The UK’s Payment Systems Regulator (PSR) has proposed a groundbreaking measure by provisionally suggesting implementing a price cap on cross-border card fees or interchange fees for credit and debit cards. Primarily targeting major U.S. payment technology giants, Mastercard Inc. and Visa Inc., this move is orchestrated to shield UK businesses from potentially excessive interchange fees. The PSR has expressed initial concerns by unveiling its provisional report for the ongoing market review into cross-country interchange fees.
Visa and Mastercard might have elevated these fees to an unwarranted level, particularly in online retail payments between the UK and the European Economic Area (EEA). This provisional step by the PSR reflects a proactive stance to ensure fair practices and foster a conducive environment for businesses engaged in cross-border transactions, aligning with its commitment to regulatory vigilance.
Key Takeaways:
- Regulatory Response to Fee Hikes: The PSR’s proposal for a cap on cross-country interchange fees directly responds to substantial fee increases by major payment technology giants, Mastercard and Visa. This regulatory action aims to alleviate the pressure on UK businesses facing elevated interchange fees, providing a safeguard against potentially excessive charges.
- The Dominance of Mastercard and Visa: The proposed fee cap highlights the dominance of Mastercard and Visa, which collectively account for over 99% of online payments at UK businesses with EEA-issued cards. The PSR’s concern over potential market dysfunction emphasizes the significant impact of these two payment networks on cross-border transactions and the need to ensure fair practices.
- Industry Pressure for Fair Practices: With the PSR advocating for a cap, the pressure on Mastercard and Visa to limit cross-border merchant fees in the UK intensifies. The proposed measures seek to protect merchants from heightened charges, addressing concerns raised by the PSR about the impact of fee increases on businesses, estimated to result in additional costs of £150 million to £200 million last year.
- Exploration of Alternatives: The PSR’s actions demand immediate action to explore alternatives to reliance on Mastercard and Visa, surpassing the proposed cap. The suggestion to examine a digital alternative aligns with broader aspirations to develop a domestically grown payment solution, emphasizing the need for a competitive and resilient market in the evolving landscape of cross-border transactions.
Cap On Cross-Border Card Fees: Pressure Mounts On Mastercard And Visa
Mastercard and Visa are facing pressure to limit cross-border merchant fees in the UK. The PSR recently updated its review of cross-country interchange fees for transactions between UK businesses and the EEA. The PSR is suggesting a cap to safeguard merchants from excessive charges.
This move comes in response to fee hikes by Mastercard and Visa and prompts the regulator to publish an interim report. The two payment networks, accounting for over 99% of online payment transactions at UK businesses with EEA-issued cards, raised their interchange charges for debit cards from 0.2% to 1.15% and for credit cards from 0.3% to 1.5% throughout 2021 and 2022.
Typically assessed per transaction and based on transaction type, these fees are a percentage of the total transaction value. While justifying the increases, Visa and Mastercard informed the UK’s Treasury Committee last year that the adjustments were necessary to counter the heightened risk of fraud in cross-border transactions. They also clarified that they, as payment networks, don’t directly benefit from the raised fee; instead, it goes to the customer’s card issuer.
The EU’s Interchange Fee Regulation has traditionally limited the interchange fee. However, since the UK’s departure from the EU in January 2020, this protection no longer covers domestic and cross-border transactions between the UK and the EEA.
Chris Hemsley, the managing director of the PSR, expressed concerns that the fees charged by Mastercard and Visa to UK businesses accepting payments from the EEA might be excessively high. He noted that the market doesn’t seem to function optimally, estimating that UK businesses paid an additional £150 million to around £200 million last year due to the fee increases.
A spokesperson from Mastercard provided a statement expressing disagreement with the conclusions reached by the PSR. The statement emphasized Mastercard’s commitment to educating the PSR on the significance of electronic payments to the economy of England.
In their statement, Mastercard asserts that in an intensely competitive payments market, interchange fees mirror the value delivered to consumers and businesses. They emphasize that Mastercard facilitates rapid, secure, and straightforward transactions, safeguards consumers from fraud, and fosters business growth in the UK and globally.
Similarly, Visa challenged the findings of the PSR in a separate statement, emphasizing the substantial value that secure, innovative, and reliable digital payments bring to UK businesses, particularly when engaging in international sales. Visa asserted that the interchange rates apply to less than 2% of UK card payments for EEA cardholders purchasing online from a UK seller, acknowledging the complexity and higher risk of fraud associated with these transactions.
The PSR is seeking input on the outlined proposals until the conclusion of January, with the last report anticipated in the first quarter of 2024. Suppose the PSR determines that all markets are not functioning effectively and deems it necessary to intervene. In that case, this report will be succeeded by a consultation on the proposed remedy package.
In a report commissioned by the government last month, it was suggested that Britain should explore a digital alternative to dependence on Visa and Mastercard, regardless of the PSR’s actions. This aligns with longstanding aspirations in the EU to develop a domestically grown alternative to the American payment duopoly, which has yet to materialize.
Why Is The Payment Systems Regulator Taking This Step?
Cards are the market’s most widely used method to make payments for any purchase in the EEA and the UK. Therefore, it is imperative that the payments in the market function effectively.
These businesses incur interchange fees when consumers use Visa or Mastercard EEA-issued cards for online payment transactions within the UK markets. Following substantial increases in a few of these charges by Mastercard and Visa during 2021 – 2022, the Payment Systems Regulator has been evaluating these costs to see if they, along with other indicators, point to a market failure.
Initial worries have been voiced through PSR that Visa and Mastercard may have increased these costs to an unreasonable degree, which would have a detrimental effect on UK businesses. According to the PSR, as Visa and Mastercard cards account for nine out of ten transactions made online at UK-based companies employing cards issued by EEA, these enterprises have few options but must incur increased costs.
About Payment Systems Regulator
Established in 2013 by the Financial Services (Banking Reform) Act, the Payment Systems Regulator (PSR) is an independent economic regulator in the United Kingdom. Tasked with ensuring the development and operation of payment systems align with users’ best interests, particularly emphasizing consumer protections, the PSR plays a pivotal role in the financial landscape. Beyond safeguarding consumer interests, the PSR actively fosters competition and innovation within payment systems, promoting a dynamic and responsive economic environment.
Endowed with expansive authority, the PSR can issue “generally applicable requirements.” This authority encompasses the ability to give general directions to regulated payment system participants and impose broad requirements on the operators of such systems. Operating from its headquarters in the Olympic Park, Stratford, the PSR signifies a commitment to regulatory oversight and the continual evolution of efficient and secure payment systems in the UK.
Conclusion
The Payment Systems Regulator’s (PSR) groundbreaking proposal to cap cross-border interchange charges for credit and debit cards, mainly targeting major players like Mastercard and Visa, underscores its commitment to safeguarding UK businesses. The interim report, addressing potentially excessive fees in online retail transactions between the UK and the European Economic Area (EEA), demonstrates the PSR’s proactive approach to maintaining fair practices.
As pressure mounts on Mastercard and Visa, the proposed fee cap protects merchants from escalating charges, fostering a conducive environment for cross-border transactions. The PSR’s initiative reflects a dedication to regulatory vigilance, ensuring the optimal functioning of the market and signaling its commitment to consumer protection, competition, and innovation in the evolving payments in the market. The final report, anticipated in the first quarter of 2024, will further illuminate the regulatory direction in this critical domain.
