PSR Sets Out First Thoughts On Cross-Border Interchange

December 19, 2022
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As part of its market review on cross-border interchange fees, the Payment Systems Regulator (PSR) has published a new paper outlining what it sees as the potential impacts of these fees on UK businesses and consumers.

As part of its market review on cross-border interchange fees, the Payment Systems Regulator (PSR) has published a new paper outlining what it sees as the potential impacts of these fees on UK businesses and consumers.

Since the UK left the EU’s internal market in 2021, Visa and Mastercard have increased the interchange fees on some UK-European Economic Area (EEA) payments five-fold.

This has affected UK businesses that accept online or mobile payments made using an EEA-issued credit or debit card.

The issue has gathered increasing momentum in the UK, with lawmakers also expressing concerns and pushing the card giants for answers.

In its new paper on cross-border interchange fees, the PSR found that between 2019 and the first half of 2022, European Economic Area (EEA) card-not-present use at UK merchants from cards issued in the EEA experienced a “relatively stable decline in both volumes and values”.

During the same period, however, data submitted to the PSR by Visa and Mastercard show that issuers increased their total revenue from UK-EEA interchange fees from £75m to £100m.

In addition, the PSR found that these revenues would likely have decreased since 2019 if the card schemes had not increased the interchange fees from the EU-regulated cap.

For the PSR, volumes and values may have been higher without these increases, as fewer transactions could have been relocated.

In other words, if a UK-located merchant is selling online to customers in France (an outbound interchange fee transaction), the merchant can leverage or even establish a presence in the EEA.

“We are aware that some merchants have taken this mitigating action to some extent, although they may have done so for reasons separate to the interchange fee (IF) increases,” PSR points out in its report.

“[This relates] to potentially higher trade friction following the UK’s withdrawal from the EU perhaps (such as new VAT and tax rules, and additional bureaucracy on managing imports/exports).”

The regulator’s current understanding of the situation, it seems, is that the largest, well-resourced merchants are more capable of carrying out relocation in practice.

This could mean that the impact of these higher interchange fees are disproportionately affecting acquirers who serve predominantly smaller merchants and those same smaller merchants too.

The PSR also warns that merchants operating in certain sectors and/or in certain circumstances may not be able to mitigate the impacts of the increases through relocation.

Meanwhile, If merchants are not able to mitigate the impact of interchange fees through relocation, they may have to pass-through the cost of the increases to consumers by upping prices, at least in part.

“Merchants could incorporate the IF into their overall cost base when making pricing decisions,” the PSR concludes.

However, the PSR has also said it would welcome input from stakeholders on whether price differentiation is taking place; for example, are those with cards issued from a different market paying a higher price than those domestically?

In terms of next steps, the PSR appears to be unsure. It does not make any concrete suggestions in the report, and instead is now seeking feedback on the issue before a deadline of January 19, 2023.

It is also unclear the extent to which cross-border interchange will continue to remain on the political agenda given the new government and current challenges.

Lawmakers had been pushing for answers in the summer, with the Treasury Select Committee sending letters to the card giants in June.

In response to the cross-party committee, both companies justified higher fees by the greater risk of fraud in cross-border transactions, and the costs incurred by banks to prevent and detect such crime.

Both companies also pointed out in their responses that that they do not earn money from interchange fees.

Mel Stride, former chair of the Treasury Select Committee, has since left that role but is now in government, as is Kevin Hollingrake, another former committee member who is said to be actively engaged in this issue.

It could be the case, however, that Westminster remains focused on issues such as the cost of living crisis and inflation, which will take up time and resources for both the government and the Treasury Select Committee in the near future.

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