Global: European Banks Express ‘Serious Concerns’ Over UK’s Transaction Fee Cap Proposal

European banks have raised significant concerns regarding the U.K.’s proposal to cap international digital transaction fees, a move they deem potentially harmful to the financial sector.

Two prominent trade organizations, the European Banking Federation and Payments Europe, have expressed their apprehensions, labeling the British Treasury’s proposal as “potentially discriminatory” and warning that it poses a “risk to the integrity of national payments and retail banking markets in the EU,” according to a report by the Financial Times (FT) on Wednesday, August 14.

In a letter obtained by FT, these organizations argued that the proposed cap could disproportionately impact fintech companies and digital banks. Unlike larger, traditional banks that rely on a diverse range of income streams, including large-scale lending, fintechs and digital banks are more dependent on revenue from payment fees. The proposed cap could, therefore, undermine their financial stability and growth.

The U.K.’s Payment Systems Regulator (PSR) introduced the proposal last year following a review of cross-border interchange fees on transactions between U.K. businesses and those in the European Economic Area (EEA). The primary goal was to protect U.K. merchants from what the regulator perceived as excessive charges.

“In this market review, we have provisionally found that the fees charged by Mastercard and Visa to UK businesses which accept payments from within the EEA are likely too high,” said Chris Hemsley, the PSR’s then-managing director, in a press release. “In short, at this stage, we do not think this market is working well.”

The PSR’s proposal includes an initial, one-time cap of 0.2% on consumer debit transactions between the U.K. and EEA, as well as a 0.3% cap on consumer credit transactions made online with U.K. businesses. Additionally, the regulator is considering implementing a permanent cap on credit card interchange fees after further analysis to determine a fair and sustainable level.

The backdrop to this proposal lies in the aftermath of Brexit. Following the U.K.’s exit from the European Union, both Visa and Mastercard significantly increased interchange fees for online transactions between the EU and the U.K., raising rates to 1.15% for debit cards and 1.5% for credit cards. The companies justified the hikes as necessary measures to address fraud risks and heightened competition.

Visa and Mastercard have both publicly disagreed with the PSR’s conclusions. Visa emphasized that its interchange rates affect less than 2% of U.K. card payments made by EEA cardholders purchasing online from U.K. merchants.

In a report issued in May, the PSR criticized the fee increases implemented by Visa and Mastercard over the past five years, stating that these hikes could not be justified by changes in transaction volume, value, or mix.

Responding to the report, a Mastercard spokesperson argued that the PSR’s analysis failed to consider the substantial investments required to maintain a secure network that prevents billions of pounds of fraud each year. Visa and Mastercard continue to stand by their pricing decisions, maintaining that the increases are necessary to support the secure operation of their payment networks.