On 3 November 2021, the Payment Systems Regulator (PSR) published its final report on its market review into the supply of card-acquiring services MR 18/1.8 (the Report).
In the Report, the PSR states that for the largest merchants with annual card turnover above GBP50 million, the market review did not find any evidence that the supply of these services does not work well.
Conversely the PSR found that card acquiring services do not work well for small and medium-sized merchants, and large merchants with annual card turnover up to GBP50 million. These merchants could make savings by shopping around or negotiating with their current supplier – but many do not.
Purpose of the market review
On 24 July 2018, the PSR first published draft terms of reference of its market review into card acquiring services. On 24 January 2019, the PSR published its final terms of reference for the market review.
Card payments are critical to the smooth running of the UK economy. For merchants to accept card payments, they need to buy card-acquiring services. The costs of these services are ultimately reflected in the prices and services they offer to their customers.
The key question for the PSR in conducting the Market Review is whether the supply of card acquiring services is working well for merchants, and ultimately consumers.
The PSR adopted two broad merchant segments:
- Small and medium-sized merchants having annual card turnover up to GBP10 million. Almost all merchants are in this segment, although they are only responsible for around 17% of the value of card transactions. The smallest merchants within this segment, with annual card turnover up to GBP380,000, account for around 90% of the overall merchant population; and
- Large merchants having with an annual card turnover above GBP10 million. This segment is dominated by a very small number of the largest merchants, with annual card turnover above GBP50 million, who are responsible for around 76% of the overall value of card transactions.
In general, a merchant buys card-acquiring services either from acquirers or payment facilitators, which offer other goods and services merchants need to accept card payments, such as Point of Sale (POS) terminals.
An acquirer means a bank or other organisation licensed by the operator of a card-payment system to recruit merchants to accept card payments. A payment facilitator means an organisation that provides card-acquiring services to merchants alongside other goods and services, but has no direct contractual relationship with the operator of the card payment system. It uses an acquirer to access the card payment system (for example, the VISA payment settlement system).
The five largest acquirers – by number and value of card transactions – are Barclaycard, Elavon, Global Payments, Lloyds Bank Cardnet and Worldpay. The largest payment facilitators are PayPal (which owns the Zettle by PayPal brand), Square and SumUp.
Independent Sales Organisations (ISOs) do not provide card-acquiring services themselves but act as outsourced sales function for acquirers – selling card-acquiring services on their behalf to merchants, alongside other goods and services.
Findings of the PSR
The PSR had published provisional findings in an interim report in September 2020. The final findings of the PSR of the market review are found in the Report.
The PSR had received 37 responses from a range of stakeholders, including merchants and merchant representatives; acquirers; Independent Sales Organisations (ISOs) and leasing firms; payment processors; card schemes; payment facilitators; banks and other stakeholders.
Small and Medium-sized Merchants (SMEs)
- Many existing SMEs do not regularly (if ever) search for providers and rarely consider switching their provider. SMEs would benefit from searching, negotiating and/or switching more regularly. On average, SMEs received little or no pass-through of the savings associated with the caps on interchange fees as mandated by the Interchange Fee Regulation as onshore into UK law (IFR) although the PSR noted it was unable to reliably estimate the degree of pass-through of these savings to merchants with annual card turnover below GBP15,000.
- Acquirers and ISOs do not typically publish their prices for card-acquiring services. 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.
- The indefinite duration of acquirer and payment facilitator contracts for card-acquiring services may explain, at least in part, why many merchants do not consider switching or searching for other providers regularly.
- POS terminals and their contracts prevent or discourage SMEs from switching as POS provided by one acquirer/payment facilitator typically cannot be used by a competitor and merchants may incur early termination fees when cancelling POS terminal contracts.
- Large merchants with annual card turnover between GBP10 million and GBP50 million may have greater buyer power or more internal resource to assess card acquiring options compared to SMEs. Nevertheless, on average, they got little or no pass-through of the IFR savings – just like SMEs.
- The issues facing SMEs such as the barriers to searching and switching also apply to these larger merchants. Like for SMEs, the PSR concluded that the supply of card-acquiring services is not working well for large merchants with annual card turnover between GBP10 million and GBP50 million.
- For the largest merchants (with annual card turnover above GBP50 million), the PSR’s pass-through analysis was inconclusive for those on standard pricing because the IFR had little effect on their average interchange fees. The largest merchants, however, typically receive the full pass-through of the IFR savings. The merchants in this segment can access information about providers and assess their requirements. While they sometimes face significant switching costs – for example, due to the complexity of integrating payments with their systems – they achieve good pricing outcomes.
- Scheme fees increased significantly over the period of 2014 to 2018. The PSR found that a substantial proportion of these increases are not explained by changes in the volume, value or mix of transactions.
As an economic regulator with a focus on competition, innovation and the interests of service-users, the PSRs will next consult on remedies to address the harms identified in the Report in early 2022.
In the Interim Report, the PSR listed actions it was considering to address the harms identified in the market review:
- Requiring all contracts for card acquiring services to have an end date (not be indefinite);
- Limiting the length of POS terminal contracts, for example to align with the 18-month limit set in the Consumer Credit Act 1974;
- Ending POS terminal contracts that automatically renew for successive fixed terms;
- Linking the contracts for card-acquiring services and POS terminals, where they are sold together as a package by acquirers or ISOs. For example, by making it easy to exit POS terminal contracts if terms change in the card-acquiring services contract (including price) without incurring termination fees;
- 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
It is largely expected that these measures, amongst others to address the harms identified in the Report, will be proposed in the remedies consultation in early 2022.