Payments regulator finds four banks failed to comply with the Interchange Fee Regulation (IFR)

The Payment Systems Regulator (PSR) has taken action against National Westminster Bank Plc, Royal Bank of Scotland Plc, Ulster Bank Ltd and Coutts & Company for overcharging interchange fees on credit cards. The regulator’s action has made sure that those who were overcharged by the banks got their money back. The PSR has also fined the banks £1.82m for failing to comply with important regulations.

The PSR spotted the issue during regular monitoring activity it carries out in its role as the main UK authority for enforcing the IFR. The banks incorrectly treated a number of cards as being ‘commercial’ cards when they should have been treated as ‘consumer’ cards. This meant that fees charged by these banks weren’t capped and were set at too high a level.

As a result, both acquirers and, ultimately, merchants were overcharged. The PSR found that the banks wrongly profited from almost £1.2m in excess interchange fees between March 2016-18.

Chris Hemsley, Managing Director of the PSR, said:

“The interchange fee caps were put in place to reduce the cost of accepting customer card payments for shops and other merchants’ businesses. The banks broke the rules by failing to bring themselves in line with the caps.

“As soon as we identified the problem, we stepped in to make sure the banks put a stop to it. Not only have the banks reimbursed the fees to acquirers which they were not entitled to collect, but we have also fined them for their failings.

“As demonstrated in this case, we will intervene and take robust action where needed to ensure compliance, including with the Interchange Fee Regulation.”

(1) The PSR opened an investigation on 4 May 2018. The full Decision Notice can be viewed here. A diagram setting out a typical transaction involving interchange fees appears in Annex 2 of the Decision Notice. The four banks in this case were ‘issuers’, as set out in the diagram.

(2) The banks agreed to settle at the earliest possible stage and therefore qualified for a 30% early settlement discount in accordance with the PSR’s approach to early settlement in IFR cases. Were it not for this discount, the PSR would have imposed a total financial penalty of £2.6m on the banks.

3) The banks failed to comply with Articles 4 and 10(5) of Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions. Post-Brexit, a modified version of the IFR continues to be in force under UK law.

(4) The PSR published its original guidance on its approach to monitoring and enforcing the IFR in March 2016. Its latest updated guidance was published in September 2021, to reflect changes arising from the UK’s withdrawal from the European Union and other changes to the regulatory framework.

(5) In line with the PSR’s guidance, these credit cards should have been labelled as consumer cards as they were ‘individually settled’ cards. The interchange fee caps apply to individually settled business credit cards because the funds used to settle the card balance come from individuals and not directly from the business (see paragraphs 2.2-2.9 of the Decision Notice).