Beyond the card networks, among those that may feel the squeeze should cross-border interchange fees see new caps in the United Kingdom are neobanks.
As reported Wednesday (Dec. 13), the U.K.’s Payment Systems Regulator (PSR) said in its review of cross-border interchange fees on transactions between U.K. businesses and the European Economic Area (EEA) that those fees should be capped. The PSR recommended that there be a cap of 0.2% for consumer debit transactions between the U.K. and EEA, as well as a 0.3% cap on consumer credit transactions made online at U.K. businesses. That’s the initial recommendation; further consideration would be given at some point to a “lasting cap” on interchange fees.
The model by which neobanks earn revenues from interchange fees — and paid for debit (and in some case credit) card transaction activities — may be upended a bit. Cross-border activity is, of course, tied most significantly to travel. And as the card giants’ results have shown as recently as the third quarter, cross-border spending was up double digit percentage points and has far eclipsed pre-pandemic levels.
That’s good news for companies like Monzo and Revolut and other firms that see top line momentum as consumers wield their cards in new locales and as neobanks enjoy the fruits of various card programs and revenue sharing agreements with partner banks.
Monzo, for example, disclosed in its most recent annual report that its transaction income — the inflows that include interchange — grew by 61% as card spend grew by 38% to 33.6 billion GBP. The company’s 127 million GBP in transaction income accounted for 75% of total income for the year.
Revolut’s financial statements are a further look backwards, given the fact that earlier this year the company released its 2021 statements. Card and interchange revenues for that year, per the company’s documents, stood at 149.4 million GBP, and was up 57% from the prior year, accounting for nearly a quarter of consolidated revenues.
For neobanks, beyond the cards and beyond the interchange, subscriptions are a way to gain recurring revenues, and thus, over time, reach sustainable profits. Revolut’s subscription revenues trailed interchange a bit, at least in the 2021 period. Monzo’s subscription income represented a relatively small (compared to transaction and interchange) 20% slice of the pie. So, for right now, interchange, it seems, has been and will remain among the key drivers of results. Any squeeze on those revenue streams might have negative ripple effects, impacting the ability to fund new card programs, or rewards programs … and in the jockeying for consumers, innovation counts. PYMNTS Intelligence has found that only about 1 in 10 consumers have used FinTechs as their primary bank. Across the pond, pressure on interchange fees may have some widespread consequences.
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