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PSR publishes interim report in market review of card-acquiring services

  • United Kingdom
  • Competition, EU and Trade
  • Financial institutions - Payment services

21-09-2020

On Tuesday 15 September the Payment Systems Regulator (the “PSR”) published its interim report (the “Interim Report”) in the ongoing market review of the supply of card-acquiring services.

Provisional findings

The provisional conclusion of the Interim Report is that the supply of card acquiring services does not work well for small and medium-sized merchants (those with annual turnover of less than £10 million) or for large merchants with turnover between £10 million and £50 million.  

This conclusion is based on the PSR’s view 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 small and medium sized merchants; and that those types of merchants would benefit from searching and, if they find a better deal, negotiating with their current provider or switching to a different one.

Key features of concern

In particular, the PSR identified three features of the market which restrict the ability and willingness of these merchants to switch and ‘secure a better deal’:

a) the complexity, and resulting cost, of comparing prices offered by acquirers and independent sales organisations (“ISOs”)[1]

The PSR found that merchants generally cannot easily access information on acquirer and ISO pricing for card-acquiring services. Instead, acquirers and ISOs usually quote a price for card-acquiring services based on information about the merchant’s characteristics collected during the sales process. The absence of published prices and the complexity of comparing prices creates significant search costs for merchants, thereby discouraging switches to alternative providers.

b) the indefinite duration of merchant contracts for card acquiring services

The Interim Report notes that acquiring contracts typically contain an initial term, after which they continue indefinitely unless terminated by either party. The contracts between merchants and acquirers therefore do not typically provide clear trigger points for merchants to think about searching for and switching to another provider, and for this reason the PSR found that it is not currently in merchants’ interests to search for and switch to a new provider.

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

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

Proposed remedies

In light of these concerns, the PSR is exploring a range of potential remedies on which it will now consult for a 12 week period, prior to publishing its final report. These are the following:

(i) Acquirer and ISO pricing

The PSR is proposing to expand and complement existing obligations under the IFR and Payment Services Regulations 2017, by enabling or enhancing tools to facilitate price comparison for merchants and/or requiring acquirers and ISOs to provide pricing information in an easily comparable format.

(ii) Indefinite duration of card acquiring contracts

The PSR is considering requiring all contracts for card-acquiring services to have a specific end date, thereby allowing merchants to evaluate whether their current provider provides the best deal and encouraging them to shop around for better offers

(iii) Long-term POS terminal contracts

The PSR is considering ending POS terminal contracts that automatically renew for successive fixed terms; limiting the length, for example, to 18 months; and linking the contracts for card-acquiring services and POS terminals, where they are sold together as a package by acquirers or ISOs, to make it easier to exit POS terminal contracts if terms change in the card-acquiring services contract - without incurring termination fees.

Next steps

The Interim Report is the latest step in the PSR’s ongoing review of the card acquiring market, the first holistic review of the market to be undertaken in the UK, which was commenced in July 2018. It follows a series of public consultations, a merchant survey and an extended period of the PSR gathering information and data directly from stakeholders.

The publication of the Interim Report now signals the start of a 12 week consultation, during which the PSR is seeking feedback on its provisional findings and proposed remedies with the deadline for stakeholder responses currently set as 8 December 2020. The PSR will then publish its final report which will detail its conclusions and final suggested remedies.

Comment

The PSR has stated that, as well as considering written responses to the Interim Report, they also plan to carry out a programme of stakeholder engagement – such as roundtable discussions - to listen to and discuss stakeholders’ views.  No timetable for this has yet been published. It will be important therefore for stakeholders to use the 12 week consultation period to engage with the PSR, to challenge its findings where appropriate, and to help shape its final conclusions and remedies, in particular to avoid unworkable remedies or unintended consequences.


[1] 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