Card fees: UK payment systems regulator publishes final terms of reference for two market reviews

The UK Payment Systems Regulator (PSR) has finalized its plans for two market reviews focused on card fees. One review will look at card schemes and processing fees and the second will look at UK-EEA interchange fees The results of the review, which is expected to be published in Q4 2023, will be of particular interest to acquirers.

Background

In November 2021, PSR released a final report on its card-acquisition services market review. See these related articles on final reports and remedies for more details. The PSR conducted the review based on concerns that card-acquisition services were not providing value for money for merchants.

As part of the market review, PSR analyzed the fees paid by acquirers to card payment systems. It has been observed that the scheme and processing fees paid by acquirers on MasterCard and Visa have increased significantly during the period 2014 to 2018. A significant proportion of this increase was not explained by changes in transaction volume, price or mix. The review also considered the impact of the EU Interchange Fee Regulation (IFR).

The PSR subsequently decided to launch two market reviews into card fees – a scheme and processing fee, and a UK-EEA customer cross-border interchange fee. After discussing the draft terms of reference in June this year, the PSR has now published the final terms of reference for review.

Review 1: Card Schemes and Processing Fees

In a press release, PSR points out that cards are the most popular payment method in the UK, with Visa and MasterCard accounting for 99% of debit and credit card payments. In order to accept these card payments, businesses must pay card scheme and processing fees, which are often passed on to consumers at increased prices. This is particularly worrisome given the rapidly rising cost of living.

In the final terms of reference, the PSR confirmed that the review would focus on the MasterCard and Visa schemes. The PSR decided to review MasterCard and Visa to understand whether the scheme and the provision of processing services are working well enough to protect competition, innovation and service-user objectives. As the PSR already has a number of programs to explore the impact of other payment methods (eg the development of new payment architectures), this particular review will not extend beyond card schemes and processing fees.

Data will be collected for the period 2017 to 2022, but PSR will also draw input from its wider card-acquirer market review for the period 2014 to 2018.

Review 2: Cross-Border Interchange Fees

The PSR seeks to understand the rationale behind the increase in interchange fees for MasterCard and Visa consumer debit and credit UK-EEA card transactions since Brexit and the impact this has had on UK businesses and consumers.

An increase in consumer cross-border interchange fees for certain card transactions between the UK and the EEA where the cardholder is not present (such as payments made over the phone or online). Prior to Brexit, this fee was capped by the IFR. Since the UK left the EU, Visa and MasterCard have increased these fees fivefold.

The PSR will focus its review on three main issues:

• What are the likely drivers and rationales for the increase in interchange fees since Brexit?
• Is there any evidence of a post-Brexit increase in interchange fees as a result of other relevant cost increases?
• What is the impact of an increase in interchange fees on competition, innovation and service users in the UK?

What next?

The PSR plans to publish its interim decision on the review of card schemes and processing fees in Q4 2023 and a final report with remedies in Q2 2024. Requests for information from market participants are expected to be published in Q4 2022.

Interim decisions for the review of cross-border interchange fees will be published in Q2/3 2023 with a final report in Q4 2023. Market participants are invited to submit evidence and feedback between Q3 2022 and Q1 2023.