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The Payment Systems Regulator (PSR) is proposing a price cap to protect UK businesses from overpaying on cross-border interchange fees, as it releases a new consultation on possible remedies.
The PSR has published the interim report for its market review into cross-border interchange fees.
The regulator has now said that it is seeking views on its provisional findings and proposed approach to remedies to help inform the final report. Stakeholders have until January 31, 2024.
“In this market review we have provisionally found that the fees charged by Mastercard and Visa to UK businesses that accept payments from within the European Economic Area are likely too high,” said Chris Hemsley, managing director at the PSR.
“In short, at this stage, we do not think this market is working well.”
The PSR is proposing a price cap to protect UK businesses from overpaying on these interchange fees. Subject to the PSR’s final report and further consultation on remedies, this could happen in two stages.
This would include an initial time-limited cap of 0.2 percent for UK-European Economic Area (EEA) consumer debit transactions and 0.3 percent for consumer credit transactions where the transactions are made online at UK businesses.
Then, a lasting cap on these interchange fees in the future, once the regulated has conducted further analysis.
The PSR has outlined its provisional concerns, stating that Mastercard and Visa have likely raised these fees to an unduly high level — at the expense of UK businesses.
Last year, for example, the PSR estimates that UK businesses paid an extra £150-200m due to the fee increases.
Lack of competition skews the market
In the report, the PSR said that evidence shows that Mastercard and Visa are likely to be subject to “ineffective competitive constraints on the acquiring side” and that there is a lack of effective competition about the setting of outbound interchange fees, which distorts the market against UK merchants and their customers.
Further, the PSR suggests that both card schemes have a commercial incentive on the issuing side to increase interchange fees, while limited alternatives mean that UK merchants that engage in international trade with the EEA must take both Mastercard and Visa.
Additionally, merchants unable to relocate in response to the interchange fee increases must either absorb additional costs or pass them on to consumers via higher prices.
The PSR has said that its current view is these UK businesses have little choice but to pay the increased costs, as Mastercard and Visa cards account for nine out of ten online transactions at UK businesses using EEA-issued cards.
“Should we ultimately conclude this is the case, our interim report sets out a range of potential solutions [that] could be implemented,” said Hemsley.
He continued to add that these 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.”
Visa and Mastercard pushback on report
In a statement, Visa told Vixio that it “strongly disputes” the report's findings.
“We believe that the proposed remedies are not justified. Accepting reliable, secure and innovative digital payments represents enormous value to UK businesses, especially when selling overseas,” the card giant said.
Visa’s spokesperson added that these interchange rates apply to less than two percent of UK card payments — these being EEA cardholders buying online from a UK seller — and reflect the fact that these transactions are more complex and carry a greater risk of fraud.
Meanwhile, a spokesperson for Mastercard said that the company “[does] not agree with the PSR's findings and will continue to educate them on the critical importance of electronic payments to the UK economy”.
“In an extremely competitive payments market, interchange reflects the value provided to consumers and businesses,” the spokesperson told Vixio. “We enable fast, safe and simple transactions, protect consumers from fraud and help business grow in the UK and across the globe.”
However, Hannah Regan, payments policy advisor at the British Retail Consortium said that the PSR’s report is “just the tip of the iceberg”.
“High cross-border interchange fees are not the only consequence of the ineffective competition in the payments market,” Regan noted. “We are seeing high fees across the board, with retailers paying £1.26bn to process card transactions last year.”
Regan said that the BRC is calling on the PSR to implement meaningful reforms to increase competition and reduce costs in the payment market.
Furthermore, she said that the Treasury should conduct a full review of interchange fees to examine if they are fit for purpose in the UK market.
Why did cross-border fees become contentious again?
Until December 2020, the European Commission capped UK domestic interchange fees and cross-border interchange fees within the EEA at 0.2/0.3 percent for debit and credit card transactions respectively, under the European Union’s interchange fee regulation, which was proposed in 2015.
Following the UK’s withdrawal from the EU, the EU Interchange Fee Regulation caps on UK-EEA transactions no longer applied and, as some sources predicted to Vixio at the time, Mastercard and Visa decided to reconsider their fees.
This reconsideration resulted in the fees for UK-EEA card-not-present transactions using consumer debit and credit cards increasing fivefold to 1.15 percent and 1.5 percent respectively.
In October 2022, the PSR issued its final terms of reference for a market review on UK-EEA consumer cross-border interchange fees to understand the rationale for and impact of increases in cross-border fees, whether the increase in cross-border fees is an indication that the markets are not working well for all service users and what, if any, regulatory intervention is appropriate.
Alongside the PSR, the UK Parliament’s Treasury Select Committee, spearheaded by former chair and now government minister Mel Stride, has undertaken work probing the payments regulator regarding the effect on businesses in the UK.
