By Damon Gibbons
The European Commission’s plans to regulate so-called ‘multilateral interchange fees’ could have major implications for the Government’s ability to successfully implement welfare reform and will negatively impact on financial inclusion efforts in the UK.
The introduction of Universal Credit aims to incentivise claimants to return to work and achieve financial independence. A major change is the making of monthly payments into a transactional account, which is intended to mimic the payment arrangements of being in employment and encourage claimants to manage their money accordingly.
Pre-paid debit cards are available to almost anyone and recent innovations have transformed them into fully-functional, transactional bank accounts, offering a potential solution to the 2.5 million claimants who would otherwise struggle to manage their money effectively and incur the penalty charges levied on traditional bank accounts. A combination of subsidy from DWP and income from the beneficiaries of direct debits could make a free, fully-functional bank account through pre-paid cards readily available. In addition, as issuers of pre-paid cards also include credit unions, this solution would complement other DWP objectives to improve access to affordable credit.
It is here that proposals from Michel Barnier, the responsible Commissioner, present a threat. Debit and credit card issuers incur costs when issuing cards and look to recoup some of these from the retailers who accept their cards. This is done through the levying of a ‘multilateral interchange fee’ on each card transaction, which helps to fund technological developments, security and services while keeping the price down for consumers. Whilst interchange fees are a relatively small cost of the total transaction (typical charges are between 0.6% to 0.7% for UK pre-paid cards), large transaction numbers results in substantial compensation for card issuers.
The European Commission thinks multilateral interchange fees are too high, and intends to regulate them to 0.3% or lower across the EU. The intention is to reduce the cost of accepting card payments for retailers in the expectation they will pass these savings on to customers. However, evidence from Australia, Spain and the US shows retailers often do not do this. The loss of revenue from retailers also caused card issuers to hike up direct costs to cardholders by over 50%. It’s a case of pressing down on a set of scales at one end, only to see them rise at the other.
There are pricing problems in the debit and credit card markets which regulators need to address. However, the Commission’s proposal is not the way forward – reducing interchange fees risks increasing the cost of card use for UK consumers, who use cards more than anywhere else in Europe, and eliminating a potentially sustainable and affordable pre-paid solution for Universal Credit claimants. The Government should raise these points with Mr Barnier as a matter of urgency.
Damon Gibbons is Director of the Centre for Responsible Credit
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