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The Payment Systems Regulator (PSR) has confirmed significant competition concerns regarding cross-border interchange fees and is proposing a price cap to curb excessive costs for UK businesses. However, it remains open minded as to what this price cap will be.
The move follows a market review revealing that fee increases by Mastercard and Visa since 2021/2022 are costing businesses an additional £150-£200m annually.
“Cards are a popular way we make payments in the UK. Our findings confirm that, due to a lack of competition, Mastercard and Visa were able to raise cross-border interchange fees to an unduly high level, costing UK businesses hundreds of millions of pounds,” commented David Geale, the PSR’s managing director.
Geale said the regulator “carefully considered” the feedback received.
“We consider that consulting on a range of options for capping prices is the best way forward to ensure UK businesses get a better deal. We look forward to receiving evidence on these proposals from all interested parties.”
Responding to the new report, a spokesperson for Mastercard told Vixio: “Artificial controls on interchange do not reflect the commercial reality of today’s market and, if not set at the right level, can negatively impact the value people and businesses receive from card payments.
“We welcome the PSR's willingness to collaborate with the industry on this topic and will continue to engage with them,” the spokesperson said.
Meanwhile, the other side of the argument has also been welcoming of the announcement.
“The Payment Systems Regulator has confirmed what businesses have long known, that the cards payment market is broken and needs fixing,” said Chris Owen, payments policy advisor at the British Retail Consortium.
“The lack of competition between the dominant card schemes and the unjustified, excessive price hikes in cross-border interchange fees are hurting retailers. The proposed price cap to address this is welcomed by the retail industry.”
Owen continued that retailers paid £1.64bn in card fees last year, whereby “cross-border interchange fees were a contributor to this”.
“We look forward to engaging with the PSR to ensure the price cap is set at a fair level in both the short and the longer term, and we would urge that the rate for fees be set to 0 percent until retailers recoup the extra costs paid since the increases were introduced,” he said.
Going forward, the BRC is pushing for the Treasury to conduct a full review of interchange fees “to assess whether they are even fit for purpose in the UK market”.
Fivefold increase
In its final report, the PSR highlights that Mastercard and Visa raised cross-border interchange fees fivefold. For example, debit card fees rose from 0.2 percent to 1.15 percent, while credit card fees increased from 0.3 percent to 1.5 percent.
The PSR’s review concludes that Mastercard and Visa face minimal competitive pressure, enabling them to raise cross-border interchange fees to excessively high levels, with these increases having placed a significant financial burden on UK merchants, costing them an additional £150-£200m annually.
The PSR has been critical of this tactic, saying that there is no justification for the fee hikes.
In particular, the watchdog said there was no evidence that the pre-increase fee levels were unsustainable or required adjustment, and neither Mastercard nor Visa conducted assessments to support their decisions to raise fees.
New price cap on the horizon
The PSR is now consulting on a price cap, concluding in its report this “would be appropriate” to reduce harm to businesses.
The PSR has proposed a two-stage approach to implementing a price cap on cross-border interchange fees to address market concerns and refine the methodology for a permanent solution.
In Stage 1, the PSR plans to introduce an interim, time-limited cap to provide immediate relief to businesses. This transitional measure will allow time to develop a detailed methodology for setting a longer-term cap.
Although the interim report suggested 0.2 percent for debit and 0.3 percent for credit transactions, the PSR has said it is “continuing to actively consider the arguments for and against” and it has acknowledged that concerns were raised about the potential costs to issuers.
Alternatives under consideration include 0.5 percent and 0.6 percent, which the PSR has acknowledged “would not reduce the detriment we have identified but would prevent the level of detriment increasing further”.
During Stage 2, the PSR plans to finalise a lasting price cap based on further analysis and stakeholder consultation, with the regulator stating that this long-term cap will be subject to regular reviews to ensure it remains effective and appropriate.
The Stage 1 cap would include a six-month implementation period and last for a total of 30 months, with a review announced within 24 months, and the PSR has confirmed that compliance monitoring provisions for Mastercard and Visa will also be included.
The consultation is open until February 7, 2025, and the PSR encourages stakeholders to submit evidence.
Depending on feedback, the regulator has said it will issue a final remedies notice next year, detailing the interim cap and outlining a methodology for a lasting solution.
