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An investigation into allegedly unfair interchange fees charged by the two main card providers in the UK has been launched with a focus on driving down costs that are stifling the innovation of fintech start-ups. Bill Lumley investigates. 

An investigation into allegedly unfair interchange fees charged by the two main card providers in the UK has been launched by the Payments Systems Regulator (PSR), with a focus on driving down costs that are stifling the innovation of fintech start-ups.

In October, the British Retail Consortium (BRC) joined forces with UK lobby groups including the Federation of Small Businesses (FSB) and the Coalition for a Digital Economy (Coadec) to form Axe the Card Tax, a lobby group formed to lower retail costs and drive innovation in the retail and start-up sectors.

Rising fees

The new lobby group’s concern is the issue of interchange fees charged by Mastercard and Visa, which together account for an estimated 99% of all debit and credit card payments in the UK, according to the PSR. The lobby group argues that the duopoly are the main proponents of rising fees attached to transactions.

The campaign wrote directly both to the UK Treasury and to the City minister in October. In a letter to Mel Stride, chair of the Treasury Select Committee, they contended that the fees associated with accepting card payments include the interchange fee, the scheme and processing fees charged by the card networks themselves, as well as the fees charged by card acquirers for their services.

“The last of these fees has been subjected to much scrutiny by the PSR through its card acquiring market review,” the letter said. “However, until recently, the first and second of these fees have received much less attention. This is despite the longstanding complaints from UK business that the cost of accepting card payments has been increasing dramatically, and despite regulation that is supposed to cap card acceptance costs.”

Meanwhile in the letter to Andrew Griffith, financial secretary to the UK Treasury, Dom Hallas, executive director for Coadec and Martin McTague, national chair for the FSB, wrote that the combination of card interchange fees and card scheme and processing fees represents a tax on almost every card payment made in the UK, piling pressure on selling margins that are already narrow. They added, “It also creates an unlevel playing field in the payments sector, meaning that alternative lower-cost payment options cannot easily compete.”

Card scheme and processing fees merit particular scrutiny, they argued, as these have increased by 600% in the past five years. They concluded that this represents a collective cost of £5bn per year to UK businesses.

Claims disputed

Mastercard rejects these claims. In a statement, the card company said: “British consumers have embraced electronic payments, using them every day to buy and do what they need easily, safely, with better protection than any other form of payment.

“The number of transactions has naturally increased, as businesses increasingly choose to accept cards because they improve sales and help to tackle fraud. We simply don’t recognise the overblown claims of the campaign.

“Mastercard offers UK retailers one of the lowest cost and safest ways to accept a payment. On a typical £50 sale, Mastercard’s [proprietary] fee is just 6p and this allows us to provide the services our customers can rely on. Without electronic payments, millions of consumers can’t make payments and businesses won’t make sales.”

Axe the Card Tax is only the latest in a series of initiatives to address a perceived unfair levy applied by the card payments companies on each transaction. In 2007 for instance, following years of lobbying by the Fair Payment Alliance — a group set up to fight the multilateral interchange fee applied by Visa and Mastercard on cross-border payments — a European Commission ruling forced Mastercard to suspend all such fees.

The current state of the payments market is unsustainable, with retailers squeezed harder than ever, while card schemes continue to rake in huge profits whenever a debit or credit card is used

Luke Kosky

Historic legislation has failed to deal with the issue and competition in the sector has suffered as a result, according to Luke Kosky, head of fintech policy at Coadec. He says: “The current state of the payments market is unsustainable, with retailers squeezed harder than ever, while card schemes continue to rake in huge profits whenever a debit or credit card is used.” 

But there is cause for optimism, he says. The PSR launched an investigation into the UK payments market last month — the findings of which will determine the future of payments in the UK, he adds. 

“It is possible to rebalance the market for the benefit of both UK fintechs and small and medium-sized enterprises,” says Mr Kosky. “More transparency will help fintechs to meaningfully compete and will give retailers more information from which to choose payment providers.” 

The manner in which the future of open banking is determined will be another key indicator of where the market is heading, he argues. “The UK is lucky to have some of the most innovative and exciting open banking providers in the world,” he says. “It is crucial that they are now given a chance to compete with the established players.”

More transparency

The FSB supports the campaign’s efforts to make the fees that merchants pay to process card transactions more transparent. Craig Beaumont, chief of external affairs says, “At the moment, many small retailers don’t know how much they will pay in fees from month to month, which is just another pressure they really don’t need at a time of flatlining consumer confidence and high inflation.”

The high level of market concentration in the processing fees arena also raises questions as to whether small retailers have access to a level playing field, argues Mr Beaumont. “Finding ways to attract new entrants to the market could shake it up, bringing new competition and a downward pressure on fees.

“Government and regulatory action to investigate this area, to ensure that card processing fees are levied in a fair and justifiable way, would bring benefits to independent retailers and to consumers, and could allow for more innovation in payments. We are in favour of efforts to make it easier for people to pay in ways that suit them, and for the cost to the merchant to be kept as low as possible.”

The crucial aspects of concern to fintechs include transparency of fees and ease of opting out, according to the lobbyists, who argue that at present, complexity is hidden behind “scheme and processing fees”, and that the onus should be on the card companies to justify their complexity and enable retailers to easily opt-out of ancillary services.

Hannah Regan, policy advisor at BRC says: “As our recent payments survey highlighted, nearly 90% of retail spending was made by card in 2021. With card fees increasing year on year, retailers are facing soaring costs and we believe that both the PSR and the government should be acting to address this anti-competitive environment and bring down card fees.”

She concludes: “Fintech innovation would be a welcome addition to the market, but until fees are addressed, they face a huge barrier to entry with innovation being stifled.”

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