By Huw Jones

LONDON (Reuters) -There is little evidence that big fee hikes imposed by U.S. duo Visa and Mastercard on retailers have led to a major improvement in service, Britain's Payment Systems Regulator said on Tuesday, flagging concerns competition was not working.

Visa and Mastercard have long dominated the market for payment cards, spurring UK lawmakers to call for closer scrutiny from the PSR, given that consumers end up paying the fees through higher prices for products and services bought.

Attempts in Europe to create home-grown rivals have floundered as banks balk at the investment cost. A report commissioned by Britain's government last year said the UK needs a "digital alternative" to the two U.S. payment processing networks.

"The PSR found that over the past five years, and after taking account of volume changes, Mastercard and Visa have increased their scheme and processing fees by more than 30% in real terms. There is little evidence that the quality of service has improved at the same rate," the PSR said in a statement detailing its provisional findings.

Cards are the most popular form of payment in Britain, with 27.1 billion transactions in 2022 worth 954 billion pounds.

The PSR's 158-page interim report estimates that the fee increases have added more than 250 million pounds ($317.78 million) annually to costs for UK businesses.

UK businesses have little choice but to pay these increased costs as Mastercard and Visa cards account for 95% of transactions using UK-issued cards, the PSR said.

"There is currently no effective competition preventing the two biggest schemes raising prices," the PSR said.

'HIGH LEVELS OF SECURITY'

Visa said its fees reflect the "immense value that we provide to financial institutions, merchants and consumers including extremely high levels of security, near-perfect operational resilience".

Mastercard said in a statement it disagreed with the PSR's findings.

"The payments industry has never been more competitive, which is reflected in the wide choice of payment options available to British consumers and businesses," it said.

The PSR said it has proposed "remedies" for public consultation that include improved transparency for users, and obligations on Mastercard and Visa to explain, consult on or document the reasons for price changes.

It also proposed greater reporting of financial information to the PSR on an ongoing basis to improve scrutiny of Mastercard and Visa's UK operations.

The public consultation is open until July 30, and a final report on card schemes and processing fees is due in the final quarter of the year.

"If the final report upholds the provisional finding that the market is not working well, the PSR will consult on the implementation of any remedies," the watchdog said.

($1 = 0.7867 pounds)

(Reporting by Huw Jones, editing by Sinead Cruise and Bernadette Baum)