What do the changes at Mastercard mean for UK business?
With Mastercard expanding its debit card presence in the UK and increasing its fees for purchases from the EU, what effects are we likely to see?
In January, Mastercard announced that the ‘interchange’ fee – which it charges on behalf of card issuers for every payment that uses its network – will increase from 0.3% to 1.5% for all purchases of EU items from UK cardholders. At the same time, it has been announced that NatWest is converting all its debit cards from Visa to Mastercard. What do these bold moves mean for the payments market?
What is the interchange fee and why does it matter?
Every time a Visa or Mastercard card payment is made, the retailer or merchant is charged a fee by the card issuer. This has been capped by the EU at 0.3% for credit cards and 0.2% for debit cards – a measure introduced in 2015 over concerns that the fees placed an unfair burden on companies and encouraged price hikes for consumers.
However, Mastercard claims that since the end of the Brexit transition period, the cap no longer applies to payments between the UK and the European Economic Area (EEA) – as these are now inter-regional transactions. It’s worth noting that these charges – which will take effect on 15 October 2021 – only apply to online payments to EU-based merchants. In-person (also known as card present) transactions will not be subject to the higher fees.
But what does this mean to business? A fivefold increase in fees is bound to have an impact (the fee rises to 1.5% for credit cards and 1.15% for debit cards). The EU’s concerns – that additional fees will encourage merchants to pass the increase in costs on to the consumer – have been echoed by MPs across the political spectrum. Conservative MP Kevin Hollinrake, chair of the all-party parliamentary group on Fair Business Banking, has said the change ‘smacks of opportunism’, telling the FT, ‘I would urge the regulators to step in as a matter of urgency to ensure that financial institutions do not use Brexit as an opportunity to hike up costs that consumers will ultimately bear’.
Mastercard insists that ‘Interchange is not a consumer-facing cost but the fees paid between merchants and card issuers for the provision of payments. Consumers should not feel any impact of changes in interchange fees.’ In practice, however, there is nothing to prevent retailers raising their charges for UK sales – on top of the additional red tape, VAT and custom duties that UK-based companies and customers are facing since Brexit.
A masterful debit grab?
Mastercard represents the largest proportion of credit card purchases in the UK, with Visa the market leader for debit cards. But that is set to change with news that the NatWest Group (which includes NatWest, the Royal Bank of Scotland, Ulster Bank and Coutts) is switching its debit cards from Visa to Mastercard. With Mastercard also preferred by Santander UK, First Direct (HSBC) and Monzo, this is the latest in a wider move by the brand to increase its card presence in the UK and Ireland. With the NatWest deal, Mastercard will soon account for one in three of all UK debit card payments.
Significantly, Mastercard have emphasised the move will focus on payment choice and innovation, building on their presence within mobile and online channels, with particular attention on safety and convenience in the digital payments arena. This reflects a growing trend in customer spending, as the long-term effects of Covid-19 have seen contactless card purchases encouraged in-store, and a significant rise in online payments due to bricks-and-mortar retail closures and social distancing. Now that customer behaviour has changed, there is a chance that these trends may not reverse – and Mastercard’s moves reveal a similar shift in emphasis amongst banks: a fascinating subject that we will continue to monitor and report on.
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