Tuesday, May 11, 2021

Post-Brexit sanction reveals the power of the credit card duopoly

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Financial regulation would be different and better after Brexit, British Chancellor Rishi Sunak has promised. Sam Woods, who heads the Prudential Regulatory Authority, spoke of being freed from the “shackles” of Brussels rules.

But British policymakers, and most other proponents of post-Brexit deregulation, probably did not have in mind the quintuple of some credit card fees when Britons buy EU products.

This is now what happens when Mastercard debit and credit cards are used – like the Financial Times revealed last week. From October, the so-called “exchange” merchant fee will drop from 0.3% of the transaction value to 1.5% when someone with a UK credit card purchases something in mainland Europe. Debit card fees will drop from 0.2% to 1.15%.

Visa did not say whether it would do the same, simply promising it would give six months’ notice if there was a change, although many in the industry expect it to emulate its big rival.

For one thing, it’s hard to blame the credit card companies. The fees were as low as they were due to an EU cap, imposed in 2015, which failed with Brexit.

‘Standardized’ cross-border charges are specifically allowed under a Brexit legislative amendment – although the Payment Systems Regulator, the UK body that took oversight from the European Commission, has maintained the caps of 0.2 and 0.3%. national card transactions.

It sounds like blatant profit. The fact that the freedom is extended to multinational financial institutions, rather than for the benefit of individuals, is a strange distortion of the concept of Brexit freedoms. This is not the kind of transfer of power that you would probably vote for knowingly.

Granted, higher interchange fees don’t automatically mean higher costs for UK consumers – and they don’t directly benefit credit card companies. The fees are actually taken from the European retailer’s bank, which pays them to the bank that issued the customer’s card.

But it would make sense to expect the fees to be passed on to customers, negating the benefits accrued in recent years. A June 2020 ReportAccording to the European Commission, which looked at the benefits of its interchange fee caps, retailers – and therefore potentially their customers – had saved € 1.2 billion per year.

Even if consumers aren’t penalized, it’s tempting to pity the Spanish chorizo ​​vendor whose business already curtailed by Covid could be in harder pressure.

But according to payments specialists, the vast majority of cross-border transactions in this way are actually with multinational groups, such as Amazon, Uber and Apple. These have often routed their transactions through low-tax European sites and may now find it more economical to repatriate reservation centers to the UK – a surprise Brexit dividend for UK tax authorities, perhaps.

What about the big picture? Price caps like this are more common in blatantly dysfunctional markets – the new UK rules six years ago have all but killed payday lenders who were abusing prices. The behind-the-scenes subtlety of interchange fees makes it less of a public cause. But it’s worth thinking about the nature of an industry dominated by a global duopoly that can get away with quintupling a load overnight.

This is all the more striking as the payments industry would have been at the center of the financial technology revolution. There has been more fintech innovation in payments than anywhere else. Yet unlike other parts of the old financial system, the new competition did not challenge traditional credit card companies, but entrench them.

Card companies have flourished in large part because of their control of the infrastructure. Some fintechs, such as Monzo and Starling Bank in the UK, are expected to reap the unexpected benefits of higher interchange fees, potentially allowing them to be stronger challengers in the future. But it remains a stark reality that few newcomer payment companies outside of China can claim to have developed large-scale alternative “rails” on which to route payments.

Even in a hectic stock market, Visa and Mastercard have excelled. Their stock prices have almost tripled in the past five years (the S&P 500 record hasn’t even doubled in that time.) No finance company – including big banking groups like JPMorgan or the ICBC in China – does claim a higher market value than Visa.

Rising UK-Europe interchange fees may sound like a niche problem, but it’s a symptom of a deeper malaise.

patrick.jenkins@ft.com

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