UK watchdog proposes cap on card fees in blow to Visa and Mastercard

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British regulators plan to reintroduce a cap on card fees imposed on transactions between the UK and EU, in a blow to the Visa and Mastercard duopoly that raised charges on businesses more than fivefold since Brexit.

On Wednesday, the Payments Systems Regulator proposed that so-called interchange fees charged for cross-border and online credit and debit card payments should be restored to the level set before the country left the EU “to protect UK businesses from overpaying”.

“The fees charged by Mastercard and Visa to UK businesses which accept payments from within the European Economic Area are likely too high,” said PSR managing director Chris Hemsley.

“In short, we do not think this market is working well . . . Last year alone, the PSR estimates that UK businesses paid an extra £150mn to £200mn due to the fee increases.”

In 2021, freed from European rules after Brexit, the card giants had boosted debit card interchange rates between the UK and EEA to 1.15 per cent from 0.2 per cent, and credit card fees to 1.5 per cent from 0.3 per cent.

Provisional findings from the watchdog said that fees on UK-EU cross-border transactions should initially be recapped at the lower levels set by the EU in 2015, amid concerns about unfairly high costs for companies and elevated prices for consumers.

The PSR added that it wants to install “a lasting cap on these interchange fees in the future, once further analysis has been carried out to establish an appropriate level”.

Since the PSR probe was launched in June last year, Visa and Mastercard have lobbied against a cap, saying that higher levels of fraud in cross-border transactions made them more expensive and risky to conduct.

They also fear that reducing the lucrative fees they can offer card issuers such as banks will chip away at the dominance of their networks, which are increasingly challenged by newer and cheaper ways to pay online.

Last month, a government-commissioned review urged the UK to create new payment systems to challenge the incumbents’ dominance, criticising the processes used by current networks as “clunky”.

Former Nationwide chief executive Joe Garner, who led the report, also said retailers felt “trapped” by having to take cards as the use of cash was declining.

Interchange fees are levied by Visa and Mastercard on behalf of lenders for debit or credit card payments carried out through their network. Whilst the card companies do not receive the fees themselves, offering issuers higher rates acts as an incentive for banks to choose one network over the other.

The PSR also said businesses had little choice but to pay the increased costs as Mastercard and Visa cards account for nine out of 10 online transactions at groups that use EEA-issued cards.

Visa said it “strongly” disputed the findings, adding the “proposed remedies are not justified”. It noted the fees “reflect the fact that these transactions are more complex and carry far greater risk of fraud”.

Mastercard said it did not agree with the PSR’s findings and that interchange fees reflect “the value provided to consumers and businesses” in an extremely competitive market.

Alvarez & Marsal director Liam Evans said the proposal was “positive news” for consumers who travel and for businesses. But it warned it could lead to networks “clawing back lost revenue” in other areas by limiting cashback and loyalty points, or charging customers for having a credit card.

Francesco Simoneschi, chief executive at TrueLayer, a London-based payment group focusing on open-banking technology, called the proposal a “short-term solution” and urged regulators to do more to promote competition and foster the growth of alternative payment routes.

The PSR, which is conducting a separate probe into card networks’ processing fees, has given interested parties until the end of January to respond to its findings and proposals.