Interchange fees are a “regressive tax” on SMEs, says Bank of England
Touching on the difficulties faced by the SMEs in the digital payments environment, Bank of England Chief Economist Andy Haldane criticised commercial card interchange fees, which he termed a ‘regressive tax’ on small and medium sized enterprises. It is a regressive tax in the sense that it places much more burden on smaller firms than larger.
Haldane, who is also a Member of the Bank’s Monetary Policy Committee, spoke on the role of fiscal and monetary policy and touched on the implication of the pandemic on the wider economy. One of the shifts which the pandemic has shaped is the “digital switch” which would lead businesses towards spending and receiving payments via digital modes. It has also become the ‘catalyst’ which could lead to faster innovation in the future related to payments.
The rate of adoption of digital technologies is four times higher in the first few months of 2020 than the whole of 2019.
Talking further on the rise of card payments over cash, Haldane touched on the pain point of the system, namely the merchant service charge (MSC) or interchange fees. It is a charge set by card networks which is paid by the merchant to its merchant acquirer for every transaction. Though these are borne by the end consumers, it has an effect on the pricing.
The cost of MSC is not evenly distributed according to Haldane: SMEs bore this charge as much as three times larger than the weighted average MSC in the UK.
Haldane also empathized with the fact that the unit cost of intermediation in the UK has been lower than several other countries. The country is becoming more data- and technology-driven with the fact that its capital city, London, has become a hub for fintechs around the world , serving as home to over 2000 fintech companies together having received $3.6bn in funding this year.
Moreover, he said that the fintech wave has touched every aspect of the financial services industry. In 2008, the Bank of England launched Faster Payments and recently in 2017, it introduced Open Banking, but it cautioned that its potential has remained “largely unrealised, with awareness and use remaining low”.
Further, he talked about digital currencies and its implications on the banking and financial markets. In conclusion, he said that in financial services, the role of digital opportunities in payments and lending are large and have the potential to deliver lasting impact both on consumers and businesses.