EU and UK need to collaborate to prevent interchange fee hike

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hen the UK was part of the EU, Mastercard and Visa could not increase their fees due to the EU Interchange Fee Regulation. By exiting the EU, the UK created a gap in the regulation that the US payment providers can exploit to their advantage – and card issuers’ benefit.

Both Visa and Mastercard have announced they will increase interchange fees for transactions made using UK-issued cards at merchants within the EU by October 2021.

Visa will increase its interchange fees for online credit card payments from 0.3% to 1.5%, while fees for online debit card transactions will rise from 0.2% to 1.15%. This represents a 500% hike for credit cards and a 475% increase for debit cards. Mastercard will implement a similar increase for its debit and credit cards.

The revenue generated by interchange fees is passed on to card issuers, meaning they are set to gain additional revenue from this increase.

According to Mark Falcon, former director of policy and strategy at the UK’s Payment Systems Regulator, card providers make a third of their profits from cross-border transactions. This move highlight US providers’ dominant position: they are not risking losing market share as they are the only providers that can offer cross-border transactions.

Despite the growing number of fintech companies trying to revolutionise the payments industry, none can challenge Visa and Mastercard in the cross-border payment space.

Last year was bad for many retailers as they were harshly impacted by the pandemic. According to GlobalData’s Coronavirus (Covid-19) Sector Impact: Retail – UK report, the retail industry in the UK lost £15.8bn ($19.29bn) in 2020.

Non-food retailers in categories such as home and beauty and clothing and footwear were among the most affected. Some businesses were able to adapt by shifting their operations online. But due to Brexit, retailers importing goods from Europe must pay a VAT customs charge. The addition of higher interchange fees means retailers will see their profits affected.

According to an EU report published in June 2020, maintaining a cap on fees helped keep prices low and saved merchants €1.2bn ($1.5bn) since 2015. With the interchange fee increases, retailers may begin passing costs on to consumers for cross-border transactions, further harming the UK-EU retail market.

Visa and Mastercard are in a dominant position when it comes to cross-border transactions between the EU and the UK. There are not many alternatives for merchants wanting to accept UK card payments, meaning they will have to either swallow the costs or pass them on to consumers.

To close the legal loophole that has led to this situation, the UK and the EU need to collaborate to introduce regulation that limits fees on cross-border transactions.

Yet given that it took four years for the UK and the EU to agree on a trade deal – despite the urgency of the situation – it seems likely to be some time before this issue is even considered by politicians on both sides, and even longer before they can reach an agreeable deal. This slow political process will only benefit Mastercard, Visa and card issuers.