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How a no-deal Brexit makes payments more pricey

With the U.K. government still at stalemate over Brexit, the prospect of leaving the European Union without a deal remains a very real possibility. Despite some recent agreements, this could have major implications for the U.K. payments industry.

In recent months, U.K. payment service providers (PSPs) had raised concerns that a no-deal Brexit could leave U.K. businesses and consumers facing higher charges when making and receiving payments in euros. Those fears have been allayed by the European Payments Council Board’s decision last month to allow U.K. PSPs to continue to participate in the Single Euro Payment Area schemes — which cover euro credit transfers and direct debits — in all Brexit scenarios.

However, if the U.K. leaves the European Economic Area (EEA) there could be other consequences.

U.K. and EU flags
The U.K. national flag, left, flies beside an European Union (EU) flag outside the Chancellery in Berlin, Germany, on Tuesday, April 9, 2019. U.K. Prime Minister Theresa May is visiting Berlin and Paris today as part of her efforts to win a short delay to Britain’s departure from the European Union, while at home some in her Conservative Party try to throw her overboard. Photographer: Krisztian Bocsi/Bloomberg

As things stand, cross-border card transactions where the issuer and acquirer are both in the EEA are categorized as intra-regional transactions. This means they are regulated within EU law and so the interchange fee is capped. However, if the U.K. ceases to be part of the EEA, then these transactions could be treated by card schemes are inter-regional transactions, meaning that U.K. merchants may be forced to pay much higher fees for accepting card payments from EEA customers.

“If the U.K. is no longer in the EEA then it would no longer be a legal requirement for the likes of Mastercard and Visa to treat payments between U.K. acquirers or issuers, and EU acquirers or issuers, in the same way they do today,” said Andrew Cregan, head of payments policy at the British Retail Consortium.

Card schemes would then be left with the choice of taking the commercial decision to apply the higher charges, or maintain the status quo. “They have the ability to treat the U.K. as if it were still a member of the EEA for the purposes of card fees and charges,” Cregan said.

Visa declined to comment for this story, and Mastercard did not respond to inquiries.

Cregan points out that choosing to apply higher fees could potentially open card schemes up to greater regulatory and political scrutiny, which they may not want. However, Visa and Mastercard have yet to make their positions public. With U.K. retailers potentially facing hundreds of millions of pounds in additional charges, Cregan said it is the responsibility of the government and Payment Systems Regulator to seek written assurances that this will not be the case.

As of yet, this has not happened.

“They have a statutory objective to look out for the public interest and for payment end users,” said Cregan. “It shouldn’t be left to trade associations and individual retailers to secure a commitment from Visa and Mastercard that would benefit U.K. consumers and businesses at large. One would hope that Visa and Mastercard would voluntarily provide those assurances rather than exploit uncertainty and circumstance, but if the U.K. does leave the EU, then the U.K. government should legislate to extend the EU Interchange Fee Regulation to cap all card fees and charges.”

Another concern which has been touted in recent months is that the EU surcharging ban — which prevents merchants from being able to charge consumers for using a specific payment method — will no longer apply in the case of a no-deal Brexit. However, experts say this is unlikely.

“I expect the surcharging ban to continue,” said Bruce Lyons, professor of economics at the University of East Anglia. “The withdrawal act says all such regulations are to be adopted by default, unless there’s an explicit decision otherwise.”

Cregan says there could also be long-term consequences for the U.K. payments industry in the development of new payment technologies, especially in the wake of open banking.

“There are lots of questions around this,” he said. “If we’re trying to develop new solutions that work across borders, then leaving the EU isn’t going to help ensure compatibility across U.K. and EU markets.”

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