Visa and Mastercard face regulatory crackdown over soaring merchant fees

To address rising merchant fees, the UK’s Payment Systems Regulator (PSR) has set its sights on Visa and Mastercard, the two giants of the card payment industry. With both companies accounting for a staggering 95% of debit and credit card transactions in the UK, the PSR’s proposed regulations aim to curb the unchecked growth of scheme and processing fees.

This comes as a response to a significant 30% real-term increase in charges over the past five years, a trend that has not been matched by improvements in service quality, sparking concern and action.

Under the new rules proposed by the PSR, Visa and Mastercard will be compelled to offer a higher degree of transparency regarding their fee structures. The regulatory body insists that these card networks must not only regularly disclose financial information to the regulator but also engage in consultations with merchants and retailers prior to any fee alterations.

Fee increases and service quality concerns

The PSR’s investigation found that Visa and Mastercard have significantly increased their scheme and processing fees—by over 30% in real terms within five years. Despite these higher costs for merchants, service quality has not improved proportionally, a discrepancy noted by the watchdog. PSR’s managing director, Chris Hemsley, expressed concern, stating that fee increases are not justified by service improvements.

“Every time someone uses a Mastercard or Visa card, UK businesses have to pay fees. These fees have significantly increased over recent years, and those increases cannot be explained by improvements in service quality. We have also identified concerns about the transparency and quality of information available to those providing card services to businesses. Competition does not appear to be protecting businesses effectively. This leads us to provisionally conclude that the market is not working well,” said Hemsley.

This gap between rising costs and stagnant service standards is now a key focus of the PSR’s efforts to prevent undue financial burdens on merchants by dominant market players.

The economic impact and call for competition

The PSR’s proposals aim to break the dominance of Visa and Mastercard, which raises concerns about the lack of competition, potentially leading to higher costs for merchants and consumers. The watchdog’s review highlights the need for a more competitive market to prevent unilateral fee hikes. Trade bodies like the British Retail Consortium and the Federation of Small Businesses support the PSR’s stance, advocating for reforms to introduce more players into the market, reduce financial strain on businesses, and foster a healthier economy.

The economic impact of fee increases by Visa and Mastercard is significant for retailers. The British Retail Consortium reports that these higher costs have added a £250 million burden on businesses. This strain is particularly severe for small retailers already facing a tough economic climate. Tina McKenzie, policy chair of the Federation of Small Businesses, noted that card fees cut into profits from nearly every sale.

Visa and Mastercard’s response

In the face of regulatory pressure, Visa and Mastercard defend their fee structures, stating that the charges are a fair reflection of the value their services provide to businesses and consumers in ensuring secure payments and protecting them from fraud.

A Visa spokesperson commented on Tuesday: “Visa’s fees reflect the immense value that we provide to financial institutions, merchants, and consumers including extremely high levels of security, near-perfect operational resilience, and a wide range of consumer protections and high-quality products and services that serve consumer and merchant needs.”

A Mastercard spokesperson said it disagreed with the PSR’s findings and that the payments sector “has never been more competitive”.

“We will continue to work transparently with the PSR and demonstrate the significant value Mastercard and electronic payments bring to the UK economy,” they added.

Broader regulatory landscape

The PSR’s actions against Visa and Mastercard are part of a broader regulatory effort to look into payment systems. Previously, the PSR called for a cap on interchange fees for cross-border transactions, a limit that was removed post-Brexit.

In the UK, Mastercard faces a class-action lawsuit alleging consumers paid for inflated interchange fees. In the US, Visa and Mastercard settled an antitrust lawsuit for $30 billion, agreeing to lower transaction fees.