November 22nd 2018
Interchange Fee Regulation and Brexit
The UK government’s plans for interchange fees following Brexit have significant implications for merchants operating in the UK as well as other European markets.
The UK will adopt Europe’s incumbent Interchange Fee Regulation (IFR) for UK domestic transactions however, cross-border card payments between the UK and the EU will not be within the scope of either the IFR, nor the regulation soon to be adopted by the UK.
For cross-border acquiring, the question is mainly around the licenses that allow acquirers to operate across Europe. UK acquirers are likely to have an EU entity due to their CBDIP (Cross Border Domestic Interchange Program) arrangements, so even if the acquirers were required to be domiciled in the EU for the license the impact is likely to be minimal.
The real impact comes from payments where either the acquirer or the card issuer is based outside the UK. These transactions would no longer be subject to interchange fee caps – leaving the pricing decision in the hands of the card schemes. There is a tendency within the industry for upwards pressure to be placed on interchange fees – specifically by card schemes wishing to encourage banks to issue cards with their brand. This upward pressure on fees is one of the main reasons why interchange was capped in the first place. Mastercard recently adjusted their intra-regional zone to exclude the Channel Islands, and subsequently raised their fees: with UK-EU transactions likely to be reclassified to something more similar to ‘inter-regional’ post-Brexit, it seems inevitable that the schemes will raise fees again.
For both UK-based merchants and EU merchants with high volumes in the UK, this means that the cost of accepting card payments is likely to increase significantly after 29th March 2019.