As part of the recent European Union (EU) interchange regulation, domestic authorities are allowed to consider further reductions of interchange fees on debit and credit card fees despite EU authorities capping these fees at 0.2% per debit card transaction and 0.3% per credit card transaction. Yesterday, the British Government published a consultation on plans to cut the fees and while further reductions may not be the end result, the existing interchange cap could mean the end of free banking in the UK.
According to the government, the interchange caps will save retailers £480 ($747) million a year and that savings can be passed to consumers. However, historical evidence would contradict this fact and MasterCard has suggested that interchange caps would lead to new fees that amount to £11 ($17) on debit cards and £25 ($39) on credit cards.
Commenting on the news, Steve Pateman, head of banking at Santander, said
“Clearly the change in the way that interchange [the card fee] is now calculated impacts the economics of any card business and we will need to reflect on how to ensure we maintain the right balance going forward.”
The decision to cap interchange on consumer cards across Europe will significantly hamper innovation and will force banks to generate new revenue streams with consumer products like free banking and rewards among the first products to be affected negatively. While retailers do benefit greatly from this regulation, evidence from around the world shows that consumers and the industry at large do not.
Ahead of the interchange regulation, Mercator Advisory Group examined the UK debit rewards landscape and hopes to replicate this research in 2016 to highlight changes following the implementation of the interchange caps. For more information, see 2015 U.K. Debit Rewards Landscape Review released in May 2015.
Overview by Tristan Hugo-Webb, Associate Director, Global Payments Advisory Service at Mercator Advisory Group
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