Published on 8 April 2020

It must be absolutely obvious who are the principals in the campaign to eliminate cash – it’s the card issuers and the card brands. Both have serious financial interests in play.

In the UK the major banks have reduced their branch networks and with it their ATM estates – to cut costs. Theirs is a major cost reduction exercise, legitimised by the story of Fintech, digitisation and so on, which provides useful top cover. As major card issuers, though, they find themselves increasingly in the position of having to pay out the 20p-per-withdrawal LINK interchange fee, and they don’t like it.

The direction-of-travel, we are told, is towards digital, and preferably a POS transaction or an online, card-not-present transaction. This type of transaction allows a deduction from the merchant’s proceeds of anything up to 8% of face value, to be divvied up between the card issuer, the switching intermediaries, with a little left over for the merchant’s acquirer.

This last component of the deduction, and only this one, is controlled by the laughable Interchange Fee Regulation, and into whose (in)efficacy the Payment Systems Regulator has launched, and is prioritising – oh yes – in its 2020 efforts, its “Card-acquiring market review”. This Admiral Nelson-like review catches, in its telescope, only the small proportion of the deduction that is the acquirer’s fee, and overlooks 90%+ of the deduction suffered by the merchant.

This deduction is forced on the merchant by the card brands’ “Honour All Cards” rule in the contract the merchant must sign with the acquirer, which is mirrored in the contract that the acquirer signs with each brand. It enables the brands to sign contracts with card issuers that permit the issuance of Premium cards with very high deductions, out of which the card issuer is able to pay for the benefits for the cardholder that are given out with the type of account the card is linked to. Cashback, vouchers, above-market interest…this is all paid for out of the deduction.

A contactless payment – the most recent displacer of cash – is just another trigger for a POS transaction, only without the PIN, and it delivers deduction revenues for the card issuers and card brands in line with any other POS transaction.

A cashback transaction, whereby the consumer experiences a cash withdrawal that is added to the cost of their shopping, has replaced an ATM withdrawal transaction subject to an interchange fee of 20p paid by their bank, with a POS transaction whose amount has been inflated by the cashback. The fees flow in that case into the card issuer, not out of it.

The loser out of all of this is the merchant in the first instance in terms of higher all-in banking costs. The loser in the second instance is the consumer, and not just the consumer using their card. The merchant increases prices for all consumers, across the board, whichever means of payment they use, in order to claw back the deductions they experience on card payments.

That’s the future supposedly – that’s digital, and don’t the card brands love it.

The two most prominent card brands – Visa and Mastercard – enjoy a privileged position in the UK market by being regulated retail payment systems but ones that have been exempted from the requirement – imposed on BACS, Cheque&Credit, Faster Payments and LINK – to run a scheme management company separate from the provision of operational infrastructure.

Visa and Mastercard manage their own schemes and provide their own operational infrastructure to themselves. BACS, Faster Payments and LINK have their operational infrastructure provided to them by a company called Vocalink, which is owned by Mastercard.

Mastercard benefits whichever means of payment is used, which chimes with an obvious global, strategic objective that they share with Visa: to be one or more stations on every single payment journey undertaken by any consumer or business anywhere.

In effect Visa and Mastercard drive revenues for the banks. So Visa and Mastercard can be said to be front-running for the banks, although neither Visa or Mastercard have been vocal in the attack on cash, despite being prospective beneficiaries of the results. They don’t need to really, with such a massive, vocal and messianic group of foghorns to do the frontrunning for them.