand the rationale to embark on this journey you will need to work through how to best achieve the desired result. The reality here is that this is extremely difficult to do well. A critical factor is the selection of the right partner to assist you with the development of this road map and to help navigate through this extremely complex commercial and regulatory maze.

How Accourt can help:

Assist in the development of the requisite supporting business case
Develop a risk assessment and gap analysis on the supporting operational infrastructure
Review and/or create supporting operational procedural documentation, including all the required regulatory and compliance documents
Support and manage the application process to the regulator and provide all subject matter expertise
Create supporting documentation for principal scheme membership
Manage the application process
Provide subject matter expertise and provide support for the scheme risk review
Provide subject matter expertise and provide support for the go-live project

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