Could a card fee cap mean the end of free banking?

By Emma Lunn

The European Commission (EC) has proposed a cap on the fees banks charge when processing credit and debit card payments.

In theory, this could lower retail prices, but some are concerned card companies could look to increase revenue elsewhere -- by introducing card fees to customers or by slashing rewards.

The proposal revolves around the "interchange fees" paid between banks for the acceptance of card-based transactions. For example, if you pay for something in a shop with plastic, the retailer's bank will pay a fee to your bank. For credit cards, the fee is generally a percentage of the value of the transaction; for debit cards, it is usually a flat fee.cap-on-fees

The EC plans include limiting the fee charged by banks to 0.2% on the value of a debit card transaction and 0.3% on credit cards. Fees across the European Union are now as high as 1.5%.

The rules were widely anticipated, given that the EC aims to regulate a sector currently seen as anti-competitive. A cap on the fees would save retailers across Europe about €4.5bn in annual charges. It would apply initially to cross-border payments, and hit UK rates after that.

First, however, each EU member must create legislation to turn the proposal into law, which could take years.

Although the move is good news for retailers who will benefit from lower costs, it could mean increased charges for cardholders. Some critics fear the fee cap could signal the end of free banking. At present, consumers have a choice between paid or free accounts, and the majority of credit cards don't have annual fees. That could change if banks have to recover lost revenue.

A report by the consultancy Europe Economics, commissioned by MasterCard, suggested a fee cap would force banks to introduce annual charges of up to £11 on debit cards  and £25 on credit cards. The report examined the impact of similar changes that took place in Australia in 2003 and Spain in 2006. It found that in both countries the changes resulted in a rise in card fees and interest rates.  

The UK Cards Association says those results bode ill for consumers under the EU proposal, especially in the UK, which makes much more extensive use of cards than elsewhere in Europe.

"All the evidence from other countries where similar laws have been introduced is that while retailers have benefited, this has not resulted in lower prices for consumers," says a spokesman for the UK Cards Association. "The main immediate beneficiaries of these proposals will be the largest 100 EU retailers, with customers losing out."

Paul Green, spokesman for credit card provider Saga, says while, in principle, the cap is good news, it's important to make sure the cost is not eventually borne by unwitting consumers. "Capping the interchange rate could encourage spending, but we need to ensure these cost savings are passed on to consumers and not added to the bottom line profits of online and high street retailers," he says.

Price comparison website Make It Cheaper, which advises business owners on how to reduce overheads, warns that consumers could see little benefit from the proposed rules. "There are so many middlemen sitting between the banks and the consumer that any cost benefit will be diluted to the extent that we are unlikely to notice any difference in retail prices," says Jonathan Elliott, Make It Cheaper's managing director. "The only exception to this is that we might see fewer of those cardboard signs in shops that warn customers of a 50p fee for low value transactions."

Retailers, meanwhile, maintain that a card fee cap would be good news for everyone, as savings would be passed from retailers to consumers. "We're delighted with this landmark proposal," says Helen Dickinson, director general of the British Retail Consortium. "Capping these excessive and anti-competitive fees will support the UK retail industry by £362 million a year, boosting the industry's ability to invest and innovate while continuing to deliver lower prices and value for customers."

See related: New consumer watchdog to get tough on financial firms, Payday lenders face severe crackdowns

Published: 25 July 2013