EU proposes card charges shake-up but will fees rise?

The European Commission (EC) wants to cap "interchange fees" charged by cardholders' banks to retailers' banks when processing transactions. (See our Cashback Credit Cards and Credit Card Freebies guides for how to make plastic work for you.)

The fees would be limited to 0.2% of the transaction value for debit cards, and 0.3% for credit cards. At present, in the UK, debit card rates are below 0.2%, but credit card rates are around 0.8%.

These fees are unseen by consumers, but ultimately we all pay for them, as retailers include them in the prices they charge for goods and services.

The Commission hopes capping the fees will lower retail prices. But British card firms say they may have to increase other charges instead, and that retailers may end up pocketing the difference.

What do the card firms say?

The UK Cards Association, which represents card issuers and handling firms, says that in countries where caps have been introduced, consumers haven't benefitted.

It says: "The EC's model brings a risk that banks and other card issuers will be forced to implement new fees, because the reduced income from retailers will mean that the substantial costs of providing cards, and the systems which enable customers to pay for things safely and speedily, will have to be funded by cardholders in other ways.

"All the evidence from other countries where similar laws have been introduced is that while retailers have benefitted, this has not resulted in lower prices for consumers.

"The main immediate beneficiaries of these proposals will be the largest 100 EU retailers, with customers losing out."

70% of all EU credit cards are in British consumers' pockets, while 30% of all EU debit or credit card spending takes place in the UK.

What does the European Commission say?

The commission doesn't believe new charges will need to be introduced.

Its vice president Joaquín Almunia says: "Consumers are encouraged through reward systems to use the cards that provide their banks with the highest revenues.

"The regulation capping interchange fees will prevent excessive levels of these fees across the board.

"A level playing field will be created for payment services providers, new players will be able to enter the market and offer innovative services, retailers will make big savings by paying lower fees to their banks, and consumers will benefit through lower retail prices."

The EC hopes the caps will encourage the growth of new payment methods which don't involve cards, such as online transactions from customers' accounts.

It adds that if some banks do increase fees, those increases – unlike the current charging system – must be transparent, allowing customers to look for cheaper options.

What happens next?

MoneySavingExpert.com senior money writer Helen Saxon says: "While we don't know exactly how this would affect the UK cards market, it could mean that using cards becomes more expensive for consumers – rewards schemes and cashback are likely to be first to go. If not, we may see an increase in costs, either on the card's APR or a charge per transaction.

"However, these measures will save retailers money – so customers could win if savings are passed on in the form of lower prices."

The plan now has to be discussed by both the European Parliament and the European Council. The EC hopes the proposals will be looked at "as soon as possible" after the summer, although there's no date for this to happen.

As part of the same package, the EC has proposed new EU-wide rules on caps for how much customers would have to pay if their cards were used fraudulently, as well as a direct debit guarantee and ban on surcharges for credit and debit cards.

However, these are already mostly covered by UK laws.