After lawsuits by hundreds of merchants, London’s Competition Appeal Tribunal unanimously ruled that the interchange fees charged by Visa and Mastercard are a violation of Europe’s competition law.
According to Reuters, the legal team representing the merchants called the ruling a major victory for businesses that have long been burdened by what they argue are unfairly high interchange fees imposed by Visa and Mastercard.
However, this is far from the first time interchange fees have been challenged, both in the UK and abroad, and there has yet to be a significant shift in these fees. For their part, both Mastercard and Visa voiced their opposition to the ruling, and Mastercard said it would seek to appeal the “deeply flawed” decision.
“It’s more of the same warmed over—merchants don’t want to pay fees to accept card payments” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “The facts are the same though, if you eliminate interchange fees as a source of income for card issuers, they will be forced to raise prices and/or raise underwriting standards to curtail losses—both of which deflate spending power of consumers.”
A Polarizing Topic
Despite these concerns, interchange fees have become an increasingly polarizing topic in recent years. Just months ago, the UK’s Payment Systems Regulator (PSR) criticized Visa and Mastercard for raising fees and consolidating their dominance in the card payments landscape.
PSR reviewed the market and found that debit and credit card fees on these payment rails add an extra £170 million ($219.7 million) in annual costs for businesses. Additionally, the regulator stated that Visa and Mastercard have increased service fees to acquirers by roughly a quarter over the past eight years, offering little justification for the hikes.
Due to these rising costs, interchange-related legal actions have continued to crop up around the world. For example, a law was recently passed in Illinois that banned credit and debit interchange fees on taxes and tips. However, it has already faced significant pushback from financial institutions.
There was similar contention in the decades-long battle between U.S. merchants and Visa and Mastercard. While a $30 billion settlement was reached last year—declared a win for merchants—a judge ultimately rejected it, stating that it didn’t go far enough to compensate retailers.
Unlocking Payments Opportunities
One reason for the growing pushback against interchange fees is that many merchants are struggling with difficult macroeconomic conditions. This has also led some merchants to begin surcharging their customers—a practice that is often best avoided. Similarly, reducing interchange fees could have significant impacts.
“If you have taken an econ class, think about the definition of a market in equilibrium,” Apgar said. “For example, what’s the right price for a gallon of milk? If milk is too expensive, consumers won’t—or can’t afford to—buy it. However, if milk is too cheap, farmers won’t be incented to produce it, so maybe they make cheese instead.”
“We covered this in our recent research on in-house payment systems, and—while not apples-to-apples with interchange—one of the key findings in our research is that merchants need to focus less on the cost of payments and focus more on leveraging what opportunities payments can unlock for their business,” he said. “Remember it’s card payments that enable buy online and pick up in-store, payment at time of order for restaurant takeout, unattended kiosk payments, etc.”
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