It was meant to be the end of the rip-off that cost consumers hundreds of millions of pounds a year. In January, all extra charges for using a credit or debit card to pay for goods and services were banned to prevent nasty surprises at the checkout. However, five months on, increases in the cost of transactions by Visa and Mastercard mean consumers now face the prospect of paying more for goods and services.
UK traders have to pay £1bn extra a year to Visa alone, after the US-owned giant doubled its fees for every card payment. This means smaller retailers are, in turn, being forced to increase their prices to cover the extra charges, thus undermining January’s surcharge ban.
Every time a customer uses a credit or debit card to make a purchase, the trader has to pay a proportion to the bank – known as the “acquirer” – that processes the payment. Part of this, called the “merchant service charge”, is an “interchange” fee, which the bank then passes on to the card issuer – usually the customer’s bank.
Other parts are a charge levied by the “acquiring bank” to cover the cost of processing the transaction, and a “card scheme fee” that goes to Visa or Mastercard. The fees fluctuate.
In 2015, the EU introduced rules to cap increasingly high interchange fees. It was on the back of these reforms that UK traders have been banned from charging customers a levy at the checkout.
But it has backfired. Visa and Mastercard, which dominate the market, have simply increased scheme fees, in some cases by up to 100%. And traders can get around the ban on surcharges by incorporating the extra processing costs in their retail prices. In short, it is the consumer who pays in the end.
Before the ban, customers could see the extra charge for using a card and had the option of choosing a cheaper payment method, whereas now everyone has to shoulder the cost, whether they use cash or card.
“It’s a classic example of the unintended consequences of regulation,” says James Daley, managing director of campaign group Fairer Finance. “All the regulator has done is squeeze one end of the balloon, and made the other end bigger.”
Some traders may be forced to stop accepting cards or close, according to the British Retail Consortium (BRC), which represents UK shops. “As consumers do not pay to use their cards, there is little awareness of increasing fees, but they – like any other cost – are ultimately paid for by the consumer,” it says. “As card fees have increased, retailers are faced with a choice of raising prices or absorbing costs to remain competitive.”
Between them, Visa and Mastercard control more than 60% of the UK card market, meaning traders risk losing the majority of their custom if they shop around for a better deal. And whereas interchange fees are publicly documented, neither company will disclose its card scheme fees, making it impossible for traders to calculate how much each transaction will cost.
According to CMSPI, a payments consultancy that advises traders, the fees are likely to rise further. As its chief economist, Callum Godwin, explains, it’s the smaller businesses that are likely to be hit hardest. “The latest increases have been targeted at those with a low average transaction value, such as local cafes and corner shops, hitting the weakest when the high street is already suffering,” he says.
“Visa and Mastercard are forcing up the cost of accepting cards without justification in order to boost their profits and they know that their cards are so widely used it has become near-impossible for merchants to refuse to accept them.”
Retailers are demanding government intervention to clamp down on the recent surge in card scheme fees and to address Visa and Mastercard’s monopoly. “The Payment Systems Regulator [PSR] needs to investigate Visa and Mastercard for their abuse of a dominant market position,” says the BRC.
So far, however, the PSR has dragged its heels. It says that at the launch of its annual plan in March, “we outlined that a variety of observations had been raised about different aspects of card payments and that, in the year ahead, we will be taking a deeper look at how this market works”. It adds that details of the investigation have yet to be finalised.
Visa and Mastercard deny profiteering at the expense of retailers, but both refuse to disclose card scheme fees. “The figures quoted are misleading and overinflated,” Visa says. “Our pricing means we can invest in world-leading cyber security and consumer protection, in innovation such as contactless and mobile payments, and in providing a global network which enables billions to make purchases safely, securely and reliably.”
Mastercard tells the Observer that its services increase custom for businesses and its fees represent the smallest percentage of the merchant service charge. “As with any payment method there are associated costs,” it says. “Our fees reflect the clear value of accepting Mastercard and the significant investment we have made in payment technology and security.”
Customers have embraced the convenience of plastic without realising the hidden costs. Before the surcharge ban, they could see how much extra they would have to pay to use a credit or debit card at the checkout and opt to use a different method to avoid the charge. Now, as the costs are fed into high street prices, they are undetectable and unavoidable and affect cash as well as card payers.
Earlier this month the government finished a consultation on the future of digital payments including the cost of card payments. Meanwhile, the European commission is reviewing the effects of the interchange fee regulations on costs, and CMSPI has launched a Europe-wide petition for it to include scheme fees.
However, campaigners are calling on the UK regulator to take immediate action to protect the high street. “There has been shocking regulatory failure,” says Mark Falcon, former director of regulation and strategy with the PSR and founder of the financial consultancy Zephyre.
“The UK payments market is increasingly in the hands of two firms, Visa and Mastercard, whose share is forecast to be 90% by 2026. The cost of accepting card payments is five to 10 times greater than cash, and the interchange regulations were to eliminate the difference.
“Instead, the money has been diverted to scheme fees, which go to Visa and Mastercard as profit, and the regulator should take action.”