PSR’s New Interchange Cap: What Every UK Business Needs to Know
Written by Lee Hart
The UK's Payment Systems Regulator has made a decisive move to protect British businesses from excessive card payment fees charged by Visa and Mastercard. The PSR is implementing a two-stage price cap on cross-border interchange fees that could save UK businesses millions of pounds annually on European customer transactions.
Since Brexit, Visa and Mastercard increased interchange fees fivefold - from 0.2% to 1.15% for debit cards and 0.3% to 1.5% for credit cards when European customers shop online at UK businesses. The PSR estimates that UK businesses paid an extra £150-200 million last year alone due to these fee increases.
This regulatory intervention affects every UK business that accepts online payments from European customers. The new price cap level will limit fees to 0.2% for debit transactions and 0.3% for credit transactions, with further analysis planned to establish permanent fee levels that better reflect market conditions.
Key Takeaways
- The PSR is introducing price caps on cross-border interchange fees to protect UK businesses from excessive charges by Visa and Mastercard
- UK businesses currently pay significantly higher fees when European customers make online purchases compared to pre-Brexit levels
- The two-stage implementation will begin with temporary caps followed by permanent fee structures based on detailed market analysis
Overview of the PSR's New Interchange Cap
The Payment Systems Regulator has proposed a two-phase price cap model to address excessive cross-border interchange fees charged by Visa and Mastercard. This regulatory intervention targets fees that UK businesses pay when European customers make online purchases using cards issued in the EEA.
What Is the Interchange Cap?
The interchange cap represents a regulatory ceiling on cross-border fees within the merchant service charge that payment card networks can charge UK merchants. These fees apply when consumers use Mastercard or Visa debit or credit cards issued in the European Economic Area for online transactions with UK businesses.
The PSR's proposed remedy follows a two-stage approach. The first stage involves temporary caps to provide immediate relief. The second stage establishes longer-term regulatory ceilings with a comprehensive methodology.
This framework specifically targets the fee increases that occurred after Brexit. When the UK left the European Union, it lost the protection of the bloc's interchange fee regulations.
Purpose and Objectives of the Cap
The Payment Systems Regulator identified that Visa and Mastercard raised fees to unduly high levels following Brexit. In 2022 alone, UK businesses paid an extra £150-200 million due to these increases.
The cap aims to protect UK merchants from excessive pricing. The PSR found that a lack of competition in the market leads to costly price increases with unclear rationale.
Primary objectives include:
- Reducing financial burden on UK businesses
- Restoring competitive pricing in cross-border transactions
- Ensuring fair treatment of merchants in the post-Brexit landscape
The regulator's intervention seeks to create a more balanced payment ecosystem where businesses receive better value.
Key Provisions and Scope
The proposed cap covers cross-border interchange fees for online retail transactions between UK merchants and EEA cardholders. It applies specifically to Mastercard and Visa payment networks.
The PSR published a consultation paper seeking industry views on the proposed remedy structure. The consultation accompanies the final report that identifies these fees as excessively high.
Coverage includes:
- Debit and credit card transactions
- Online purchases only
- UK-EEA cross-border payments
- Both Mastercard and Visa networks
The PSR plans to publish a final remedies notice on the initial price cap in 2025. A methodology for the lasting cap will follow at a later date.
Impact on UK Businesses and Merchants
The proposed interchange fee cap creates significant financial relief for UK businesses, with potential savings of £150-200 million annually. Merchants across all sectors will experience reduced payment processing costs, whilst small and medium-sized enterprises face particular operational advantages.
Cost Implications for Service Users
UK businesses currently pay £150-200 million extra per year due to increased interchange fees. The PSR's proposed cap would reduce these costs substantially.
The fee structure shows dramatic increases since Brexit:
Card Type/Pre-Brexit Rate/Current Rate/Proposed Cap
- Debit Cards/0.2%/1.15%/0.2%
- Credit Cards/0.2%/1.5%/0.2%
Research indicates that 95% of interchange fee increases pass through to merchants. This means businesses bear nearly all additional costs when fees rise.
The cap would return fees to pre-Brexit levels. For a business processing £100,000 in EEA card transactions monthly, savings could reach £11,400 annually on debit cards alone.
Effects on Merchants' Operations
Merchants accepting online payments from European customers face the highest impact from current fee structures. The PSR's market review focuses specifically on card-not-present transactions between UK and EEA customers.
