Card-acquiring services: UK Payment Systems Regulator to carry out market review

The UK Payment Systems Regulator (PSR) has published draft terms of reference (ToR) for a market review into card-acquiring services using its general powers under the Financial Services (Banking Reform) Act 2013 (FSBRA), following concerns that this market may not be working well for merchants, and ultimately consumers.

What does this mean for you?

The proposed ToR are very broad, and touch on fundamental issues for acquirers, including the nature and characteristics of the card-acquiring services and market, as well as merchant fees and quality of service. By using powers under FSBRA, the PSR will have access to a broad 'toolkit' of potential outcomes. This means that the review has the potential to be transformative, and to have a significant and lasting impact on acquirers' businesses. You should therefore plan to engage with the PSR as soon as possible.

Why is the PSR doing this?

The PSR's main concern is that acquirers have not passed on to smaller merchants (and consequently to consumers) the savings they made from the interchange fee caps introduced by the Interchange Fee Regulation (IFR). Since it was expected that this would be achieved by market forces, the PSR is concerned that competition may not be working effectively in the acquiring market.

In addition, the PSR is concerned about a lack of transparency around the fees merchants pay to accept card payments.

What is the proposed scope?

At present, the PSR's focus is on the supply of card-acquiring services (ie services provided to merchants by acquirers and payment facilitators) but it leaves open the possibility of carrying out further work to investigate other issues and markets should it find evidence of potential harm that does not relate to this supply. The review will also consider the role that independent sales organisations play as a channel for acquirers to sell their services. 

Given that Mastercard and Visa branded cards together accounted for over 98% of all UK debit and credit card payments in 2017, both by volume and value, the PSR is unsurprisingly choosing to focus (albeit non-exclusively) on those schemes.

Supply of products and services that are related to card-acquiring services, including ancillary services such as the supply of POS terminals, are not in scope except insofar as they may affect the supply of card-acquiring services.  Similarly, acquiring services for digital (i.e. non-cash) payment methods other than card payments – such as payment methods that enable merchants to be paid using interbank payment systems – are outside the scope of the market review.  However, testing whether merchants have credible alternatives to card-acquiring services will be part of the market review.

What's the proposed approach to the market review?

The proposed ToR set out a wide-ranging and comprehensive approach to reviewing the market, based primarily on the following core themes relevant to acquirers:

  • the nature and characteristics of card-acquiring services;
  • whether there are credible alternatives to card-acquiring services for some or all merchants;
  • who provides card-acquiring services and how their market shares have developed historically;
  • how providers of card-acquiring services compete for merchants, and how this process affects merchants;
  • how merchants buy card-acquiring services;
  • the regulatory and legal framework that applies to the supply of card-acquiring services;
  • the scope for differentiation and innovation;
  • the outcomes of the competitive process, including the fees merchants pay and the quality of service they receive.

What specific issues will the PSR cover?

The PSR is proposing to examine three specific issues of interest within the scope of its work.

Barriers to entry or expansion for providers of card-acquiring services

The types of barrier could include technical, contractual, legal or regulatory constraints, or economies of scale. In particular, the PSR highlights competitive pressure on established suppliers, and difficulties for a new supplier looking to launch innovative products as potential barriers that it plans to examine.

Barriers to switching or searching that merchants face

The PSR will be looking into how merchants choose between providers of card-acquiring services to improve its understanding of the barriers merchants face in the process.  It is concerned about the potential knock-on effect on prices and quality of service if merchants can't switch or search easily.

Availability of services that facilitate merchant decision-making

The PSR will consider if there are factors that prevent such services from emerging or growing, including any restrictions on independent sales organisations or others that could prevent them from helping merchants make better choices.

What action could the PSR take?

If the PSR identifies any detriments to service users during the market review, it will consider what actions to take. Measures could range from making recommendations for industry initiatives or enhanced industry self-regulation to carrying out an investigation into a potential breach of the Competition Act 1998 or making a market investigation reference to the Competition and Markets Authority (CMA).

Engage now…or repent at leisure

The potential outcomes of the market review could be transformative, and could have a significant and lasting impact on the way that acquirers do business. Given the fundamental and complex nature of the some of the issues that the PSR proposes to include within the scope of the market review, and the potential outcomes, a proactive approach to engagement with the PSR at this early stage is essential. Early engagement and comment on the draft terms of reference provides an opportunity to influence the scope of the review, or steer the PSR to consider issues that could open up opportunities.

Please contact us if you would like to discuss how this impacts you and how we can help you to respond.

Back to main blog
Loading data