The PSR’s acquiring consultation – the merchant’s view31st July 2018
On Tuesday 24th July, the UK’s Payment Systems Regulator (PSR) announced that it is running a market review into the supply of card acquiring services in the UK, including a public consultation. In this article, we look at the scope of the review and what merchants can expect to get out of it.
CMSPI will submit a response to the consultation and we welcome thoughts and opinions from merchants. If you would like to contribute to our response, please contact CMSPI Chief Economist, Callum Godwin at email@example.com
The PSR was formed in April 2014 and became fully operational in April 2015. It is the world’s first dedicated payments regulator and was introduced following campaigns from a wide number of industry stakeholders including CMSPI that called for an independent regulator of the payments industry. The PSR describes its purpose as “making payment systems work well for those that use them”.
Work to date
In our view the most notable intervention the PSR has made from a merchant perspective is its determination that there was a lack of competition in the market for the provision of payments infrastructure, paving the way for the Mastercard acquisition of Vocalink for £800m. CMSPI was against this merger on the basis that it was a diagonal merger that gave Mastercard ownership of the supplier of some its competitors, BACS and Faster Payments.
Unfortunately for merchants, the PSR has not made any moves to address the possibility of imposing lower interchange caps and has not, to date, addressed the substantial scheme fee increases imposed upon merchants since Visa Inc. purchased Visa Europe in 2016.
This latest review is the first sign of a proactive approach towards addressing merchant issues, and CMSPI welcomes this.
Five Key Takeaway Points
1. Card acquiring
The decision to include card acquiring services directly within the review is good news. Many (mainly smaller) UK merchants are still charged on blended pricing structures and have yet to see some or all of the benefits intended by the European interchange fee regulation (IFR).
2. Scheme fees
Scheme fees are indirectly within the scope of the review which means that it is likely that a further review will be required to address the issue directly. This could take time and, in our view, scheme fees are an urgent issue that should have been positioned front and centre of this review. CMSPI estimates the impact of scheme fee increases since January 2017 to be as much as £1 billion per annum for UK merchants (including volume increases) and further increases are expected from Visa and potentially Mastercard later this year.
3. Missing – Amex and ATMs
Until recently LINK’s ATM interchange fees, which compensate ATM acquirers for the costs they incur, have followed the guidelines of an independent cost study conducted by KPMG. However, due to competitive pressure from Visa and Mastercard LINK has abandoned the cost study and announced a gradual reduction in ATM interchange fees from 25PPT to 20PPT. In July 2018 it was announced that the planned reductions have been scaled back following concerns that the reduction in remuneration will lead to ATM closures and potential access to cash issues for consumers, particularly affecting the vulnerable. We believe the PSR should intervene and look at the possibility of regulating ATM interchange fees to protect the interests of these consumers.
We would also like the PSR to review American Express (Amex) cards, where fees for merchants are still very high – though we have seen some downwards pressure following the IFR. A potential remedy would be to introduce competition on the acquiring side of three party card schemes. This would mean that Amex would have to compete with conventional acquirers to acquire Amex transactions, putting downwards pressure on fees.
4. Interchange caps
It is disappointing that a review of domestic UK interchange fees is not within the scope of this review. This however, is something that we feel the PSR should be monitoring in lieu of the July 2018 interchange litigation judgment from the Court of Appeal, which ruled in the merchants’ favour by ruling that interchange fees are restrictive of competition in the acquiring market.
Many of the issues we have discussed in this article have been around for a long time. Substantial scheme fee increases began in January 2017, which effectively doubled scheme fee costs for some merchants in high transaction value sectors such as hotels. On the unbundling issue, there is plenty of evidence going back many years in Europe, the U.S. and Australia that found acquirers to have profited following regulation of interchange fees. This includes investor earnings call transcripts, central bank reports and acquiring profit margins in the public domain. This should have been monitored as soon as the regulation entered into force in December 2015, rather than left until mid-2018.
The UK is Europe’s largest card market and has the world’s first designated payments regulator. Despite this, the UK lags behind many other countries both within and outside of Europe in terms of its approach to payments regulation.
This upcoming review into the acquiring market from the PSR is undoubtedly a step in the right direction, but there is still a long way to go before we can expect to see tangible improvements. We are also concerned that the scope of the review is too narrow and does not seem to have prioritised well.
CMSPI will submit a response to the PSR’s consultation which includes our analysis of the key issues listed above.
To read the full article, including additional commentary on the five key takeaways, please click: The PSR’s Acquiring Consultation – The Merchant’s View