31.05.2017.

Draft Law on Interchange Fees and Special Operating Rules for Card-Based Payment Transactions

The NBS has prepared the Draft Law on Interchange Fees and Special Operating Rules for Card-Based Payment Transactions. Its adoption will contribute to the further development of cashless payments in the country and fair practice in card-based transactions. The arrangements proposed in the Draft Law build on the regulatory framework for state-of-the-art forms of payments, set up with the adoption of the Law on Payment Services in 2014.

Practice has identified business rules in the field of card-based payments which limit the development of cashless payments. It is due to these very rules that retailers often give up on accepting payment cards, insisting on cash payments only. This results not only in the reduced share of cashless compared to cash payments, but also opens room for the grey economy.

One of the key limiting factors for card-based payments are interchange fees paid by the acquiring bank (providing a merchant with a POS terminal and executing card-initiated payment transactions) to the bank that issued the card, for each transaction carried out at the POS. These fees represent an important element of the merchant charge that acquiring banks charge merchants for each card-based payment transaction.

As the level of the merchant charge depends directly on the merchant’s negotiating power, large trading chains receive the most favourable bank offers, while small merchants, artisans and small shops do not have such a negotiating position and are offered high merchant fees, which discourages them from accepting payment cards.

To protect small and medium-sized merchants and resolve the issue of high interchange fees in the Republic of Serbia, the NBS prepared the above Draft Law that would cap these fees. By lowering interchange fees as a generator which guides the market to a non-optimal direction, the Law primarily aims to create the conditions in which competition among banks and card schemes would lower the prices for end-users.

A phased reduction in interchange fees has been proposed and its effects on the income of issuing and acquiring banks have been taken into account. The capping of interchange fees will be carried out in two phases – in the first nine months of implementation of the Law, the fees would be reduced to 0.5% for debit cards and 0.6% for credit cards, and further down to 0.2% for debit and 0.3% for credit cards thereafter.

The Draft Law also relies on arrangements applied in EU countries. Full implementation 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 began in mid-2016, whereby this matter is directly regulated in all EU member states.
In addition to the proposed phased reduction in interchange fees, which should result in the lowering of merchant fees and broadening of the card acquiring network, the Draft Law regulates the following issues relating to card-based payments:

1. Co-badging – a card issuer can include two or more payment brands or applications on the same payment card, while the rules of payment systems (Visa, Mastercard etc.) cannot prevent or limit this possibility.
2. Unblending – introducing transparency in fee charges and strengthening the negotiating power of merchants, notably the small ones. Merchants can no longer be imposed the rule of a uniform calculation of fees where the acquiring bank does not determine the merchant fee depending on the type of card used for payment, but instead, the merchant fee is defined in a uniform manner – the cards with a lower interchange fee (e.g. debit cards) subsidise the use of “more expensive” cards (e.g. credit cards).
3. The “Honour All Cards” rule – the obligation imposed on merchants by banks and payment card schemes to accept all cards of the same brand, irrespective of the different costs of these cards (the “Honour all Products” rule) and irrespective of the issuing bank (the “Honour all Issuers” rule). While the “Honour all Issuers” rule is justified since it prevents merchants from discriminating between individual banks which have issued a card, the “Honour all Products” rule is unjustified as it imposes upon merchants the obligation to accept all cards of the same brand – both those with low and those with high costs. To prevent this, the Draft Law forbids the introduction of the “Honour all Products” rule, i.e. merchants can choose low-cost payment cards only (e.g. merchants accepting debit cards would not be forced to accept credit cards).
4. Unallowed influence on merchants in terms of the use of payment instruments – banks and payment card schemes cannot forbid a merchant to direct a consumer to use any payment instrument (e.g. due to lower merchant fees in such case), to give a priority to a payment instrument of a particular payment card scheme and to inform the user about the fees that the merchant pays to the acquiring bank.
5. Information for merchants on individual card-based payment transactions – enhancing the transparency of fees that the acquiring bank charges to the merchant so that the bank must submit to the merchant, following the execution of an individual card-based transaction, among other, the information on the amounts of the merchant and interchange fees relating to the transaction.
6. Protection of users’ rights and interests – ensuring the protection of rights and interests of payment service users in accordance with laws regulating payment services and the protection of financial service consumers.
7. Supervision – the NBS will supervise the implementation of the Law by payment card issuers and acquirers, including payment card schemes, processors and other providers of technical services which support the execution of payment transactions subject to this Law, as well as entities responsible for their operation. Supervision will be carried out in accordance with the Law on Payment Services.

Citizens, professionals and all other interested parties are invited to submit their suggestions and objections to the Draft Law within the public debate by 20 September 2017 at: kabinet@nbs.rs.

Governor's Office