PSR proposes cap on cross-border interchange fees

The Payments Systems Regulator (PSR) in the UK has provisionally proposed a cap on cross-border interchange fees on retailers and other businesses charged by Mastercard and Visa on transactions made between the UK and European single market.

PSR proposes cap on cross-border interchange fees

The PSR says the cap will protect businesses from overpaying, after it published interim findings of a market review on interchange fees charged since Brexit, when the bloc’s longstanding cap ceased to apply in Britain.

Following the UK’s withdrawal from the EU, the EU IFR caps on UK-EEA transactions no longer applied.

Mastercard and Visa decided to reconsider their fees. This reconsideration resulted in the IFs for UK-EEA CNP transactions using consumer debit and credit cards increasing fivefold – from 0.2% and 0.3% to 1.15% and 1.5% respectively.

This change piled pressure on the PSR to consider re-introducing a cap in Britain, and the watchdog said last year it would conduct two market reviews, but that an outcome could take years.

The PSR said the review focused on charges set by Mastercard and Visa, as they account for 99% of debit and credit card payments in the UK.

The watchdog said both companies had likely raised fees to an “unduly high level”, costing UK businesses an extra £150-200 million ($190-250 million) last year due to fee increases, with the charges potentially passed on to consumers.

“In short, at this stage, we do not think this market is working well,” PSR managing director Chris Hemsley said in a statement.

Under the proposals, the PSR would impose an initial time-limited cap of 0.2% on UK-European Economic Area debit transactions and 0.3% on credit transactions.

A lasting cap would then be imposed once further analysis is carried out.

A spokesperson for Visa said the company strongly disputed the findings of the PSR’s interim report and said the proposed remedies were “not justified”.

“Accepting reliable, secure, and innovative digital payments represents enormous value to UK businesses, especially when selling overseas,” the spokesperson said.

“These interchange rates apply to less than 2% of UK card payments – European (EEA) cardholders buying online from a UK seller – and reflect the fact that these transactions are more complex and carry far greater risk of fraud.”

However, as with all regulation there are unintended consequences, “This is positive news for consumers who travel and businesses,” notes Dr Liam Evans, Director at Alvarez & Marsal.

However, this will likely lead to credit card firms clawing back lost revenue in other areas such as limiting cashback and loyalty points, which will impact a broader range of consumers.

Credit card firms will also look at other ways to reduce the impact by exploring how foreign currency is calculated or start charging customers for having a credit card.”

There is a risk this will this result in credit card firms taking a hard stance on accepting future foreign transactions, if this happens, consumers may find their options limited.”