As U.K. card payments rise, retailers renew fight on fees

The growth and dominant market share position of payment cards in U.K. retail sales is prompting a new pushback from retailers who are wary of rising network fees.

Payment card usage (debit, credit and prepaid) grew in 2017 and represented over three-quarters of all retail sales in the U.K., according to the annual payments survey conducted by the British Retail Consortium (BRC), a trade group. This activity represents a one percent share growth from 2016 which came at the expense of cash payments, which represented 22 percent of total sales. The growth in card payment share was partly driven by U.K. customers choosing to use cards in lieu of cash for lower value payments, the BRC noted.

Interchange and network fees have been a contentious issue in the U.K., and globally as retailers have pushed back against acceptance costs they feel are too high. Last year a U.K. merchant group sued Visa and Mastercard for damages over interchange fees. And this summer, the networks were dealt a setback in a separate U.K. retailer suit lead by Sainsbury, Walmart and Asda when a British appeals court ruled in favor of the retailers by declaring that fees fixed by Visa and Mastercard restrict competition and are unlawful.

The European Union introduced legislation capping interchange fees in 2015 for consumer cards. It set the interchange fee cap at 0.2% of the transaction value for consumer debit cards and at 0.3% for consumer credit cards. Commercial cards were excluded from cap, which also does not cover non-EU cards such as a U.S. or Brazilian card being used at a European merchant. While interchange is capped, the BRC contends that other network fees are rapidly rising to fill the gap.

Network fees jumped by 39% in 2017, according to the BRC's survey, which found that retailers spent almost £$1 billion in 2017 to process card payments, up about £170 million from 2016 — a roughly 20 percent annual growth rate. In contrast, total U.K. retail sales grew by only 4.3 percent for 2017.

“The study talks about the rising scheme fees, which is not the same as interchange,” noted Zil Bareisis, a London-based senior analyst at Celent. “Interchange is a fee that is set by the schemes, but paid by acquirers to the issuers; these are the fees that have been regulated in Europe and are already at low levels. On the other hand, scheme fees are charged directly by the networks, and it is those that according to the study have been rising.”

Visa disputes the premise of the study.

“The figures quoted are misleading and over-inflated," said Ian Burge, U.K. & Ireland communications lead at Visa. "Our pricing means we can invest in world-leading cybersecurity and consumer protection, in cutting edge innovation such as contactless and mobile payments, and in providing a global network which enables billions of consumers to make purchases safely, securely and reliably at more than 46 million merchants worldwide.”

Mastercard did not respond to an inquiry by deadline.

While the BRC’s call for action may find some appeal, pressure on card acceptance fees may actually come from a competitive technology that may soon be available.

“I don’t expect further regulatory action on interchange, although some pressure on the networks to reduce the scheme fees is likely," Bareisis said. "Also, PSD2 has created the conditions in Europe for bank account-to-account payments to be used in the retail context. There are a number of issues that I believe need to be addressed first before A2A payments can become a credible alternative to cards when shopping, but if they are successful, it will also put pressure on cards to reduce costs.”

Andrew Cregan, head of payments and consumer credit at BRC, insists that government intervention is still necessary.

"Regulatory action is needed now to address the problem of soaring scheme fees which come at a time when the retail industry is facing acute cost pressures elsewhere," Cregan said. "Fees vary depending on the type of card, where it's issued, where it's used and how it's used, with other fees charged or about to come into effect."

These include authorization fees, PCI non-compliance fees, joining fees, chargeback fees, non-secure transaction fees and terminal rental fees, Cregan said.