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The UK's Payment Systems Regulator (PSR) has hinted that it may still intervene over merchant rates as responses to its new guidance on interchange regulation highlight rising fees as a result of Brexit.
The PSR has published responses to consultation paper 21/5 outlining proposed changes to its guidance on the Interchange Fee Regulation (IFR). These changes reflect that the UK is no longer in the EU and, therefore, inter-regional rates no longer apply. Although submissions from the payments industry, including UK Finance and HSBC, have accepted the need for these changes to the new guidance, the British Retail Consortium (BRC) has raised concern about the prospect of fees rising drastically as a consequence of the card companies adopting new interregional rate caps.
However, in a speech at the PayExpo Payments Leaders’ Summit, Chris Hemsley, the managing director of the PSR, hinted that it may still intervene over card fees.
Background
The IFR came into force in the UK in 2015 and mirrored similar regulation in the EU which capped rates at 0.3 percent for credit cards and 0.2 percent for debit cards. While the UK was in the EU, these rates also applied to all inter-regional card transactions within the union. However, with the UK leaving the EU in January, both Visa and Mastercard announced that interchange rates — the fee they charge on behalf of issuers — between the two jurisdictions would increase to the same as any other third country. This means for card-not-present purchases from the UK to Europe it is jumping to 1.15 percent for debit cards and 1.5 percent for credit cards.
According to the BRC’s submissions, a combination of both scheme fee and interchange fee increases could cost British retailers £60m per year as a result of the UK's departure from the EU (CMSPI estimates, 2021), equivalent to roughly 1.5 basis points (0.015 percent) of the value of the UK's retail sales, on top of the 0.6 percent retailers currently pay.
In a further swipe at fees, the retail lobbying organisation also argued that scheme fees (the part of the merchant charge that goes to the card scheme) should be subject to “utility-style” regulation.
Interchange is a significant revenue driver for issuing banks and, in their defence, banks will point to the fact that interchange helps fund incentives to encourage consumers to spend at retailers, fraud risks, as well as the protections to ensure consumers have confidence to spend at retailers. For this reason, there is a love-hate relationship that merchants often have with card acceptance. Increasing sales and other benefits are offset by often the high cost of acceptance. The BRC’s own survey shows how cards have become an increasingly important to their member’s sales as demand for non-cash options increased during the coronavirus pandemic.
Hints of future interventions
With the UK leaving the EU, consumer cross-border card payments between the UK and EU are no longer subject to the interchange fee caps established under either the UK IFR or EU IFR. Although the PSR’s new guidance simple reflects this fact, the fee increases announced by Mastercard and Visa as soon as regulatory restraints were removed has not gone unnoticed.
PSR chief Chris Hemsley said: “The absence of specific regulatory caps is not itself sufficient reason to increase particular fees, particularly if these increases are not obviously linked to costs.
“Such pricing behaviour poses real questions about how well this market is working, and not just in the context of cross border interchange fees.”
There could also be further troubles ahead, especially for the card schemes: “Our work on card acquiring has set out analysis that suggests that scheme fees paid to Mastercard and Visa approximately doubled between 2014 and 2018. Our conclusions on this point will be published shortly.”
Policymakers have for a number of years been trying to improve competition in the retail payments space. Payments modernisation is becoming a reality all around the world, offering innovative, faster, accessible and potentially cheaper choices in the way we pay. The growth of real-time payment systems and the promotion of open banking show that there are real alternatives to cards for retailers. Back in July 2021, to highlight one example, Emirates airline launched a new open banking style payments service utilising real-time payments in partnership with Deutsche Bank. In the EU, policymakers are going even further through the creation of a pan-regional European Payments Initiative. There are increasing options available, even if progress is uneven. The challenge for any new payment service is end users and stakeholders must have a reason to switch. Removing costs may be top of the agenda for the retailer, but consumers will still demand the same benefits, protections and ease of use they have come to expect from cards.
The success of these new payment models is likely to play an important part in future regulatory interventions as Hemsley noted: “A viable alternative to card schemes in retail payments would mean a more competitive market that requires less regulatory intervention in the longer term. But in the shorter term we might still intervene, including if scheme fees and interchange fees continue to rise unchecked.”
