The supply of card-acquiring services does not work well for small and medium-sized merchants and large merchants with annual card turnover up to £50 million, the PSR says in its final report.
On 3 November 2021, the PSR published its final report into the card-acquiring market review. In summary, the PSR concluded that the supply of card-acquiring services does not work well for small and medium-sized merchants and large merchants with an annual card turnover up to £50 million. The PSR reported merchants with an annual turnover between £15,000 to £50million, served by the five largest acquirers “got little or no pass-through of the Interchange Fee Regulation (IFR)” savings which capped consumer credit cards at 0.3%, and consumer debit and prepaid cards at 0.2%. The focus of the market review was card-acquiring services for Visa-branded and Mastercard-branded transactions.
In 2018 the PSR published draft terms of reference for a market review into the supply of card-acquiring services. Its announcement arrived as consumers in the UK increasingly looked to use card payments in the purchase of goods and services. For merchants to accept card payments they need to buy card-acquiring services. However, there were concerns that card-acquiring services may not offer value for money for merchants and specifically, acquirers might not be passing the savings made from the interchange fees caps onto smaller merchants, under the IFR. Lack of transparency around fees merchants pay to accept card payments, and the ability to compare or switch were also concerns raised.
As the cost of card-acquiring services could be reflected in prices and services offered to consumers, the PSR was concerned if the supply of these services was not working well for merchants it would ultimately impact consumers.
COVID-19 has also accelerated the use of card payments in the UK, resulting in retailers/merchants becoming even more reliant on payment service providers to process payments. Whilst most small and medium-sized merchants want to accept card payments, the PSR’s final report highlights that it has not seen any evidence of reasonable substitutes for Mastercard or Visa cards. Were this to occur, it “would exert a competitive constraint on the supply of card-acquiring services for these cards”.
The final report identifies three features which, if remedied, will improve small and medium-size merchant’s ability to search and switch, or negotiate a better deal. In turn, this will reduce overall the obstacles merchants face in getting a better deal. Individually, and combined, the report finds that the following features restrict merchant’s willingness and ability to search and switch:
(i) Acquirers and independent sales organisations (ISOs) don’t typically publish their prices and their pricing structures and approaches to headline rates vary significantly. According to the PSR, this makes it difficult for a merchant to compare prices for ISOs, acquirers, and payment facilitators.
(ii) 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.
(iii) POS terminals and POS terminal contracts can prevent or discourage merchants from searching and switching provider of card-acquiring services. This can occur as a merchant may need a new POS terminal if it switches provider of card-acquiring services but it could incur a significant early termination fee cancelling its existing POS terminal contract.
In light of recent announcements by Visa and Mastercard post-Brexit about increases in interchange fees focused on cross-border transactions, the PSR warned that it is “very clear” regulatory constraints (i.e. caps) preventing an increase in card fees being removed post-Brexit is not a “sufficient reason to increase fees, particularly if those increases are not obviously linked to costs.” To address these behaviours, the PSR set out in its strategy its plans to unlock the potential of account to account payments to offer a viable alternative to card payments.
The PSR will publish a remedies consultation in early 2022, which will seek views and information from stakeholders. It expects the payment industry to play a key role in developing “effective and proportionate measures that increase merchant engagement”, and ultimately, improve choice and prices for merchants. A provisional decision on remedies (and potentially a draft remedies notice) will be published for consultation later in 2022.
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 *PSR card-acquiring market review - final report - November 2021 Page 140, Paragraph 7.21
 *PSR card-acquiring market review - final report - November 2021 Page 136, Paragraph 7.2
 PSR card-acquiring market review - final report - November 2021 Page 23, Paragraph 3.34
 As above