Mastercard hikes fees 500%, could open banking come to the rescue?

Consumers using their Mastercard-powered credit and debit cards in the EU will prompt higher interchange fees for businesses following a planned fee hike from the payments giant later this year. 

The news, first reported by the Financial Times, could result in higher prices with Mastercard now taking 1.5 per cent of a transaction’s value with the EU’s current cap of between 0.2 - 0.3 per cent coming to an end in October.

The decision should, however, accelerate fintech's use of Open Banking, which has the potential to remove the need for card payments completely and therefore avoid fee hikes says Lars Trunin, Head of UK Product at TransferWise.

"To consider increasing the cost of card payments fivefold is genuinely staggering, and cannot be seen to be anything other than unprincipled. But this move, while disappointing, could accelerate the uses and demands of Open Banking,” he said.

“Open Banking could remove interchange fees completely by providing a viable alternative to card payments through bank to bank payments, and Faster Payments could be the rails for this alternative scheme. Merchants could then provide a payment method that is incredibly low-cost, and gives them access to funds immediately, creating a system that rivals traditional card payments for both parties,” he added.

Now three years old in the UK, Open Banking has seen a surge of activity during the pandemic as digital payments have boomed and the use of APIs to facilitate payments has become more reliable. 

For online payments, there is “absolutely no reason” why merchants and consumers can’t benefit from Open Banking functionality right now,  Trunin says. 

“The systems are in place, and you only need merchants to engage with it to create a smoother and cheaper process for everyone,” he said.  

However, the picture becomes more complicated when it comes to in-store card payments, as the analogue world further evolution to reach the same position. 

“While the UK leads the way when it comes to Open Banking maturity, bank transfers still need to translate to point of sale transactions before we can make this a reality for ‘real world’ payments,” Trunin said.

“Greater competition and choice for both issuers and merchants should lead to a more competitive environment, driving down costs for this infrastructure. A move that clearly needs to take place soon, to avoid fee hikes from expensive payment oligopolies," he added.