The Payment Systems Regulator (PSR) has published its final report on its market review into the supply of card-acquiring services (the Report). The Report concludes that the supply of card-acquiring services does not work well for merchants with an annual card turnover of under £50 million.

The PSR will publish a remedies consultation in early 2022. It will then publish a provisional decision on remedies for consultation later next year.

Background

The review was launched because of concerns that card acquiring services may not offer value for money for merchants. Some concerns that had been raised include:

  • Acquirers may not have passed on savings to smaller merchants from the fee caps introduced by the Interchange Fee Regulation (IFR) in December 2015;
  • Lack of transparency around the fees merchants pay to accept card payments;
  • Difficulty for merchants comparing and switching providers; and
  • The significant increase in scheme fees paid by acquirers to Mastercard and Visa over recent years.

The focus of their market review was on card-acquiring services for Mastercard and Visa. The Report follows on from the PSR’s interim report published in September 2020.

The PSR has been evaluating and examining how competition in the supply of card-acquiring services operates, including looking at the fees merchants pay for card acquiring services and the quality of service they receive.

The PSR adopted two broad segments for the review, splitting merchants into:

a) small and medium sized merchants having an annual card turnover up to £10 million – this includes almost all merchants with those with a turnover of up to £380,000 accounting for around 90% of the overall merchant population; and

b) large merchants having an annual card turnover over £10 million – this segment is dominated by a small number of the largest merchants with a turnover of over £50 million, accounting for around 76% of overall card transactions.

Points of interest: the growth in card acceptance

The Covid-19 pandemic has caused an acceleration of well-established trends such as the growth in card payments, changing shopping preferences, and increasing levels of card acceptance.  This prompted the PSR to consider it even more important for the supply of card-acquiring services to work well for merchants going forward.

The PSR also noted that there has been rapid expansion of the largest payment facilitators and Stripe in recent years, who dominate the market for the smallest merchants. In particular, they onboarded over 80% of merchants between 2014 and 2018.

Key findings in the Report

The Report notes that the largest merchants who are on interchange ++ pricing received full pass-through of the IFR savings, saving approximately £600 million in 2018. These merchants account for 77% by value of transactions. But small and medium sized merchants (and other large merchants) received little or no pass-through of the IFR savings.

In line with its interim report, the PSR found that small and medium sized merchants do not regularly search, consider switching providers or negotiate with their current provider – even though they could get a better deal if they did so.

The PSR identifies three features that both individually and in combination restrict small and medium sized merchants’ willingness and ability to compare and switch between acquirers:

Lack of Transparency

Acquirers and independent sales organisations (ISOs) don’t typically publish their prices, and their pricing structures and approaches to headline rates vary significantly. This makes it difficult for a merchant to compare prices for ISOs, acquirers and payment facilitators.

Indefinite contract terms

The indefinite duration of acquirer and payment facilitator contracts for card-acquiring services do not provide a clear trigger for merchants to consider switching provider.

POS terminals and contracts 

POS terminals and POS terminal contracts can prevent or discourage merchants from changing their provider of card-acquiring services. These contracts typically have longer minimum terms than acquirer contracts and the POS terminals are often not compatible with different acquirers. Merchants can often incur significant early termination fees cancelling their existing POS terminal contracts.

Remedying the above issues will improve outcomes for merchants by encouraging them to compare and switch between providers, or negotiate a better deal with their existing provider. The PSR’s view is that a more straightforward and low-cost search and switching process is needed so merchants can compare different providers and deals.

Scheme fees

The Report also concludes that scheme fees charged by Visa and Mastercard have increased significantly between 2014 and 2018 (more than doubling) – and those increase are not explained by changes in the volume, value of mix of transactions.

What’s next?

The PSR is due to publish a remedies consultation in early 2022, following which it will seek views and information from stakeholders, with payments industry stakeholders expected to play a key role in developing effective and proportionate measures that increase merchant engagement and ultimately improve choice and prices. Following this, a provisional decision will be published for a further consultation in late 2022.

The PSR has set itself an ambitious agenda when it comes to shaking up the UK payment acceptance landscape, but it remains to be seen whether it will opt for direct intervention to ensure effective competition, or rely on the goodwill of actors in the sector to improve the outcome for merchants, particularly those who lack the bargaining power to negotiate rates or terms.

We suspect the PSR will consult on at least some of the following potential changes in the remedies consultation (many of which were identified in their interim report):

  • whether there are options to increase the portability of POS terminals;
  • requiring all card-acquiring services contracts to have an end date;
  • limiting POS terminal contract lengths;
  • ending the automatic renewal of POS terminal contracts for successive fixed terms;
  • linking the contracts for card-acquiring services and POS terminals, where sold together as a package by acquirers or ISOs, making it easier to exit POS terminal contracts without incurring significant termination fees;
  • improving and/or developing tools to allow for price comparison by merchants; and/or
  • requiring acquirers and ISOs to provide pricing information in a comparable format.

There will no doubt be strong views from different stakeholders in the industry on the effectiveness of any such changes and any potential unintended consequences. We eagerly await the PSR’s proposals and we’ll provide a further update when the remedies consultation is published.

Contributors: Lydia Aspinall and Julie Nauwelaers

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

22 December 2021

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