UK Verdict on Card Fees Sparks Fears of Global Shake-Up for Interchange Models

The United Kingdom’s Competition Appeal Tribunal (CAT) created a payment industry sensation recently with a ruling that found Visa and Mastercard’s multilateral interchange fees (MIFs) to be in violation of European competition rules.

The decision marks the end of an extended litigation process with hundreds of U.K. stores and could ultimately cost card giants billions of dollars.

Visa and Mastercard have promised to appeal the ruling, but even that raises questions about interchange fee models not only in the U.K. but also in other countries where the networks do business. That includes the United States, where regulatory attention has been mounting.

Merchants argue that swipe fees inflate prices artificially and dampen competition. The tribunal sided with merchants that the fees were unnecessary for card systems to function and that they discouraged merchants from looking for better terms.

Mastercard referred to the decision as “deeply flawed,” while Visa stated that interchange was required to keep the digital payments environment in an operational and secure condition.

The decision places additional pressure on American legislators who recently considered but did not move forward with the Credit Card Competition Act (CCCA).

That piece of legislation would compel big banks to offer routing options outside of Visa and Mastercard.

While that legislation has stalled, analysts believe that this decision in the United Kingdom could breathe new life into movements for similar regulatory reforms in America.

The CAT ruling held that the fees breached Article 101 of the Treaty of the Functioning of the European Union. That law no longer directly binds post-Brexit Britain, but the ruling nevertheless sends a warning to policymakers everywhere: Interchange fees can again be subject to review.

U.S. regulators have acted in a scattershot fashion. Illinois recently deferred enforcement of a state law preventing swipe fees for taxes and tips. Federal lawmakers, meanwhile, continue to wrangle over the CCCA, which backers think would lower costs for consumers and merchants.

Unlike in the U.K., however, U.S. policy initiatives have encountered strong lobbying from payment networks and banks. Visa and Mastercard say their fees pay for fraud protection, innovation, and reliability. Critics reply that those perks cannot justify the opaque and compulsory nature of the fees.

The U.K. ruling’s financial impact has yet to fully materialize, but it could force Visa and Mastercard to repay billions to merchants. That in turn would trigger cost-saving moves or increases in fees in other areas to make up the difference.

Issuers that partner with these networks may also feel the squeeze. Other fees may be increased by banks in case interchange earnings decline — for instance, cardholder fees or interest charges. That puts a squeeze on card marketers to redefine value propositions and on fintech disruptors to introduce lower-fee alternatives.

Even if the ruling has no legal weight in America, it could come into play in terms of optics. State and federal officials can point to it as justification to review time-tested card fee procedures. To American cardholders, that would mean more choices in the end — but less predictability in card prices.

Mastercard and Visa said they will appeal the ruling, and litigation may take years. But that’s the issue: Officials are growing less tolerant of entrenched pricing practices in the payments space. Processors now have a case in point to dispute MIFs, and other countries can follow.

For card networks, the problem continues to be how to remain profitable and not elicit additional outrage. And for credit card issuers that base their rewards cards on interchange revenue, this move may signal that the rules of the game are starting to shift.