Brexit Could Increase Card Fees by Millions

Brexit Could Increase Card Fees by Millions but the Regulators Don’t Care. Most merchants have seen card fees reduce significantly in the last few years and this would be set to continue if it were not for… erm, Brexit. European regulators have been behind most of the reductions to card fees which we’ve seen in the past two decades but both UK and European merchants may be about to take a backward step which could lead to millions in additional interchange and scheme fees.

How Did We Get Here?

In Europe the card schemes operate three regions (there are actually more but we’ll keep things simple): domestic (cardholder and merchant are based in the same country), intra-regional (cardholder and merchant are based in different EU countries) and inter-regional (cardholder is from outside the EU shopping at a merchant within the EU).

Interchange Fee Regulation (IFR) was introduced in Europe in December 2015 which capped domestic and intra-regional interchange fees at 0.20% and 0.30% for debit and credit cards respectively.

Then earlier this year, in exchange for the European Commission terminating its investigation into the card schemes, they  committed to capping inter-regional fees at the same levels for card present transactions but at much higher levels of 1.15% and 1.50% for e-commerce. These new caps will come into force on 19 October 2019.

So What’s the Problem?

Well, firstly, the good news is that the UK government has introduced legislation which effectively translates the IFR into UK law but the bill’s scope is domestic transactions only. What this means then is that, if and when the UK leaves the EEA, it seems the card schemes can do what they like with intra-regional and inter-regional card fees as these will no longer be bound by EU law and the UK government has ignored these transactions in its Brexit planning.

The concern for UK merchants is that transactions by EU cardholders at UK merchants go from being intra-regional to inter-regional, which carry fees up to 10x higher. The opposite, a UK cardholder at a European merchant, would have a similar impact but would increase costs for European merchants.

However, there is an even greater risk for UK businesses. When the inter-regional commitments come into force on 19 October, interchange on these transactions will reduce by up to 90%. However, if the UK leaves the EU and EEA on 31 October, the commitments will no longer be legally binding and so the millions merchants were set to save annually could last just 12 days.

According to Bankhawk analysis certain sectors – such as hotels, airlines and luxury retail – will be hit the hardest whilst others such as groceries may not see much of a difference as the majority of their transactions are from UK cardholders anyway.

Surely the Regulators Won’t Let This Happen?

Wrong! Bankhawk recently wrote to the UK payments regulator and to the Secretary of State for Business. The response we received was almost identical from both and was one of indifference. Both stated “The precise impact on interchange fees will depend on the commercial decisions taken by the card schemes… in the event of a no-deal scenario”.

At Bankhawk we know all too well what happens when one relies on commercial decisions taken by card schemes… they increase fees to the benefit of their shareholders. This is why they have doubled scheme fees since Visa Inc. acquired Visa Europe in 2016, and also why Visa’s stock is up nearly 1,000% in ten years.

While there has been no public statement made by either Visa or Mastercard, a source close to the companies “does not expect any favours” for merchants.

With UK businesses already struggling with unprecedented uncertainly due to Brexit, having to plan for a potential swing of millions of pounds in card fees is another headache they could do without.

What Can You Do?

Brexit Could Increase Card Fees by Millions but the Regulators Don’t Care.

Bankhawk continues to work with regulators and merchants to ensure fees are optimised and “Brexit-proofed” as much as possible for all eventualities, with nothing off the table.

For more information, or to know how Brexit could impact your fees, please contact Bankhawk.