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Mastercard Raises Interchange Fees Due to Brexit

Mastercard has been under heat after it was announced that they will sharply increase interchange fees post-Brexit, revealing the power of credit card duopoly. Let's look at what caused this increase and how it could affect both merchants and buyers. This article covers the reason for this substantial fee increase by Mastercard and the impact it will have on British buyers and banks, followed by what this could mean for online sellers.

Who will be affected by these new fees and what led to them?

When a British shopper uses a credit card to buy from an EU-based company, Mastercard will charge 1.5 per cent of the transaction value for every online credit card payment, instead of the current 0.3 per cent. As for debit card payments, the fee will jump from 0.2 per cent to 1.15 per cent. This change will take effect starting October 15th. 

Mastercard will now charge 1.5% of the transaction value

The reason why the fee was as low as it was has been an EU cap on fees imposed in 2015, which fell away with Brexit. Here is what MasterCard told merchants about this new fee:

The cap no longer applies to some transactions post-Brexit, because payments between the UK and European Economic Area are now deemed “inter-regional”.

While this jump in fees is imposed by Mastercard, the increase will admittedly benefit British banks and other card issuers, rather than Mastercard itself. 

As for consumers, they will face higher costs if companies choose to pass on the fee, but it's almost inevitable they will raise their prices, creating a further burden on purchasing products from EU-based companies. Taking into consideration that UK’s online spendings since the pandemic has grown exponentially with a large portion of goods being from outside of the UK, a drop in imported goods is to be expected as a result of the increased fees.

Online revenues statistics in the UK during the pandemic
Online revenues in the UK

When it comes to E-commerce start-ups and subscription businesses, this will put even more pressure on them, especially coming at a time where a huge number of small businesses have shifted to online models to survive the pandemic. For merchants based in the EU selling to UK customers, the checkout experience should be an immediate priority as shoppers need to be well informed during checkout whether there are any additional costs for goods shipped to the UK. Check out our previous video for the latest insights & 5 tips on cart abandonment at checkout.

At the same time, it is important to clarify that goods are coming from EU merchants given that British shoppers are at risk of paying more for their items as soon as the new interchange fees are effective. European acquirers will likely suffer from an adverse effect. But we expect and hope for strong initiatives from payments associations and introduction of alternative options.

The main takeaway:

While the fees are imposed by Mastercard, they will likely not benefit from the actual fees. E-commerce startups will likely suffer from higher drop out rates as a result of the fees increase they will discover at check out.

What is particularly interesting about this news is that it reveals the power of duopoly. And you can't help but wonder whether Visa will follow Mastercard’s steps on this matter. Do you think customers will suffer from higher prices on their goods? Or will new regulations come into place to cap interchange fees?

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