E-commerce businesses experience disproportionate effects. Online retailers processing high volumes of European transactions currently face processing costs five times higher than pre-Brexit levels.
Many merchants have limited alternatives. Mastercard and Visa cards account for 9 out of 10 online transactions at UK businesses using EEA-issued cards.
The cap would provide operational predictability. Merchants could better forecast payment processing costs and adjust pricing strategies accordingly.
Implications for Small and Medium-Sized Businesses
Small and medium-sized enterprises (SMEs) face particular challenges with current interchange fee levels. These businesses often operate on thin margins where payment processing costs significantly impact profitability.
SMEs typically lack negotiating power with payment processors. Unlike large corporations, they cannot secure preferential rates or alternative payment arrangements.
The proposed cap offers proportionally greater benefits to smaller businesses. A small online retailer processing £50,000 in EEA transactions annually could save approximately £5,700 under the new structure.
Many SMEs have reduced their European customer focus due to increased costs. The cap could encourage these businesses to re-engage with EEA markets, potentially expanding their customer base and revenue opportunities.
Role of Visa and Mastercard in Interchange Fees
Visa and Mastercard control nearly all UK card payments and set the interchange fees that businesses pay. Both companies dramatically raised these fees after Brexit, creating substantial new costs for UK merchants.
Dominance of Mastercard and Visa
Mastercard and Visa hold overwhelming control over the UK card payment market. The UK regulator challenges their dominance with both companies maintaining a 98% market share in UK card payments.
This dominance extends to online transactions with European customers. Mastercard and Visa account for 9 out of 10 online transactions at UK businesses using EEA-issued cards.
UK businesses have little choice but to accept these payment methods. Customers expect to pay with Visa and Mastercard cards. This leaves merchants with no realistic alternative when facing fee increases.
The PSR recognises this market concentration as problematic. Businesses cannot negotiate better rates when two companies control nearly the entire market.
Changes After Brexit
Brexit fundamentally changed how interchange fees work between the UK and Europe. Previously regulated caps on UK-EEA card-not-present interchange fees no longer apply since the UK left the EU.
Both companies implemented massive fee increases after Brexit:
Card Type/Previous Rate/New Rate/Increase
- Debit Cards/0.2%/1.15%/475%
- Credit Cards/0.3%/1.5%/400%
These increases happened in 2021 and 2022. Visa and Mastercard increased interchange fees fivefold after Brexit removed European regulatory constraints.
The financial impact on UK businesses has been severe. UK businesses paid an extra £150-200 million due to these fee increases in one year alone.
Reactions from Card Schemes
Neither Visa nor Mastercard have publicly detailed their reasoning for the substantial fee increases. The companies implemented these changes without extensive consultation with UK businesses or regulators.
The PSR has examined the rationale behind these increases. The regulator is examining the drivers for the increases in these fees to understand Mastercard and Visa's justification for higher rates.
Both companies maintain that their fees reflect the value and security they provide. They argue that processing cross-border transactions involves additional costs and risks that justify higher charges.
The card schemes have not announced plans to voluntarily reduce fees. This resistance has prompted the PSR to consider regulatory intervention through price caps.
Industry observers expect both companies to challenge any proposed caps. Previous regulatory disputes over interchange fees have led to lengthy legal battles in other jurisdictions.
How Cross-Border Interchange Fees Are Regulated
Cross-border interchange fees between the UK and EEA operate under different rules than domestic transactions. The Payment Systems Regulator oversees these fees and has proposed new caps following significant fee increases by Mastercard and Visa.
Definition of Cross-Border Transactions
Cross-border transactions occur when consumers use payment cards issued in one region for purchases in another. For UK businesses, these typically involve customers using EEA-issued cards for online purchases.
The cross-border interchange fees are paid by acquirers to issuers every time consumers use Mastercard or Visa cards for transactions between the UK and European Economic Area. These fees differ from domestic transaction fees.
Brexit removed the Interchange Fee Regulation caps that previously limited these fees. The removal of the IFR 0.2% cap for debit cards and 0.3% cap for credit cards allowed card schemes to set higher rates.
UK businesses bear the cost of these fees, which are typically passed through their payment processors.
Current and Proposed Fee Structures
Mastercard and Visa significantly raised cross-border interchange fees in 2021 and 2022. These increases affected card-not-present transactions, primarily online purchases.
