Unfair for retailers to pay fees to card companies? Who foots the bill?

Financial Services Team Blog

Mark Foran

I was interested to see a recent news report that the European Commission has suggested that fees payable from retailers to Mastercard and Visa should be more tightly controlled or even discontinued, the rationale being that charges to retailers, in turn passed to consumers, are unfair and lack transparency.

Given that few of us can avoid seeing the insignia of either of these organisations each time we reach into our wallet or purse for a card, if the Commission’s proposal is carried through it is likely to have an impact on one or more players in the consumer-retailer-transaction company triad.

Winners and losers? Until it becomes a reality in which retailers and transaction firms have to act it is difficult to say. The consumer is undoubtedly most powerless to benefit from passed on savings or to combat passed on costs.

Retailers will naturally find their coffers swelling as the interchange fees to Mastercard and Visa are no longer due. However, while many try to position themselves as customer-friendly, it is not easy to envisage hordes of retailers passing much or any of their cost savings to their customers – certainly not in anything other than a fleeting way. Higher profits and shareholders rubbing their hands are likely to be more of a priority and certainly more of a temptation.

On the other side of the fence the transaction companies’ shareholders will be proverbially tearing their hair out as, between the two major players, they come to terms with an estimated loss of around £2.4bn. Someone will have to fill this void and who better than the consumers. There are a few ways in which they can do this. One is a levy on each new card, passed onto the banks which will in turn pass the cost onto the card holder. Another is a monthly fee for holding and/or using the card. You can almost hear the backlash from the general public about such moves – other than pure savings accounts, an account without a card attached to it is the exception rather than the rule. A cheaper, more traditional alternative may be welcomed by some but others would point to the fact that not holding a card means walking into a branch, the numbers of which continue to dwindle even for some High Street stalwarts.

The charges for cards have not been set in stone and will not be until the banks and transaction companies need to impose them, although £11 and £25 per debit card and credit card respectively have been mooted.

Perhaps more concerning for consumers is that when similar moves have been made to quell or eradicate interchange charges in other countries, debit and credit card providers have raised interest rates to retain profit levels.

No savings at the checkout and additional fees on your statement. It’s easy to see who loses if this becomes a reality.

But who are the biggest losers?

A thought should be spared for AVA (Added Value Account) holders. Some can be paying up to £300 per year for benefits they may never use (or even be aware of) only to be about to pay further charges for spending their own money.

And like a lot of charges, fees and interest rates the hardest hit are likely to be the poorest. To most a one-off £11 charge for taking out a card will not break the bank but the outlook is likely to be different for a household surviving on minimum wage or on benefits. If the passed on costs manifest themselves in interest rate hikes or charges for using a card then this portion of the population will constantly be paying more than before and, as always, paying a higher (an even higher) proportion of their income than the rest of us.

So what’s the answer? Well we can’t force retailers’ prices down, at least not long term, so is another option to lessen our use of cards? At a time when the touting of digital wallet becomes louder and the idea gathers momentum it may be that people decide to ‘go retro’ and carry more paper and less plastic around with them. Who knows – if this forces people to use cards less by drawing out a budgeted amount for the week, fortnight or month it may even lift some people out of any debt that they find themselves in.