UK businesses are being charged interchange fees on cross-border transactions at an ‘unduly high level’, according to the country’s Payment Systems Regulator (PSR).
The PSR recently concluded a market review into cross-border payments, raising concerns that Mastercard and Visa – the two biggest processors of international transactions from the UK to the European Economic Area (EEA) – have significantly raised fees.
The PSR review found that the two US firms are used for nine in 10 card transactions by British companies for business in the EEA. As a consequence, these UK enterprises have paid an estimated £150-200m in fees.
Chris Hemsley, PSR Managing Director, said: “In this market review we have provisionally found that the fees charged by Mastercard and Visa to UK businesses which accept payments from within the EEA are likely too high. In short, at this stage, we do not think this market is working well.
“Should we ultimately conclude this is the case, our interim report sets out a range of potential solutions which could be implemented. They are designed to make sure cross-border interchange fees are set at a level that better reflects the interests of all Mastercard and Visa users. We are also considering the longer-term outcomes so we can determine how we may need to adapt these fees in future.”
The primary solution proposed by the PSR is the aforementioned price cap. The PSR review found following the UK’s exit from the EU in 2020, Mastercard and Visa increased interchange fees from 0.2% and 0.3% to 1.15% and 1.5% respectively.
To solve the financial burden for both UK businesses and the general public, the regulator suggests an initial time-limited cap of 0.2% for consumer debit transactions from the UK to the EEA and 0.3% for consumer credit transactions.
Once the impact of this initial cap is visible and analysis can be carried out to ‘establish an appropriate level’, the PSR intends to introduce a ‘lasting cap’ on interchange fees.
However, some observers have noted that the PSR’s judgements could pose something of a double edged sword, as credit card providers will likely find other ways to recoup their losses from capped fees.
Commenting on the PSR’s judgements, Dr Liam Evans, Director at Alvarez & Marsal, said: “This is positive news for consumers who travel and businesses. However, this will likely lead to credit card firms clawing back lost revenue in other areas such as limiting cashback and loyalty points, which will impact a broader range of consumers.
“Credit card firms will also look at other ways to reduce the impact by exploring how foreign currency is calculated or start charging customers for having a credit card. There is a risk this will result in credit card firms taking a hard stance on accepting future foreign transactions, if this happens, consumers may find their options limited.”
The market review has been followed by the opening of a consultation on the topic, particularly seeking input from issuers, acquirers, card scheme operators, businesses, and cardholders. The window for feedback will close on 31 January 2024.
