At the beginning of the year, Mastercard announced that it was increasing the fees EU firms face to take payments from online shoppers from the UK by at least 400%. Mastercard’s interchange fee is currently 0.3% on credit card payments and 0.2% on debit card payments but will be increasing to 1.5% and 1.15% respectively in October. In March, Visa followed suit as it announced it was set to increase the interchange charges on items ordered in the UK from Europe, with a fivefold increase of 1.5% on the online credit card payment rate.
This fee increase has left many concerned about the impacts on the consumer, as it will likely mean higher prices are passed on to them, as well as the impact on already struggling SME’s. Someone who has thoughts on this is Andria Evripidou, Policy Lead at Yapily, a fintech that offers open banking APIs that connect businesses to banks. Here she discusses how Visa and Mastercard’s credit card payments increase will negatively affect merchants and consumers.
Recovering from the impact of a tough year is the biggest priority for EU merchants. However, this is no easy feat, and it’s only being made harder thanks to Mastercard and Visa’s decision to hike online credit card payments for UK customers.
The increase, which will see a substantial rise from 0.2% for online credit card payments to 1.5%, and from 0.2% to 1.15% for debit cards, is a blow to many businesses across the Union. For SMEs in particular, it will hamper their road to recovery.
Despite regulatory promises, Mastercard has attributed its move to the UK’s exit from the European Union. This is a clear sign of dishonesty. It’s time for both regulators and the wider industry to show card schemes that times have changed. There is a better payment option readily available that will support businesses’ financial recuperation – Open Banking.
A squeeze on profits
The credit and debit card duopoly damages businesses’ books. The card duopoly eats away at their profit margins with excessive fees and ignores its commitments to regulators. This next move will be no exception. SMEs already battling to stay afloat will have the added pressure of yet another expenditure. Most likely, those who need to keep as much profit as possible will look to pass these additional costs onto their customer base – British consumers.
British consumers make tens of billions of pounds worth of purchases every year from European merchants on credit and debit cards. These figures have only been accelerated throughout the pandemic, where more and more British consumers have turned to e-commerce, ordering European products online to be delivered to the UK.
A rise in these prices will only lead to the number of transactions reducing as British consumers, many of whom have also been financially impacted by the pandemic, will simply look to shop elsewhere. Ultimately, European merchants will lose much-needed business. And it is not just European merchants that will feel the impact. UK merchants that import products and raw materials from the EU are likely to be faced with higher prices in addition to import duties and other costs brought about by the UK’s withdrawal from the EU
Beyond this fact, the move is a clear sign of dishonesty towards both European regulators and the EU Commission. The EU introduced a cap on such fees in 2015 after concerns they pushed prices up for consumers and unfairly burdened companies, and both Visa and Mastercard previously provided commitments to keep interchange fees under control. Clearly, it’s time to show the card schemes that this cannot continue and there is in fact a better alternative.
Open Banking – the alternative to high fees
Open Banking powered technology – coupled with lower fees – means cards are no longer the only way of accepting online payments.
Cutting out the middleman, Open Banking is a fraction of the cost to merchants when compared to using traditional credit and debit card schemes. With Open Banking, the merchant’s bank details are shared directly with the consumer’s bank as customers can authorise money to be transferred to businesses’ accounts directly from their bank account or mobile wallet. This means transactions are priced at a fraction of the traditional cost.
For example, our research found in the sample month of March 2020, there were 1.6 billion debit and credit card transactions made in the UK, with a total spend of £57.5billion. After factoring in a 1% fee on each transaction, representative of a standard card fee at the time, that’s £575m paid to card providers in one month. With the increase in interchange fees, this number will only increase in the coming months.
In the UK, e-commerce businesses such as Amazon, eBay or Shopify process on average 10,000,000 transactions per month, with an average value of £67 each. With a typical card network fee rate of 1% per year, that’s £80,400,000 wasted by merchants annually. If merchants had processed their payments through Open Banking, it would have only cost them £6,360,000 per year – saving these businesses 92%, which equates to £74,040,000.
As SMEs set out their recovery plan and look to cut costs where they can, these savings will prove critical if they are to take back control of their business’s financial health.
Regulators and industry must work together to show card schemes that the status quo has changed. There’s no longer only one option for merchants and consumers when it comes to making online payments. The savings Open Banking can provide will put merchants across the EU (and UK) in a much stronger financial position than if they were forced to rely solely on card schemes. Something that is critical as they look to recover from the impacts of the pandemic.