The PSR estimates that UK businesses paid an extra £150-200 million in 2022 alone due to these fee increases. The regulator found these fees to be unduly high.
The PSR has proposed a two-stage price cap remedy. The consultation on the proposed price cap seeks to address what regulators view as excessive fee levels.
The proposed caps would restore more reasonable fee levels for UK businesses processing EEA customer payments.
UK-EEA Consumer Debit and Credit Transactions
The PSR's market review focuses specifically on consumer debit and credit card transactions between the UK and EEA. These transactions represent the majority of cross-border payment activity for UK retailers.
Card-not-present transactions between the UK and EEA are the primary focus of the regulation. These include online purchases, telephone orders, and mail orders.
Consumer debit transactions typically carry lower interchange fees than credit transactions. However, both categories saw substantial increases after Brexit removed regulatory caps.
The PSR found that these fees negatively affect merchants and may be passed through to customers. The proposed remedies specifically target consumer payment card transactions to protect UK businesses from excessive fees.
Details of the Two-Stage Price Cap Implementation
The PSR has designed a two-stage price cap remedy to address excessive cross-border interchange fees charged by Visa and Mastercard. This approach features an interim cap followed by a permanent solution based on comprehensive analysis.
Stage One: Interim Cap Levels
The interim cap represents the first phase of the PSR's enforcement strategy. The PSR continues to consult on what an appropriate level would be for this initial price ceiling.
The interim cap will target the fees that increased dramatically after Brexit. Mastercard and Visa raised their charges from 0.2% and 0.3% to 1.15% and 1.5% respectively for UK-EEA transactions.
The PSR has not yet announced specific interim cap levels. Businesses can influence these decisions by responding to the consultation with evidence and reasoning. The regulator emphasises that any cap level must align with business interests whilst addressing competition concerns.
Stage Two: Permanent Cap Methodology
The permanent cap requires more detailed analysis than the interim measure. The PSR will launch a consultation on developing a methodology for calculating the stage two price cap once the first stage is implemented.
This methodology will consider multiple factors including:
- Market competition dynamics
- Cost structures of payment providers
- Impact on business operations
- Consumer pricing effects
The permanent solution aims to establish long-term fee levels that reflect competitive market conditions. The PSR will conduct further analysis to ensure the methodology addresses underlying market failures whilst maintaining payment system functionality.
Timeline for Implementation
Implementation faces significant delays due to legal challenges. The PSR is pausing any further consultation or decision regarding a potential interim price cap until at least the end of Q3 2025 due to ongoing litigation over its powers.
The regulator will provide updates by the end of the third quarter of 2025. If the PSR proceeds with the two-stage approach, it will run another consultation before imposing any interim cap.
The original consultation period closed on 7 February 2025. However, the legal proceedings have effectively suspended the timeline for actual implementation of either stage of the price cap remedy.
Market Review and Future Outlook
The PSR's comprehensive market review has revealed significant competition concerns in cross-border interchange fees, with UK businesses paying an extra £150-200 million in 2022 alone due to fee increases. The regulator's proposed remedies could reshape the payment landscape and create new competitive dynamics in the market.
Findings of the Market Review
The PSR's final report confirms that Mastercard and Visa raised interchange fees to unduly high levels, particularly impacting UK merchants accepting European cards. The review identified a fundamental lack of competition in the market.
Key findings include:
- Fee increases occurred in 2021 and 2022 with unclear rationale
- Cross-border interchange fees are excessively high and negatively affect merchants
- Limited competitive pressure allows arbitrary pricing decisions
- UK businesses face significant cost increases without justification
The payment systems regulator found that the duopoly structure enables both card schemes to implement costly price increases simultaneously. This market failure particularly affects online retail transactions between the UK and European Economic Area.
Potential Long-Term Outcomes
The PSR's proposed two-stage price cap remedy could fundamentally alter the cross-border payment landscape. An initial interim cap would provide immediate relief, followed by a more comprehensive long-term framework.
Expected market changes:
- Reduced costs for UK businesses accepting European cards
- Increased transparency in interchange fee structures
- Enhanced regulatory oversight of payment systems
- Potential retaliation from card schemes through alternative fee structures
The regulator plans to publish a final remedies notice in 2025, establishing both immediate relief and methodology for lasting caps. This approach balances urgent business needs with comprehensive market reform.
