Court Rules in Favor of Payment Systems Regulator
The UK High Court has ruled in favor of the Payment Systems Regulator (PSR), dismissing a legal challenge brought forth by Revolut, Visa, and Mastercard. The companies were attempting to prevent the implementation of a plan designed to limit the fees banks charge each other for cross-border online payments.
The court's decision supports the UK regulator's authority to introduce price caps on these interbank fees. This ruling comes after Visa and Revolut initiated judicial review proceedings last year, arguing that the regulator was overstepping its bounds and negatively impacting competition. The court found these arguments unconvincing.
Background: Increased Fees Post-Brexit
The dispute originated in 2023 when the PSR observed a significant increase in fees charged for cross-border online payments, which had reportedly risen fivefold since the UK's departure from the European Union. This observation prompted the regulator to propose intervention to cap these charges.
The PSR specifically highlighted "card not present" transactions—where a consumer in one country pays a merchant in another, typically online—as the area experiencing the most substantial fee surges. Data indicated that between 2021 and 2022, Visa and Mastercard's debit card fees escalated from 0.2% to 1.15%, while credit card fees climbed from 0.3% to 1.5%.
Although Visa and Mastercard do not directly retain interchange fees, the court acknowledged their vested interest. The ruling suggested that higher fees incentivize banks to favor their services, as increased fees translate to greater revenue for banks. Conversely, reduced fees might lead banks to explore alternative payment providers.
The PSR had previously warned, in a briefing obtained by the Financial Times, that these fee increases were costing UK businesses an additional £150 million to £200 million annually. This financial burden was a key driver for the regulator's decision to implement the cap, aiming "to protect UK businesses from overpaying."
Industry Concerns Over the Price Cap
The proposed price cap faced opposition from various fintech companies and banks, particularly in Europe. One industry trade body expressed concerns to the Treasury, stating that the cap would result in financial losses on each transaction, as the processing costs would exceed the permissible fee.
Fintech firms like Revolut echoed these sentiments, emphasizing that their business models heavily rely on payment fees, unlike traditional banks that generate revenue from lending. Capping these fees directly impacts their primary income streams.
Furthermore, some industry participants argued that the new regulation could have detrimental effects on the broader economy and contradict the UK government's objectives for industry growth, characterizing the cap as anti-competitive.
The landscape for cross-border payments has already become more complex and expensive since Brexit. Banks face additional operational burdens in processing UK-Europe transactions. The proliferation of digital wallets, such as Apple Pay and Google Pay, also introduces new technological requirements and associated costs.
While the specific date and limits for the price cap are yet to be finalized, the High Court's ruling empowers the PSR to proceed. However, the regulator itself is slated for dissolution, with its functions to be absorbed by the Financial Conduct Authority.
This development occurs in the wake of former President Donald Trump's push for a 10% cap on credit card interest rates, adding another layer of regulatory pressure on the financial sector.