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European banks have raised “serious concerns” with the Treasury about a plan by the UK regulator to cap international digital transaction fees that generate revenue for EU banks and payment companies.
Two trade bodies — the European Banking Association and Payments Europe — warned the proposed move was “potentially discriminatory” and a “risk to the integrity of national payments and retail banking markets in the EU”.
It particularly risks harming Fintechs and digital banks, the pair warned in a letter to City minister Tulip Siddiq and Payments Systems Regulator chair Aidene Walsh. Fintech companies do not offer lending at scale and so are more reliant on income from payment fees than larger banks.
The row between European companies and the UK regulator exemplifies the challenges of navigating regulatory divergence after Brexit.
The push by the regulator to cap fees, which the industry warns is seen in Europe as a “protectionist” measure, comes even though the new Labour government has expressed a desire for closer regulatory ties with the EU.
The letter, seen by the Financial Times, focuses on a plan by the Payments Systems Regulator to cap interchange fees — which are levied by Visa and Mastercard on behalf of banks — on cross-border online payments. The fees have risen more than fivefold since Brexit.
The watchdog said the move was designed “to protect UK businesses from overpaying” following growing complaints about the high fees charged to retailers by Visa and Mastercard.
A previous cap on interchange no longer applied after the UK left the EU, prompting the regulator to conduct a market review. It estimated that UK businesses had paid an extra £150mn to £200mn in 2022 alone due to the sharp rise in fees.
To protect UK merchants, the watchdog plans initially to cap interchange fees at their pre-Brexit level of 0.2 per cent on online debit card purchases made by customers of European banks in the UK, and 0.3 per cent for such payments made on credit cards.
The cap would only apply to online purchases made by European customers in the UK, not to online purchases made by customers of UK banks in the European Economic Area, which includes the EU as well as Iceland, Liechtenstein and Norway.
But European industry representatives say their costs of processing payment have soared since the UK left the EU, particularly with the rise of digital wallets such as Apple Pay and Google Pay adding to their charges.
The trade bodies warned in the letter that EU banks and payment companies “will lose money on each transaction”, as their cost of operating payments is now higher than the fees they will be able to recoup under the cap.
The PSR said when it opened its plans to consultation that the initial cap threshold would be subject to change “once further analysis has been carried out to establish an appropriate level”. The watchdog was due to publish its final update in the first quarter of this year, though has not yet done so.
The PSR said: “We are carefully considering all feedback received and continue to engage with industry. Once we have reviewed all the feedback, we will publish our final report, followed by a further consultation on any remedies and their implementation.”
One industry insider said the move was seen as “protectionist” in Europe while a large UK bank had privately expressed concerns that the EU would impose a similar cap for UK players as retaliation.
The letter urged the Treasury to confirm to industry that EU banks and payment companies “will not be subject to any cap that unfairly disadvantages them” and that UK authorities would consult EU member states before taking “such a material step”.