On the 24th July 2018, the Payment Systems Regulator (PSR) published a draft terms of reference for a market review into the supply of card-acquiring services in the UK. It will remain open to consultation over the summer of 2018. Through this review, the PSR aims to study the competitiveness of the market and ensure that services provided are in merchants’ and consumers’ interests.
Card payments are vital for the movement of funds within the UK economy. In 2017, there were 13.2 billion debit card payments (totalling £523 billion) and 3.1 billion credit card payments (totalling £168 billion). The number of merchants now accepting card payments continues to grow, with debit card transactions having now overtaken cash payments as the most common payment method.
However, many stakeholders have raised concerns about the card acceptance process and whether the fees associated are fair to both merchants and consumers. The PSR has focussed on the supply of card acquiring services primarily for two reasons:
1. There are concerns over competition in the supply of card acquiring services, primarily for smaller merchants, driven by the view that acquirers are holding on to the savings made from the Interchange Fee Regulation (IFR) caps introduced in 2015.
2. The expectation that any card payment system problems that affect merchants would materialise through the charges and services they receive from acquirers and payment facilitators.
The proposed scope of the market review
The PSR proposes to examine the supply of card acquiring services by acquirers and payment facilitators in the UK, with the role of ISOs (Independent Sales Organisations) also considered.
The focus will be on the supply of services in relation to Mastercard and Visa, due to their strength in the UK market (98% of cards in use in the UK are branded Visa or Mastercard), while other schemes will also be observed and examined.
Other non-card related payment acceptance services will not be considered in scope as they do not appear to be a good alternative to card acceptance for merchants.
PSR’s proposed approach
To understand the effectiveness and the level of competition in the supply of card acquiring services, the examination will include:
- The nature and characteristics of card-acquiring services
- The availability of credible alternatives for some or all merchants
- The historical development of card acquiring services and how they share the market
- How providers of card-acquiring services compete for merchants, and how this process affects merchants
- How merchants buy card-acquiring services
- The surrounding regulatory and legal framework
- The scope for differentiation and innovation
The PSR will explore the outcomes of the competitive process, including the fees merchants pay and quality of service.
Specific issues of interest
Three key issues have been identified from stakeholder and desk-based analysis. However, the PSR notes that it does not yet have a view, at the outset of the consultation, on the impact or issues that may arise concerning the supply of card acquiring services. These key issues are:
1. Barriers to entry or expansion — It can be challenging to offer new card acquiring services and thereby create more competitive pressure on established suppliers. The PSR wants to understand the technical, contractual, legal or regulatory or ‘economies of scale’ barriers to entry or expansion.
2. Barriers to switching and searching by merchants — The PSR would like to examine how merchants choose between providers. When there are barriers to switching and searching, a merchant may become less responsive to price increases and quality of service issues.
3. Availability of services that facilitate merchant decision making — It is suggested that greater access to services for merchants would help them make better choices about card acquiring services and would promote competition.
In the event of the PSR identifying any detriment to service users, there is a range of actions which can be taken, such as setting up industry initiatives to prevent further detriment or making proposals to the Financial Conduct Authority (FCA) for targeted intervention.
If there is a combination of detrimental factors that create an adverse impact on competition, the matter could be referred to the Competition Markets Authority (CMA) for an in-depth investigation. Any actions taken are to follow the three principles of efficiency, proportionality and transparency.
The consultation welcomes feedback on the draft terms of reference and has provided a list of consultation questions. The PSR is consulting over the summer and is open to comments. The consultation feedback will close on the 14th September 2018.
CONSIDERATIONS FOR FIRMS
Card and non-card payment acceptance is a critical activity for all firms. The management of this activity is vital to ensure firms manage their costs and charges effectively, support any mandatory regulatory compliance related to payments, and deliver the best and most appropriate payment methods to their customers.
Huntswood's in-house experts have the knowledge and experience needed to work with you across all areas of payments, including across the acquiring market. This could include detailing how firms can deliver the best customer journey and experience, achieve regulatory readiness and compliance, deliver the most appropriate payments operating model, and ensure payments security. We are also well placed to help you identify and respond to the commercial opportunities and challenges presented as part of this market consultation.