Lack of Payment Competition Raises Costs

Mastercard has announced that the interchange fee on products bought online in the EU by British card holders will increase from 0.3% to 1.5%. Debit card fees will increase from 0.2% to 1.15%. This fee increase is justified because now the UK is no longer part of the EU, fees will be charged at the ‘inter-regional’ fee level rather than ‘intra-regional’ fee level.

Card transactions incur Merchant Service Charges (MSC). These are made up of two parts - the interchange fees, referred to above, paid to the cardholder’s issuing bank, and scheme fees, paid to the schemes. The international card schemes set both fees. The costs are hard to map out because they are not published, and the charging structures vary significantly.

Since the EU IFR was introduced fixing the interchange fee, scheme fees have steadily increased. Research published by CMS Payments Intelligence (CMPSI) – an independent, global payments consultancy that advises merchants on how to improve their payments arrangements, reduce costs, and implement innovative solutions – shows that, between 2017 and August 2020, the card companies increased various scheme fees 11 times. The significance of 2017 is that two years after the EU introduced its IFR, it reviewed the efficacy of its legislation. At that time, the EU did not see the need to regulate further.

In 2019 the UK was Europe’s largest e-commerce market; Mastercard’s announcement is estimated to cost European merchants an additional €16.55 million in card fees annually. The IFR was estimated to save €9.4 billion. However, today CMPSI calculates that MSC costs are higher than they were before IFR and up from immediately after IFR was introduced (from 39 to 48 base points).

This UK fee increase demonstrates the power of payment companies to set fees as they like. Visa is expected to follow Mastercard’s lead, but whether it does or not, this highlights the impact of the lack of competition in the sector. Which, ironically, is why the EU is encouraging the establishment of European equivalents of the American card giants.