Visa, Mastercard's post-Brexit pricing opens a door for competitors

Visa and Mastercard's fees are often the subject of regulatory and legal battles, and U.K. regulators are questioning whether a slate of new competitors can keep the major card networks in line. 

The U.K.'s Payment Systems Regulator is performing two market reviews into Visa and Mastercard fees and cross-border interchange. At the same time, the PSR is also looking to increase competition by encouraging efforts to expand account-to-account payments, a transaction option that directs funds directly from the consumer's bank account to the merchant's account. 

The U.K. investigation gives the spotlight to alternative payment rails, which have existed for years but are gaining momentum over the past year as battles over card network fee hikes have gotten more heated. 

"There is momentum to try to create lower-cost payment methods on behalf of businesses and merchants all over the world," said Sanjay Sakhrani, a managing director at KBW, which has done research into the intersection between alternative payment methods and the battle over card fees. 

Daniel Acker/Bloomberg

The U.K. probe is partly related to Brexit. The card brands were no longer subject to European Union interchange fee regulations following the U.K.'s departure from the EU, and Visa and Mastercard levees went up quickly for e-commerce purchases.  

For card-present cross-border transactions, fees have remained the same in the U.K. at about 0.2% for debit and to 0.3% for credit cards per transaction, according to the PSR, which in a June report measured changes in U.K. card fees since the Brexit departure date of January 1, 2021. At the same time, card-not-present fees have jumped from the same 0.2% and 0.3% to 1.15% and 1.5%, respectively. The PSR wants to determine the rationale behind the rate increases.

The PSR review will look at the structure and types of processing fees, and will take input until Aug. 2. It will then determine steps to "promote effective competition or address any harm."

The PSR is working with other British regulators and the country's Treasury department to produce future open-banking regulations that will spur A2A payments adoption. Open banking refers to sharing data in a way that allows a financial institution to support transactions that involve accounts at other companies, including banks, fintechs and third-party apps. 

Visa and Mastercard, which did not return requests for comment by deadline, control about 99% of the U.K.'s card market. Cards are the most popular way for consumers to make a payment in the U.K., Natalie Timan, head of strategy at PSR, said in an email, noting merchants must pay certain fees which can ultimately impact the cost for goods and services. 

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“We’ve been gathering information since the start of this year and have identified that a detailed review of the market is needed," Timan said. 

Open banking has the potential to make payments easier and quicker for everyone and that means enabling account-to-account retail payments will help to unlock competition between payment systems, which is a key priority, Louis Myers, external relations manager for PSR, said in an email.

"We want to see U.K. payments have sufficient diversity and rivalry," Myers said, adding that competition will create more confidence that the prices will reflect the cost to process payments. While PSD2, the regulation that provides a blueprint for open banking, is focused on Europe, it has helped drive global growth of open banking elsewhere. And card-fee disputes in the U.K. are often a precursor to similar battles in the U.S. and other markets. 

That includes use of A2A payments as a card alternative. 

In the U.S., for example, digital payment companies such as Click2Pay, Affirm and Curve increased their marketing to merchants this year ahead of a recent Visa and Mastercard fee hike. Dwolla has also positioned itself as a noncard A2A rail to attract new merchants to its network.  And Amazon, which has squabbled with Visa over card fees in the U.K. and Singapore, in the past year added Affirm as a payment alternative and is promoting the buy now/pay later lender heavily as part of its annual Prime Day sale.

"There has been a big push in Europe, given the [PSD2] directive, to support A2A payments, and this U.K. review will further that," Sakhrani said. "There is also momentum for open banking and A2A in Asia and the U.S."

The PSR is also examining scheme fees, which refer to charges to merchants for participation in the card system. The PSR reports these fees increased about fivefold as a percentage of merchant revenue between 2014 and 2018, and the PSR says it has received concerns from merchants regarding additional boosts in scheme fees since 2018. 

While A2A payments are gaining favor, card payments still provide benefits that give the networks a potential advantage, such as the wide availability of support from merchants, according to Sakhrani.   

"It has taken a long time to get ubiquity for card transactions," Sakhrani said. "It will take a long time for A2A payments to have that."

Additionally, card payments provide risk management and protection against stolen funds or illicit payments, he said. 

"The card networks also provide fraud protections and other security," Sakhrani said. "There are benefits associated with card transactions that A2A payments may not necessarily have at this time."