Mastercard and Visa look set to face a cap on their cross-border interchange fees after Britain’s payment watchdog raised concerns that they have increased charges to “an unduly high level”.

The Payment Systems Regulator (PSR) said a cap would protect UK business from overpaying on fees charged on transactions made between the UK and the European single market.

It said UK firms paid an extra £150 million to £200 million last year alone due to five-fold fee increases pushed through by the card firms in 2021 and 2022.

The PSR said its findings so far suggest that the market is “not working well”, with UK firms having “little choice but to pay the increased costs”.

Visa said it “strongly disputes” the findings by the regulator and argued its proposed measures are “not justified”.

Mastercard and Visa cards account for nine out of 10 online transactions at UK businesses using EEA-issued cards, according to the PSR.

It comes after the regulator launched a market review on interchange fees charged since Brexit, when the European Union’s rules on payments stopped applying to the UK.

Chris Hemsley, managing director at the Payment Systems Regulator, said: “In this market review we have provisionally found that the fees charged by Mastercard and Visa to UK businesses which accept payments from within the European Economic Area (EEA) are likely too high.

“In short, at this stage we do not think this market is working well.”

He added: “Our interim report sets out a range of potential solutions which could be implemented.

“They are designed to make sure cross-border interchange fees are set at a level that better reflects the interests of all Mastercard and Visa users.”

The PSR is looking at introducing initial time-limited caps of 0.2% on (EEA) consumer debit transactions and 0.3% for consumer credit transaction, where the transactions are made online at UK businesses.

It plans to launch a long-term cap, but will do further analysis to look at what the level should be.

It is now consulting on its proposals until January 31 and plans to publish a final report in the first quarter of next year.

Both Mastercard and Visa said they do not agree with the PSR’s findings.

A spokesman for Visa said: “We strongly dispute the findings of the PSR’s interim report and believe that the proposed remedies are not justified.

“Accepting reliable, secure, and innovative digital payments represents enormous value to UK businesses, especially when selling overseas.

“These interchange rates apply to less than 2% of UK card payments – European (EEA) cardholders buying online from a UK seller – and reflect the fact that these transactions are more complex and carry far greater risk of fraud.”

A Mastercard spokesman said: “We do not agree with the PSR’s findings and will continue to educate them on the critical importance of electronic payments to the UK economy.”