UK regulator raises concerns over cost of processing card payments

The Payment Systems Regulator (PSR) has published its final report into the card-acquiring market (146 page / 1.85MB PDF). The review found that businesses that record annual sales from customer card payments of between £15,000 and £50 million are not benefitting from interchange fee caps introduced in 2015. The regulator also identified a lack of transparency around prices, and that the nature of many acquirer and point-of-sale (POS) terminal contracts discourage merchants from switching providers.

The PSR said it would now work with the payment services provider industry to develop remedies that increase merchant engagement and make sure the market works better for them.

Financial services expert Mila Pencheva of Pinsent Masons, the law firm behind Out-Law, said: “Lack of transparency in the pricing of card payment services has been a longstanding issue in the payments industry. This together with the myriad of barriers to new entrants in the card payment ecosystem has had an ongoing negative economic impact on a number of its participants but most prominently on merchants and end customers.”

“How to solve these problems has posed a conundrum for law makers and regulators alike for years. The introduction of the Interchange Fee Regulation (IFR) in 2015 was a key milestone, its main aim to reduce costs for merchants by capping interchange fees and supporting competition throughout the card payments ecosystem,” Pencheva said.

“However, as the PSR found in its report, the IFR has not reached its full potential and a lack of pricing transparency and competition remains. The long-awaited results of the PSR’s market review into card-acquiring services provide a welcome new opportunity for reshaping the market but it is unclear if the remedies which will come out will be enough,” she said.

The PSR said there were three features which restricted merchants’ willingness and ability to switch providers and find the best deal for them.

It said acquirers and independent sales organisations do not 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 independent sales organisations, acquirers and payment facilitators.

The review found the indefinite duration of acquirer and payment facilitator contracts for card-acquiring services do not provide a clear trigger for merchants to think about searching for another provider and switching.

The PSR also said that POS terminals and POS terminal contracts can prevent or discourage merchants from searching and switching provider of card-acquiring services. Merchants may need a new POS terminal if they switch their card-acquiring service provider, but could incur a significant early termination fee cancelling their existing POS terminal contract.

Pencheva said the potential solutions to the barriers to switching laid out in the PSR’s September 2020 interim report (99 page / 2.09MB PDF), such as limiting the duration of contracts or making POS terminals more portable, would be welcome and easy to implement.

“A careful balance will need to be struck to ensure certain relationships do not lose their commercial value for acquirers, resulting in restricted access to acquiring services for merchants,” Pencheva said.

Pencheva said the proposed remedies could prompt merchants to switch. However, they were unlikely to make shopping around for a better deal any easier, since, as the PSR identified, there is lack of transparency on and uniformity of pricing. The PSR’s proposed remedy is to enable and enhance price comparison tools and require acquirers to provide pricing information in easily comparable format.

“Any change resulting in merchants and consumers being provided with additional information is likely to be beneficial,” Pencheva said. “However, acquiring service providers need to be alert to the operational burden a change in pricing information requirements might bring and only time will tell if this solution will be sufficient to enhance the intended benefits of the IFR and existing transparency regulation.”

“A key element of acquiring services pricing is card scheme fees, which the PSR has reported increased significantly over the period 2014 to 2018. Imposing further requirements on acquiring service providers is unlikely to influence this important pricing element and acquiring service providers cannot be expected to be frontrunners for change in this area,” Pencheva said.