UK card use soars but fees are hurting merchants, warns BRC

Cards now account for more than three quarters of retail sales in the UK, according to the British Retail Consortium.

The BRC, which sampled 48% of the entire UK retail industry in its research, says total retail sales rose by 4.3% in 2017, to £366 billion, up £15 billion on the previous year. Average transaction values were also up, by £4.15, to £22.57. Of that total retail spend, £277.1 billion was paid for using cards – that is 76%.

But, the BRC warns, benefits delivered by the Interchange Fee Regulation (IFR) are being eroded by increases in scheme fees, which increased by 39% in 2017, measured as a percentage of turnover. It is calling for regulatory action to address the problem of soaring scheme fees, to tackle fee increases, to simplify fees and charges, and to expand IFR to cover all card fees and charges.

The Payment Systems Regulator, which regulates the card industry, already indicated in July that it intends to conduct a market review into the supply of card-acquiring services. A market consultation closed on 14 September and it will publish its final terms of reference by the end of the year, with a report and any actions following that.

UK retailers spent an additional £170 million to process card payments in 2017, or £970 million in total, says the BRC – costs that are borne by businesses of all sizes. It adds: “The adverse impact of these scheme fee increases has been partly hidden by savings in other card charges. The scheme fee increases to retailers in 2018 range between 30% and 100% for domestic transactions alone.”

The UK is one of Europe's more enthusiastic card markets, but cards do enjoy traction across the continent. In France, for example, at the end of 2017 there were 79.9 million cards with a payment function in circulation, making payments worth €527.9 billion, according to ECB figures. But less than 20% of these cards had a credit function.

The card business certainly remains a highly profitable one. CMS Payments Intelligence, a payments consultancy, says: “Due to the high barriers to entry and the high cost of change in the payments industry, the market is highly profitable, with card schemes reporting profit margins in excess of 50% and card acquirers typically seeing profits of 30%-40%.”

However, card providers reject the characterisation of cards as expensive. They point out that card fees in Europe have fallen around two-thirds – from around 0.9% to 0.3% for credit cards – since IFR came in, although larger merchants have been bigger beneficiaries, being able to secure better deals than their smaller peers. Even among merchants of a similar size, some may have better deals than others because they have spent more time looking for the best offer.

Jason Lane, executive vice president of market development for Europe at Mastercard, notes Europe has among the lowest card acceptance costs anywhere in the world. “In the EU, the so-called interchange fees for consumer credit cards are capped at 0.3% and at 0.2% for debit and prepaid cards. In the US, these fees for credit cards are much higher and can go up to 1.4%,” he says. “I think this is very competitive for the benefits it offers retailers, in terms of reducing the cost of collection and storage and weight associated with managing cash.”

The fact that card use continues to grow despite the charges may be providing a lifeline for cash, with retailers still incentivised to accept and even encourage cash payments. Increasing use of cards has been mirrored by falling use of cash, says the BRC, both as a share of retail transactions, which is down 0.5%, and as a share of retail sales, which is down 1.2%.

The convenience of contactless payments has been cited by many as a big reason for the increasing use of cards, but independent payments consultancy CMSPI says contactless actually cannibalises card more than it does cash. But, it warns, there is a threshold below which it becomes more desirable for merchants to accept cards than cash, and that, in the UK, merchants in many sectors are close to that threshold.

So far, scheme fee increases have prevented the threshold actually being breached, says CMSPI. However, “should the cost of cash exceed the cost of cards, we would likely see merchants start to discourage cash use,” it says. “For example, we may see surcharging for cash transactions, self-service checkouts that don’t accept cash, and large supermarket chains that only have limited cash tills.”

That would likely give card use another significant push, and drive cash use down further. How far cash use could actually fall is unclear. One of the markets with the lowest use of cash is Sweden, where cash spending was around SKr130 billion in 2016, representing 7% of all consumer spending, says CMSPI. But Sweden's relatively small population and higher income equality, and the ease of accepting cards for small merchants via iZettle, make it a different landscape to the UK, it notes.

Setting aside the issue of cost, Lane emphasises the other benefits of using cards – benefits merchants pay for, for themselves and their customers, when they pay card charges.

Lane says: “Retailers have a choice. Cash, despite its inefficiencies, of course remains an option, and a lot of merchants also offer PayPal, despite that being more expensive for them, because some of their customers might want that choice. But cards are very popular with consumers because of their ease of use and the security that comes with them. They allow retailers to cement the bond of trust with their customer. The retailer gets the security of knowing the payment will be made.”

Steve Robson, head of commercial cards, treasury and trade solutions at Citi, agrees. “Cards offer shoppers a protected environment. With push payments initiated by the account holder, for example, in the case of fraud, banks have not felt an obligation to reimburse clients. With cards, the cardholder is protected if there is a third-party fraud problem.”

Cards have three big advantages, says Robson. “They are real time, they offer cardholder protection and they are global. I do not see any alternative payments that can offer anything like that today.”

Meanwhile, cards themselves continue to innovate in ways that could further increase their use. Gpay and Apple Pay allow users on Android and iOS platforms respectively to store their cards inside their phones, meaning they can use them without physically having to carry them around. 

Elsewhere, virtual cards attempt to reimagine cards in the internet age, making it easier to use cards where the buyer does not trust the seller, as in many online transactions. Virtual cards offer a one-time generated card number that can be used for a predefined period and location, keeping the underlying card number hidden from the merchant, significantly reducing the risk of fraud.