The
Payment Systems Regulator (PSR) has recommended a cap on cross-border interchange fees after its market review into the fees.
This is not the only interchange fees story to hit the headlines this week. Earlier this week, the Canadian government came to an agreement with
Visa and Mastercard to lower their interchange fees. From next Autumn, small businesses and non-profit organisations with less than $300,000 in Visa sales and less than $175,000 in Mastercard sales will qualify for fee cuts of up to 27%.
So what are interchange fees, and who will benefit from their being capped?
What is an interchange fee?
An interchange fee is a charge made to a merchant’s bank account when a consumer uses a card to make a purchase. The acquiring bank, that of the merchant, pays the issuing bank, that of the consumer.
Fees are initially collected by the customer’s card provider, like Visa or Mastercard, paid to the issuing bank. In cases where the card provider is also an issuing bank, like American Express, they don’t have to go through this extra step.
Visa and Mastercard are not issuing banks, so they can also charge a network fee from a transaction that would come out of the merchant's total processing cost.
The fees are taken as a percentage of the transaction. In the US and Canada the average interchange fee is currently around 1.81%, according to
Clearly Payments. The new changes proposed in Canada would rein this in to an annual weighted average interchange rate of 0.95%.
In Europe,
legislation from 2015 capped this at 0.2% for debit card and 0.3% for credit cards. However, this only applies to countries within the EU, so it is likely higher for transactions with non-member states.
This legislation covered the UK, however, since the UK's withdrawal from the EU, those caps no longer apply to member states. In their report, the PSR states that following Brexit, Mastercard and Visa reconsidered their fees for UK to EU card-not-present
(CNP) transactions, resulting in an increase to 1.15% for debit cards and 1.5% for credit cards.
Who loses out when interchange fees are cut?
For merchants, interchange fees can be one of the largest costs when accepting credit or debit cards. So, a cut in fees aims to benefit merchants, and in this case, UK merchants to access the EU market.
The PSR report is targeted at Mastercard and Visa to lower their fees. The report stated: “When they decided to increase UK-EEA consumer CNP outbound [interchange fees], Mastercard and Visa did not ensure that the interests of all users were taken into account.”
The report further argued that the upward pricing pressure is evidence of a lack of effective competition which is not constraining Visa and Mastercard in the setting of cross-border interchange fees.
They stated the higher fees do not incentivise innovation and results in higher costs and prices for UK merchants, especially SMEs and their customers. The PSR reported that the 2022 increase in fees by Mastercard and Visa amounted to approximately £150
million to £200 million extra paid that year by UK merchants, which may to an extent have been passed on to consumers.
The PSR also raised concerns that without a cap, Mastercard and Visa could have the incentive to continue to raise these fees.
The regulator is proposing a two-stage process to change interchange fees:
1. An initial time-limited cap of 0.2% for UK-European Economic Area consumer debit transactions and 0.3% for consumer credit transactions;
2. A lasting cap on these interchange fees in the future, once further analysis has been carried out to establish an appropriate level.
The PSR is accepting feedback on this proposal until 31 January 2024.
With the cap proposed in Canada, the government said it expected to save eligible Canadian small businesses about $1 billion over five years.
These caps may be a loss for card providers, but a win for merchants and potential innovation.