Brexit related interchange fees argument rumbles on

Some of the many benefits that were predicted from Brexit may not realise their early promise and interchange fees may be top of that list!

The Prudential Regulation Authority talked of being freed from the “shackles” of Brussels’ rules. Financial regulation would be different and better after Brexit, promised UK chancellor Rishi Sunak.

But UK policymakers, and most other supporters of post-Brexit deregulation, probably did not have in mind the quintupling of certain credit card fees when Britons buy goods from the EU.

That is now what is happening when Mastercard debit and credit cards are used. From October, merchant’s so-called interchange fees will jump from 0.3{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of the transaction value to 1.5{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} when someone with a UK credit card buys something online from continental Europe. Debit card fees will rise from 0.2{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} to 1.15{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

Visa has not made an official announcement on its interchange fees policy for the future.

On the one hand, it is hard to blame the credit card companies. The fees were only as low as they have been because of an EU cap, imposed in 2015, which fell away with Brexit.

The “normalised” cross-border charges are specifically permitted under the terms of a Brexit legislative amendment — even though the Payment Systems Regulator, the UK body that has taken on oversight from the European Commission, has kept the 0.2 and 0.3{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} caps on domestic card transactions.

Admittedly, higher interchange fees do not mean automatically higher costs for British consumers — and do not directly benefit the credit card companies. The fee is levied on the European retailer’s bank, which pays it to the bank that issued the customer’s card. But it would be logical to expect the charges to be passed on to customers, reversing benefits accrued in recent years.

A June 2020 report from the European Commission examining the advantages of its interchange fee caps found that retailers — and, thus, potentially their customers — had saved €1.2 billion a year.

But it is worth noting that the vast majority of transactions conducted cross-border in this way are actually with multinational groups, such as Amazon, Uber and Apple. These often route their operations through low-tax EU locations and may now find it more economic to repatriate booking centres to the UK — a surprise Brexit dividend for British tax authorities.

Long term view?

Price caps like this are more usual in obviously dysfunctional markets — new UK rules six years ago all but killed off price-gouging payday lenders. The backroom subtlety of interchange fees makes them less of a public cause.

What will strike the policy makers in the EU is that they remain beholden to the US based duopoly of Visa and Mastercard despite the vast influxes of capital into FinTech in the last 10 year. The FinTech movement was supposed to challenge the old order and re-establish a new. Judging by the duo’s stock prices – 3 times what they were five years ago – this does not seem to have happened.

These types of activities I am certain, will not pass unchecked, and it would not surprise me to see further backing for the EPI initiative to take a more dominant role in the future, backed heavily by EU policy makers.