In the latest clash over card interchange fees, the UK’s Payment Systems Regulator (PSR) has criticized Visa and Mastercard for ratcheting up fees and dominating the card market.
Following a review of UK market conditions, the PSR determined that debit and credit card fees on these payment rails add an extra £170 million ($219.7 million) in annual costs for businesses. Over the past eight years, the regulator also found that Visa and Mastercard have raised their service fees to acquirers by roughly 25% without justification based on costs, competition, or innovation.
“The switches can be a bit of an easy target,” said Hugh Thomas, Lead Commercial Payments Analyst at Javelin Strategy & Research. “When global multinationals are put in contrast to small businesses in a given country it can certainly seem like big beating up on small, but I would say these fee structures are not pulled from the air—they’re designed to create an appropriate balance between the needs of the merchant and the needs of the issuer.”
“The issuer is effectively being asked to cover risk that the cardholder buys something and doesn’t eventually pay for it,” he said. “The card is meant to be an encouragement to spend more on a given visit, i.e. more than the cash you might have in your pocket. The merchant realizes the benefits of not having to manage credit and not having to account for countless cash drop-offs.”
Reconciliation Outside of Regulation
Despite the benefits card networks offer merchants, the interchange fees they charge have been controversial. In the U.S., a $30 billion settlement between Visa and Mastercard and merchants—largely based on interchange fees—was tabled after a federal judge determined the settlement amount was too low.
However, the best hope for reconciliation between merchants and card networks might lie outside of the courtroom.
“The regulators don’t want to wade in and legislate outcomes, they want to legislate the circumstances that drive optimal outcomes,” Thomas said. “That is having conversations between the merchant associations and the banks to say, ‘Tell us why you think your pricing is fair or not fair, and we will try—in as not heavy-handed a manner as we can—to ensure that everybody remains happy.’”
The Appropriate Balancing Act
This approach has been successful in areas like Canada, where agreements between card networks and merchants—that are not imposed by regulators—have established processes to periodically review interchange fees and ensure they are priced appropriately.
“It’s a balancing act,” Thomas said. “When you read provocative statements designed to grab headlines, I don’t think you get the full picture of what’s going on. The process should be to hash through the issues such that everybody gets heard and you get the optimal outcome where maybe nobody’s happy, but it’s the appropriate balancing act.”