Opportunities for Increased Competition
The PSR's intervention could catalyse broader competitive improvements in payment systems. Key findings from the final report on cross-border fees suggest regulatory action may encourage alternative payment methods and increased innovation.
Competitive opportunities include:
- Alternative payment providers gaining market share
- New entrants challenging established card schemes
- Innovation in cross-border payment technologies
- Enhanced merchant negotiating power
The market review demonstrates regulatory willingness to address competition failures in payment systems. This precedent could encourage further scrutiny of other payment market segments, potentially benefiting businesses across multiple transaction types.
Frequently Asked Questions
The PSR's proposed interchange fee cap addresses specific concerns about cross-border transaction costs that have increased dramatically since Brexit. UK businesses face new regulatory changes that could reduce their annual payment processing expenses by millions of pounds.
How will the PSR's New Interchange Cap impact transaction fees for UK businesses?
The PSR's proposed cap directly targets the £150-200 million in extra costs UK businesses currently pay annually for cross-border interchange fees. The regulator plans to reduce these fees from their current levels of 1.15% for debit cards and 1.5% for credit cards.
Businesses accepting payments from European Economic Area customers will see the most significant impact. The PSR estimates that 95% of interchange fee increases are passed through to merchants, meaning the cap will provide direct cost savings.
The regulator proposes implementing an interim cap first, potentially returning fees to pre-2021 levels. This temporary measure would remain in place whilst the PSR develops a permanent pricing structure.
What are the implications of the PSR's recent regulations on cross-border transactions for UK companies?
Cross-border transactions between the UK and EEA face specific regulatory changes under the PSR's proposals. These regulations apply specifically to cards issued in the EEA and used at UK businesses for online retail transactions.
UK companies processing payments from European customers will benefit from reduced interchange costs. The PSR found that Mastercard and Visa raised cross-border interchange fees fivefold between 2021 and 2022, from 0.2% to 1.15% for debit cards.
The regulations do not affect domestic UK transactions or payments made with UK-issued cards. Only cross-border transactions where EEA-issued cards are used for online purchases from UK merchants fall under these rules.
In what ways does the Payment Systems Regulator's final report affect UK interchange fee structures?
The PSR's final report confirms that Mastercard and Visa were not subject to effective competitive constraints, allowing them to increase fees to unduly high levels. This finding supports the regulator's decision to implement price controls.
The report identifies a lack of justification for the fee increases. The PSR found that Mastercard and Visa raised their fees without regard to the potential impacts on businesses and their customers.
These findings establish the legal basis for regulatory intervention. The PSR's analysis shows that the previous fee levels were working effectively before the schemes increased their charges.
How should UK businesses prepare for changes in Mastercard's interchange fees following PSR guidelines?
UK businesses should monitor the PSR's consultation process, which runs until February 7th, 2025. The regulator encourages all interested parties to contribute evidence on proposed fee levels.
Businesses processing significant volumes of cross-border transactions should prepare for potential cost reductions. The PSR's proposed interim cap could return fees to pre-2021 levels, providing immediate savings on European customer transactions.
Companies should review their payment processing agreements and fee structures. Understanding current interchange costs will help businesses calculate potential savings once the cap takes effect.
What do UK business owners need to understand about the recent updates to interchange fee regulation?
Business owners must understand that the regulations target specific types of transactions. The fees referred to are specifically outbound cross-border interchange fees for EEA-issued cards used at UK businesses.
The changes result from Brexit's impact on payment regulations. Previously regulated caps on outbound cross-border interchange fees no longer applied after the UK left the EU.
The PSR plans a phased approach to implementation. An interim cap will be introduced first, followed by a permanent solution based on further analysis and industry consultation.
Could you explain the distinctions between UK and U.S. interchange fees after the PSR's new cap implementation?
The PSR's cap applies specifically to cross-border transactions between the UK and EEA countries. This creates a distinct regulatory framework from the United States, where interchange fees are governed by different rules and authorities.
UK domestic transactions remain subject to existing interchange fee regulations. The IFR introduced business rules and fee caps for domestic payments, separate from the new cross-border regulations. Unlike the UK's structured regulatory approach, the U.S. has a more complex system where interchange fees are primarily determined by card networks with limited federal oversight, resulting in generally higher fees than those permitted under UK and EU regulations. This regulatory divergence means UK merchants potentially face lower costs for EEA transactions compared to similar cross-border payments involving U.S. cards.
About The Author
Lee Hart
