Card interchange charges: What do retailers need to know?

Why are we talking about this now?
The European Commission last week laid out proposals to cap the charges retailers pay to card companies and banks each time a customer makes a credit or debit card transaction. At present, retailers pay £850m in card processing fees each year.

Why do the charges exist in the first place?

The interchange fees are charged by the banks and the banks pay card companies a fee for their services.

A retailer’s bank will provide terminals and service, which are charged through the merchant service cost. That will include the interchange fee, which passes between the retailer’s bank and the card holder’s bank. The interchange is in place to balance the costs between the two because the card issuing bank’s costs are greater than those of the acquiring bank because of the risk factor in payment processing.

What will the new cap mean?

The European Commission argues interchange fees paid by retailers end up being passed on to the consumer, who often do not realise they are being charged. Consumers are encouraged by reward systems to use the cards that provide banks with the highest revenues.

At present, card schemes charge retailers between 0.1% and 2.5% on purchases and the average charge per credit card transaction is 0.9%. The proposed cap would cut credit card fees to a maximum of 0.3% and 0.2% for debit cards. It will initially apply to cross-border payments, such as a UK resident making a purchase from elsewhere within the EU, before being applied in the UK within two years.

The British Retail Consortium estimates that the changes could save retailers £362m each year. Announcing the cap, European Commission internal market and services commissioner Michel Barnier said: “Our proposal will promote the digital single market by making internet payments cheaper and safer, both for retailers and consumers”. He maintained that the charges will “finally put an end to the unjustified high level of fees”.

Are there knock-on impacts?

Consultancy Europe Economics calculates card issuers’ revenue losses will total £2.4bn. Some observers believe they may try to recoup the loss by charging for current accounts, through higher interest fees or even charges for using cash points.

Europe Economics also says there is no evidence the savings resulting from the cap will be passed on to the consumer.

Since the ruling it has emerged that retailers including Asda, Next, B&Q and Sir Philip Green’s Arcadia are suing Visa to recoup 10 years’ worth of excess debit and credit card processing fees.