Around £5bn is lost every year to card fees on shops, businesses have complained, as the cost of living bites for consumers.
A coalition of retail and fintech trade associations, including the British Retail Consortium, the Federation of Small Businesses and Coadec, have launched a new campaign, Axe The Card Tax, to push the UK government to create a more level playing field.
"This coalition has extensive evidence built up over many years, and we know that this problem is only getting worse,” Charlie Mercer, head of economic policy at Coadec, told VIXIO.
“The status quo is eating into already razor-thin business margins and we now have a flock of innovative ways of paying ready to compete if only there was a level playing field."
Mercer continued that through conversations with fintechs, it became clear that the payments market was not functioning as well as it should. “Once we peered under the rock, we saw how broken it actually was.”
“Costs of card payments have ballooned for retailers as they've come to dominate market share,” he said. “There are emerging technologies that could compete, but banks are not incentivised to support alternatives to cards due to how lucrative card payments are for them today."
For example, for every payment made on card, the retailers are charged a merchant services fee, comprising interchange fees, acquirer net revenue and scheme processing fees.
Merchants say that scheme and processing fees have increased by 600 percent since 2014, the consortium of trade associations cautioned.
“We’re backing this campaign as we know that card fees are a significant burden for small businesses, but their impact is often hidden,” said Martin McTague, national chair of the Federation of Small Businesses. “Customers don’t realise that card processing companies take a bite out of every sale they handle.”
According to McTague, these charges are often confusing and lacking in transparency, pushing up costs for businesses and consumers alike. “There’s a strong case for the Payment Systems Regulator to intervene, to help level the playing field for small firms.”
This vision, according to the campaign, offers businesses the opportunity to use cheaper alternative providers as the cost of doing business increases as a result of inflation and higher energy costs.
"As a coalition we want to deliver value and choice for retailers, and a level playing field for fintechs,” said Mercer.
In addition, Mercer said that the trade associations want to equip the PSR with the evidence, data and first hand accounts it needs for its investigations and for the regulator to see the extent of the issues. “As a coalition including innovators and retailers, we are presenting a voice for disruption and better value.
“We also want to be a vocal supporting coalition for the investigations in the first place,” he continued. “It is inevitable that some actors with much to lose will attempt to be vocally defensive of the status quo, and we hope to present a supportive, and extensive coalition with over 240,000 firms represented."
Mercer confirmed that the PSR has been introduced to this campaign and is keen to hear more. In addition, the coalition of associations has written to HM Treasury, and are keen to gain influence in Westminster.
“While the Treasury Select Committee and MPs like Mel Stride and Kevin Hollinrake are vocal and informed advocates of the issues, we want to ensure policy makers across the House are aware of the need to Axe the Card Tax, for the sake of the cost of doing business and the growth of our fintech sector,” he said.
Another side to the story
This type of campaign is not new in Europe. In Brussels, trade association EuroCommerce launched a similar report in December 2020.
This pointed out that the average cost of card payments in the EU is now higher than it was when the Interchange Fee Regulation (IFR) came into force in 2015, nullifying any benefits previously derived from the regulation.
At the time, Mastercard EU chief Mark Barnett told a conference that “there are a plethora of services which an issuer or an acquirer may sign up to”, which can incur a mix of underlying costs.
So, the situation is complicated. For card issuing banks, incentives have significantly been curbed since the introduction of interchange fee regulations, which lowered interchange to just 0.2 percent of the transaction value on a standard domestic debit card payment.
Meanwhile, the majority of the merchant service typically does not go to the bank. For instance, one of the issues highlighted by the PSR in its recent report into the card acquiring market was that some acquirers were not passing on the interchange cap savings to merchants.
Although some merchant acquirers in the UK are also banks, such as Barclays, the majority of card acquiring in the country is carried out by non-banks.
There is also another reason besides financial incentives as to why banks may prefer the status quo.
For example, an overlooked benefit is the ubiquity and popularity of cards among their customer base. It is also the reason why retailers feel there is no option but to accept cards.
Alternative solutions are available but consumers are generally creatures of habit and to get them to switch requires providing incentives. This could come in the form of rewards, security features or better user experience.
However, the problems with many of the proposed alternatives to cards, including open banking services, is, to date, few solutions offer the same level of benefits and redress when things go wrong, such as chargeback rules. This can be built into the payments systems but will inevitably add costs.