Visa and Mastercard's proposal to raise scheme fees and U.K. interchange rates on cross-border transactions post-Brexit has increased pressure on regulators to cap them, and on merchants to seek alternatives.
Before Brexit, U.K. merchants benefited from a European Commission-enforced cap on credit and debit card interchange fees for all transactions made between the U.K. and the EU. This no longer applies.
Starting in October, Visa plans to increase the interchange fee on digital payments made between European customers and British businesses from 0.3% to 1.5%, as well as vice versa, while the interchange fee for cross-border debit card payments made online will also rise from 0.2% to 1.15%. Mastercard is planning to implement the same fee increases, but only for online card payments made between British customers and European merchants.
Visa and Mastercard representatives told PaymentsSource that raising interchange fees on domestic-only transactions would not be possible, because they are capped by U.K. regulators. They also note that they do not directly benefit from increases in interchange, as these fees go to the issuing banks.
However, the card networks are also planning to increase their scheme fees — fees paid on each transaction which go to the card brand, while the interchange fees go to the acquiring bank — on cross-border payments in 2022. Industry experts say that this represents a substantial part of their business model.
“Interregional transactions are by far the most profitable for the card schemes,” said Mark Falcon, a former director of policy and strategy at the U.K.'s Payment Systems Regulator, who now runs payments consultancy Zephyre. “You can see that from their financial data, they make a third of their profits from interregional, which is the combination of the scheme fees and the foreign currency fees as well. Even though interregional is only a few percent of transactions in terms of volumes, it's extremely high profit in terms of revenue.”
According to Visa and Mastercard, the scheme fee increases are needed to fund the various fraud prevention mechanisms which are an integral part of the e-commerce environment.
But the proposed fees may prompt the Payments System Regulator and government officials to intervene. The British Retail Consortium's head of finance policy, Andrew Cregan, is pushing for regulators to abolish interchange fees altogether.
“It's within the power of the PSR to set interchange fees at zero if they wish; nothing would need to change in legislation,” he said.
The trade group also wants the card networks’ scheme fees to be capped.
“We've seen these double-digit increases year-on-year in card scheme fees, which if these were consumer-facing fees, then there would be uproar,” said Cregan.
Some merchants may seek ways to avoid the new rates. According to FSB data, one in ten U.K.-based exporters are now looking at setting up a base in the EU to negate the cross-border fees, while there is an increased drive among the business community to explore open-banking options to circumvent the card networks altogether.
“In an ideal world we’d just cut out the middlemen and the fees they charge, entirely,” said Martin McTague, national vice chair of the Federation of Small Businesses. “It’s encouraging to see NatWest trialing account-to-account transactions in a retail setting and we hope to see other payment firms following suit. If we can make that process secure, it almost certainly marks the way forward.”
Visa and Mastercard representatives told PaymentsSource that a major component of their offering is their continued investment in cybersecurity, and any alternative would need to provide the same infrastructure to protect consumers, requiring significant expenditure.
However, there are reports that even commercial giants are now becoming restless, as a result of the increases in fees, which may lead to new innovations. “It’s completely non-negotiable, it's just take it or leave it. No merchant can say, 'No, I don't want to take Visa or don't want to take Mastercard,' and that has become even more extreme with a pandemic, with people stopping using cash," Falcon said.
