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Scheme and processing fees, as well as cross-border interchange, are top of the agenda for the Payment Systems Regulator (PSR) as it launches two market reviews into debit and credit card payments in the UK.
On Tuesday (June 21), the PSR announced that it has launched two separate reviews into the costs associated with payment cards in the UK. The regulator is seeking comments to its draft terms of reference as it tackles both scheme and processing fees, and cross-border interchange.
The review of the scheme and processing fees follows a previous market review by the PSR into the card-acquiring market, which found that the fees paid by acquirers had increased significantly from 2014 to 2018.
During this review, it also raised the alarm that scheme fees have continued to increase.
The regulator now says it wants to understand “whether the markets in connection with scheme and processing fees are working well”.
This market review will examine the levels, structure and types of scheme and processing fees that acquirers and issuers pay to card payment system operators, and builds on the findings of the card acquiring market review.
Alongside this, the PSR will also look at UK-EEA consumer cross-border interchange fees after spotting a surge in card-not-present fees in the last year.
Following the departure of the UK from the EU, both Visa and Mastercard increased these fees five-fold. For example, interchange fees have increased from 0.2 percent and 0.3 percent to 1.15 percent and 1.5 percent respectively in card-not-present transactions using consumer debit and credit cards.
International transactions are an important part of card payments, with the PSR noting that in 2021 one in every 12 UK-issued debit card transactions was international.
Visa and Mastercard account for 99 percent of debit and credit card payments in the UK, according to the PSR.
This issue was further highlighted earlier this year when e-commerce giant Amazon threatened to ban Visa credit card payments in the UK due to the high costs.
Although the card companies have provided some explanation for the increases, the PSR says it “wish[es] to explore further the basis for them”.
“The PSR wants to understand the rationale behind these increases and whether they are an indication that the market is not working well,” the regulator said.
Need for swift action
This announcement is a step in the right direction, Callum Godwin, chief economist at payments consultancy CMSPI, told VIXIO.
“However, the hope for retailers is that it results in swift action.”
The consultancy estimates that the average European retailer now pays more to accept card payments than they did prior to the interchange fee regulation.
In particular, CMSPI estimates that since the regulation of the interchange fees in 2015, increases in scheme fees have meant that merchants in the UK now pay £501m in additional annual card acceptance costs.
In October 2021 and April 2022, UK retailers saw a further estimated £51m added to their annual fees due to cross-border fee reclassifications between the UK and the EEA, according to the consultancy.
“We have seen around the world that with cap-based regulation while offering savings in the near term, it creates a bit of a whack-a-mole situation with the non-capped fees often swelling.”
“This is why lots of regulators look at different ways to ensure companies and fees stay competitive, like co-badging or routing initiatives.” This has been the case in the US, where the 2010 Durbin Amendment mandated double-routing for debit card transactions.
Chris Hemsley, the managing director of the PSR, first hinted at a potential regulatory intervention over card fees last October when he pointed out that the absence of specific regulatory caps is not itself a sufficient reason to increase particular fees.
A UK Finance spokesperson said: "Card payments are a popular choice for customers. UK Finance will continue to work with members and regulators to ensure a well-functioning market that delivers good outcomes for customers and businesses."
The public can submit comments to the two draft terms of reference until August 2.
