Post-Brexit interchange fee plan sparks outcry from UK traders
Visa and Mastercard’s proposal to increase UK system fees and interchange rates on cross-border transactions after Brexit has increased pressure on regulators to cap them and on traders to seek out alternatives.
Prior to Brexit, UK merchants benefited from a cap imposed by the European Commission on credit and debit card interchange fees for all transactions between the UK and the EU. This no longer applies.
From October, Visa plans to increase the interchange fees on digital payments made between European customers and UK businesses from 0.3% to 1.5%, and vice versa, while the fees for interchange for cross-border debit card payments made online will also increase. from 0.2% to 1.15%. Mastercard plans to implement the same fee increases, but only for online card payments made between UK customers and European merchants.
Representatives from Visa and Mastercard told PaymentsSource that increasing interchange fees on domestic-only transactions would not be possible, as they are capped by UK regulators. They also note that they do not directly benefit from increases in trade, as these fees go to acquiring banks.
However, the card networks also plan to increase their system fees – the fees paid on each transaction that go to the brand of the card, while the interchange fees go to the acquiring bank – on cross-border payments in 2022. Industry experts say this is a substantial part of their business model.
“Cross-regional transactions are by far the most profitable for card systems,” said Mark Falcon, former director of policy and strategy for the Payment Systems Regulator in the UK, who now heads the payments consultancy Zephyre. “You can see that from their financials they make a third of their profits from the area, which is the combination of the system fee and the exchange fee as well. Even though the interregional represents only a few percent of transactions in terms of volumes, this is an extremely high profit in terms of turnover. “
According to Visa and Mastercard, increases in system fees are necessary to fund the various fraud prevention mechanisms that are integral to the e-commerce environment.
But the proposed fees may prompt the payment system regulator and government officials to intervene. British Retail Consortium chief financial officer Andrew Cregan is pushing for regulators to abolish interchange fees altogether.
“ESP has the power to set the interchange fee to zero if it wishes; nothing should change in the legislation, ”he said.
The trade group also wants system fees for card networks to be capped.
“We’ve seen these double-digit year-over-year increases in card system fees, which if they were a consumer fee then there would be an uproar,” Cregan said.
Some traders may be looking for ways to avoid the new tariffs. One in ten UK-based exporters now consider setting up a base in the EU to waive cross-border fees, as the business community increasingly tempted to explore banking options, according to FSB data. open to bypass the card networks altogether.
“In an ideal world, we would have just done away with the middlemen and the fees they charge, entirely,” said Martin McTague, national vice president of the Federation of Small Businesses. “It is encouraging to see NatWest testing account-to-account transactions in a retail environment and we hope to see other payment companies follow suit. If we can secure this process, it almost certainly marks the way forward. “
Representatives from Visa and Mastercard told PaymentsSource that a major part of their offering is their continued investment in cybersecurity, and that any alternative would need to provide the same infrastructure to protect consumers, which would require significant spending.
However, some reports indicate that even the business giants are increasingly restless, due to rising fees, which can lead to new innovations. “It’s completely non-negotiable, just take it or leave it. No merchant can say, ‘No, I don’t want to take Visa or I don’t want to take Mastercard,’ and it has become even more extreme with a pandemic, with people stopping using cash, ‘said Falcon.