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Interchange Fees - Fix the UK/EEA Card Not Present Fee Problem - Or Try an 'Alternate Approach'

Bill Trueman
Image Credit: Pixabay
Image Credit: Pixabay

In 2015, the EU interchange fee regulation (EU IFR) set ‘price caps’ on interchange fees (IF) for domestic transactions and for across the EEA to try and keep merchant costs down. This led to big savings after April 2015 as the IF costs to merchants were then lower. The UK was then part of the EU, with interchange set at 0.2% for consumer debit card transactions and 0.3% for consumer credit card transactions.

 

When the UK withdrew from the EU in 2020, caps on UK-EEA transactions (i.e. for now EU cross-border ecommerce) no longer applied: so from October 2021 for Visa and April 2022 for Mastercard, the IF levels for UK-EEA card not present (CNP) rose from 0.20% to 1.15% for debit cards and from 0.30% to 1.50% for credit cards. That is a 400% increase, which does not include the other fee elements of the merchant card charges.

 

This brought the costs to merchants to the level between the EEA and the rest of the world. So, the fees passed to the issuers increased for all ecommerce transactions at UK merchants for EU card issuers, and of course vice versa.

 

Regulator Action


The UK Payment Systems Regulator (PSR) reviewed the impact and reported in December 2024. In summary:


1. Card Issuers and Card Schemes

  • Interchange fees are critical for the card payments industry.

  • Card issuers have experienced increased costs.

  • A reduction in interchange fees would stop existing and new card issuers’ profitability.

  • Interchange fees set by the EU Commission in 2015 were too low anyway and did not consider all the costs.


2. Merchants and Acquirers


  • New Interchange fee levels set by the card schemes in 2021/2022 appeared arbitrary.

  • No additional risks on ecommerce transactions after Brexit.

  • New fees added costs for UK merchants, and thereby customers.

 

The PSR conclusion was that increases for UK-EEA transactions were not properly assessed or justified. The PSR proposes a two-stage plan:


a) STAGE 1: A mandatory but short-term reduction in the UK-EEA CNP transaction fees. The PSR favours the pre-Brexit 0.2% and 0.3% cap values, to align them for both domestic and intra-regional transactions.

b) STAGE 2: To implement more recommendations as part of the PSR Market review of cross-border fees - see report[1], and for a longer-term cap – either at the Stage 1 level, lower or higher, after a further stakeholder engagement.

 

NOTE: The final report and the ongoing PSR Stage 1 Remedy Consultation[2], were both published in December 2024. The PSR seeks stakeholder feedback on Stage 1 reduction above by early February 2025.

 

Other Considerations / What Next?


The stakeholders are predictably poles apart – which must be reconciled, i.e.


a) Merchant: reduce interchange fees because it is difficult to defend, versus

b) Issuer: interchange fees do not reflect additional issuer costs. Forced 2015 reduction did not understand true issuer costs.

 

It would be fair on consumers and merchants, fees to be reduced both ways for EEA and UK.

 

Interchange is just one part of merchant costs of card acceptance. Other parts have been steadily rising, which are typically passed on to merchants and therefore consumers.

 

Merchants will and MUST find alternatives though lower cost cross-border payments (and arguably all other payments).

 

The UK and other regulators require the wider payments industry to be more innovative and competitive, to increase choice, security and trust.  Whilst it should keep ‘tinkering’ with this and fix this immediate issue; it should also be bolder and solve the broader issue of evolving solutions to protect UK merchants and to speed-up the push to non-card alternative payments.

 

Ecommerce transaction costs cry-out for an open-banking push payments solution: where the EU market appears to be fast overtaking the original UK lead in Open Banking for merchant payments.  European regulators must also feel similarly.

 

To focus upon alternative payment methods for ecommerce transactions, a specific use case for account-to-account retailer push-payments must be delivered quickly and be an early focus for the new UK National Payments Vision[3] published in November 2024. This must ensure greater interoperability for all cross-border payments.


Kevin Smith and Bill Trueman are directors at Riskskill, and are payments and risk specialist, with over 25 years of experience. For more information about Riskskill visit website at www.riskskill.com


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