The new EU rules on interchange fees will backfire says Geoff Ho
CALL ME cynical, but I suspect that new European Union rules that are intended to cut the cost of debit and credit cards are going to backfire spectacularly.
The EU intend to bring in a new ruling which will cut the cost debit and credit cards
On Wednesday, the Payments System Regulator will introduce an EU mandated cap on "interchange" fees, which are the charges banks and card companies levy on each other for processing card transactions.
The new rules will cap interchange at 0.3 per cent of the value of each credit card transaction and 0.2 per cent for debit cards.
The banks have been forced to scale back due to the new caps about to be in place
The current rates are 0.85 per cent for credit cards and 0.29 per cent plus an additional fee for debit cards.
The British Retail Consortium estimates that cutting these fees could save merchants £480 million annually and the Government expects the savings to be passed on to the consumer in the form of lower prices. They will not.
The European Union will introduce the new rule on Wednesday
Banks and card providers have already reacted to the caps by dramatically scaling back and even scrapping generous loyalty schemes.
Do not be surprised if or when they follow that up by hiking other charges. The profitability of the banking sector is lower than it has been in years, because of new entrants in the market and activities such as investment banking not being as profitable as they used to be.
In that context, there is no way that the banks and card providers will wear such a huge drop in their income.
They will find a way to make it up and I suspect that it will come at the expense of the consumer and businesses. You have been warned.