Debate continues over what new fee cap means for you

By Marianne Curphey

 A new cap on interchange fees -- the fees credit card providers charge merchants to process credit card payments - is sparking debate over whether consumers will ultimately benefit from the move.

Under the terms of an agreement between the European Commission (EC), Visa and MasterCard, as of March 2015 the fees will be limited to 0.3% of a purchase's price for credit cards and 0.2% for debit cards. The current fees range from 0.8% to 1.25% on credit cards. The changes will happen gradually, with fees decreasing over a 12-month period.


Proponents promise savings and transparency
People who support the cap say it will lower the cost of doing business for merchants and those savings will be passed on to consumers.

EU competition commissioner Margrethe Vestager claimed that the legislation is "good for consumers, good for business and good for
Europe", noting that the cap will allow consumers to understand what charges they are paying.

"We campaign that all fees should be transparent," agrees Samuel Mond, managing director of ClearCash, whose pre-paid MasterCards are an alternative to credit cards for people rebuilding their credit. "Then people
can understand what they are signing up for."

Opponents warn of higher bank fees, fewer rewards
But some -- including Visa and MasterCard -- say consumers may see higher banking fees, and that some plastic perks and rewards might take
a hit as a result. Indeed, Mond believes the cap could end free, basic accounts altogether.

A September 2014 Europe Economics report commissioned by MasterCard backs these beliefs, stating that when interchange fees were capped in Spain, Australia and the United States, the result was "reduced revenue for banks, reduced costs for large retailers and an overall increase in costs for consumers as banks pass on increased costs at a higher rate than retailers pass on savings".

Richard Koch, head of policy at the UK Cards Association, says that the introduction of the cap would have a particularly detrimental effect on the UK, which represents 30% of the EU card payment market and 70% of the EU credit card market.

The overall effect could mean a card payments system that looks and feels very different in the future, "with potentially less to invest in fraud prevention, innovation and competitive offers for consumers," Koch says.

"The changes will cut profitability and we will see less generous rewards," warns David Black, independent personal finance specialist. "Card providers may be less generous with their offers."

Andrew Hagger, founder of MoneyComms, agrees, saying that the changes might result in "incentives or perks being downgraded" because banks' profit margins are likely to be lower.

"In Australia, where 10 years ago the cap on interchange fees was introduced, it has been rewards cards that have been affected," says David Mann, head of banking at uSwitch. "Interchange fees used to fund the rewards programmes or perks for customers who had cards with add-on benefits like cash-back schemes or travel benefits. In the future, cards like this might have an annual membership ‘fee' for customers."

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

Published: 11 March 2015