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PSR confirms UK market for card-acquiring services does not work well for merchants

  • United Kingdom
  • Competition, EU and Trade
  • Payment systems and digital commerce

04-11-2021

On 3 November 2021, the Payment Systems Regulator (the “PSR”) published its final report (the “Final Report”) following its market review into the supply of card-acquiring services. The PSR’s Final Report largely confirms its provisional findings set out in its Interim Report published in September 2020 (see our briefing on the provisional findings), concluding that this market does not work well for small and medium-sized merchants (“SME merchants”)  nor for large merchants with annual card turnover up to £50 million (“large merchants”).  

The PSR intends to publish a remedies consultation in early 2022 to set out its views on the most suitable remedies package to address the concerns identified in the Final Report, and to seek stakeholders’ input on these.

Key issues identified

The PSR found that many SME merchants do not regularly search, consider switching their card acquiring provider or negotiate with their current provider despite evidence that they could obtain a better deal if they did so. The PSR concluded that this could discourage acquirers wishing to serve particular merchant segments from entering and expanding, and may have the effect of weakening competition between providers who currently do serve those merchants.  The PSR also found that the majority of available interchange fee savings brought about as a result of the introduction of fee caps for certain card transactions under the Interchange Fee Regulation 2015 (the “IFR”) were not passed through at all, or only very little, to SMEs and large merchants and that this was another indication that competition was not working well in the supply of card acquiring services.  

In terms of large merchants, the PSR concluded that the features which restrict the searching and switching behaviour of SME merchants will also apply to this group.

The PSR did not, however, identify any issues with the supply of card-acquiring services in respect of the largest merchants with annual turnover exceeding £50 million. 

Key features of concern

The PSR examined a range of factors to understand why many SME merchants do not search around and switch and concluded that the following three features (both individually and in combination) restrict the ability and willingness of SME merchants and large merchants to switch and ‘secure a better deal’, and explain the pricing outcomes for SME merchants:

a) difficultly in comparing prices of acquirers and independent sales organisations (“ISOs”)[i]

The PSR found that merchants generally cannot easily access information on acquirer and ISO pricing for card-acquiring services, as they do not typically publish their prices for these services, and their pricing structures and approaches to headline rates vary significantly. This makes it difficult for many merchants to compare prices resulting in high search costs. The PSR is of the view that more can be done to allow merchants to easily access pricing information in a way that enables them to compare and make good choices regarding their card-acquiring services provider. 

b)   the indefinite duration of acquirer and payment facilitator contracts for card- acquiring services

The Final Report notes that acquirer and payment facilitator contracts typically contain an initial term, after which they continue indefinitely unless terminated by either party. The PSR remains of the view that the indefinite duration of these contracts may explain, at least in part, why many merchants do not consider switching or searching for other providers regularly.  This is because these contracts do not typically provide clear trigger points for merchants to think about searching for and switching to another provider. The PSR concludes that after a certain point, merchants that grow their card turnover will particularly benefit from comparing different offers to see if their current deal still fits their needs - otherwise they may end up paying more than they need to.

c)    the long initial terms and / or automatic renewal of acquirer and ISO point of sale (“POS”) terminal contracts

The PSR found that POS terminals and POS terminal contracts can prevent or discourage merchants from searching and switching their card-acquiring services provider because of a combination of two factors:

  • in order to change provider of card-acquiring services, merchants that obtain a POS terminal from an acquirer or ISO must first terminate their current POS terminal contract as they typically cannot use the same terminal with a different provider; and
  • acquirer and ISO POS terminal contracts often have long initial terms of three to five years, or have terms which automatically renew for successive fixed periods, and may also include early termination fees. Therefore, a merchant could incur a significant early termination fee when cancelling its existing POS terminal contract, even if no such fee would apply when cancelling its card-acquiring services contract.

The difficulties and costs associated with exiting terminal contracts, therefore, acts as a barrier to switching providers of card-acquiring services.

Scheme fees

In the PSR’s final Terms of Reference, it said that it would also examine how scheme fees have changed over the period 2014 to 2018. Based on the PSR’s analysis, it concluded that scheme fees increased significantly over that period and that a substantial proportion of those increases were not explained by changes in the volume, value or mix of transactions.

Next steps

The PSR will publish a remedies consultation in early 2022 setting out its proposed remedies package to address the concerns identified in the Final Report.  Stakeholders will have an opportunity to provide their feedback on the proposed remedies and the PSR expects the payments industry to play a key role in developing effective and proportionate measures that increase merchant engagement and ultimately improve choice and prices.  Following this, the PSR will publish a provisional decision on remedies (and potentially a draft remedies notice) for consultation later that year.

Comment

After more than a year the publication of the PSR’s Final Report, to a very large extent, confirms the conclusions it had provisionally reached last September. During this period, the PSR will have reviewed large volumes of evidence including the 40 stakeholder submissions it received in response to its Interim Report consultation. While the PSR refers to a number of points made in those submissions, concerns raised by stakeholders are in the main dismissed. In the Final Report the PSR has therefore largely held its ground in terms of the key issues identified, the features found to be causing those issues and its ultimate conclusion that the market is not working well for SME and large merchants.

What remains to be seen is how the PSR proposes to remedy the problems it has found. The impact of remedies can be far reaching and so it will be critical for the sector to engage actively in the remedies consultation to ensure that any remedies are proportionate in terms of scope and design and capable of being effectively implemented whilst avoiding unintended consequences. We will now have to wait until early 2022 to see what the PSR proposes and be ready to respond.

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[i] ISOs are organisations that sell card-acquiring services to merchants on the acquirer’s behalf but does not itself contract with merchants for card-acquiring services.