The guidance sets out how the regulator will monitor and enforce newer elements of the EU Interchange Fee Regulation (IFR) which come into effect in June this year.

The MSC essentially packages up several costs charged for each card transaction and passes them onto the merchant in one fee. However, acquirers are not currently required to explain to a merchant what makes up this charge.

Hannah Nixon, managing director of the PSR, says: “The lack of clarity as to what is included in the Merchant Service Charge means that companies find it harder to negotiate on fees and are less likely to see reduced costs passed on to them. In turn, merchants cannot then pass these savings to their customers.”

The publication of the paper follows the PSR’s final guidance on the first phase of IFR that were in force by December 2015, which capped interchange fees at 0.2% for debit cards and 0.3% for credit cards.

“The interchange fee is only part of what makes up the Merchant Service Charge but we are still being asked by merchants why they are not seeing the cut in the interchange fee being passed on," says Nixon. “It is up to the individual companies to negotiate on the merchant service charge rate, but we would still expect that acquirers pass on reduced costs to merchants and, in turn, that these are then passed onto consumers."

The watchdog is calling for comments and feedback by 8 July, before passing the rules later in the year.

The draft paper also considers the approach to co-badged cards that have two or more payment options on the same card and requirement for electronic and visual identification on all credit and debit cards.

Full guidance paper: