In her latest thought piece, Genevieve Marjoribanks talks about the changes to cross-border card interchange fees
It’s been a few months since the UK’s withdrawal from the EU. We’re all getting used to the resulting changes to many aspects of our lives. In the world of payments, one significant change was that the EU’s regulation of interchange fees on card transactions was replaced here by a UK regulation that applies only to UK-issued cards used in the UK.
Both Mastercard and Visa have told us they plan to increase some cross-border interchange fees. This will generate more revenue for card issuers at the expense of merchants, and indirectly at the expense of customers.
This matters, as UK consumers are making increasing use of cards to make payments. 2020 data from UK Finance show that card payments accounted for almost 60% (by volume) of all consumer payments. Our interim report on the supply of card-acquiring services shows that together Mastercard and Visa accounted for 98% of all card payments at UK outlets in 2018, both by number of transactions and value. We want to see competition in payments delivering good outcomes for customers and in competitive markets we expect prices to reflect the costs of supplying goods and services.
But the main way that competition seems to operate in card payments is different than in other markets. Merchants who accept cards have to take both Mastercard and Visa cards, so there’s no obvious competitive pressure by them on the card schemes to hold down interchange fees. The card schemes do compete for the custom of card issuers who can choose between schemes. This puts upward pressure on fees and therefore on merchants’ costs and customer prices. Rather than competition holding prices down, it seems to push prices up.
There has been a long history of involvement by regulators and the courts in the setting of interchange fees. The EU’s 2015 regulation of card interchange fees within the EEA (EU IFR) was followed in 2019 by the European Commission’s acceptance of binding commitments by the schemes to cap fees on cards issued outside the EEA and used at merchants in the EEA.
With the UK now not within the EEA, when the holder of a UK-issued card buys goods or services from a merchant in the EEA, the cap on the interchange fee is now higher than it was before Brexit. And when the holder of a non-UK-issued card buys from a UK merchant, the interchange fee paid by the merchant (via its acquirer) to the financial institution which issued the card is simply no longer capped.
We expect the fees charged for card payments to be appropriate and fair. If costs rise, it is appropriate and fair for fees to rise. But the costs of accepting EEA-issued cards in the UK or UK-issued cards in the EEA appear not to have increased, so why are Mastercard and Visa proposing to raise interchange fees?
The short answer is: because they can. Brexit has loosened some of the regulation of fees, and the card schemes are responding to the commercial incentives presented by this change.
The slightly longer answer is that, as I have pointed out above, in the card payment market, free from the previous regulatory controls, the way competition works appears to push up interchange fees, so merchants and their customers face higher prices even if costs haven’t increased.
What can the PSR do about this unsatisfactory development? We are the lead authority for monitoring and enforcing the UK’s post-Brexit interchange fee regulation. But the issue is about fees which were formerly regulated or capped by the EU IFR and which are now not within the scope of the UK IFR. The PSR does not have the power to widen the scope of interchange fee regulation in the UK.
We will continue to monitor developments and consider what action is possible. We have reminded Mastercard and Visa of the need to assure themselves of their compliance with all legal obligations. They also need to consider the effect on their customers and businesses across the UK, if they push up the fees charged to UK merchants (and indirectly UK consumer prices) in the absence of any real change in the costs of running the card payment systems.
In the longer run, our recently published proposed Strategy includes a plan to promote greater competition between payment systems, particularly by promoting the development of interbank payments for retail transactions as a credible alternative to card payments. I invite you to take a look at our thinking on this. Interchange fees are a feature of a payments market in which competition may not to be working as well as it ought to. We want to make competition work better.