Clifford Chance

Following the launch of its market review into the supply of card-acquiring services in July 2018, the Payment Systems Regulator's (PSR) has published its interim report: Market Review (MR18 1.7) (15 September 2020) (MR18/1.7), setting out a number of key recommendations that include advising smaller merchants to switch supplier and removing perceived barriers which potentially impede the switching process.

Background to the market review

The market review was originally launched against the backdrop of the Interchange Fee Regulations (IFR) which came into force in December 2015 and sought to examine whether card acquiring services were working well for merchants.

Whilst the IFR caps interchange fees on most card transactions, it does not cap the merchant service charge (MSC) that merchants pay, relying instead on competition between providers of card-acquiring services to ensure that the cost savings they realise (IFR savings) are passed through to merchants.

The market review focused on card-acquiring services for Mastercard and Visa, and how fees had changed between 2014 and 2018. In reviewing that data, the PSR divided merchants into two segments:

• Small and medium-sized merchants, with annual card turnover up to £10 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 £380,000, account for around 90% of the overall merchant population. 
• Large merchants, with annual card turnover over £10 million. This segment is dominated by a very small number of the largest merchants, with annual card turnover above £50m.

Findings

The PSR's interim report found:

• Larger merchants with an annual turn-over greater than £50m typically received full pass through on IFR savings. Although few in number, this group was responsible for around 77% of the overall value of transactions in 2018. The estimated benefit of the savings to these merchants was around £600 million in 2018.
• Conversely, small to medium sized merchants with annual card turnover up to £50 million served by the five largest acquirers received little or no pass-through of the IFR savings.

Recommendations

Switching

The PSR's analysis indicated that whilst small and medium-sized merchants did not receive pass-through of IFR savings from their existing provider, they could secure better deals in the form of lower MSCs either by switching to a different provider of card-acquiring services or by negotiating with their existing provider. 

However, in order to benefit from choice and better deals, merchants need to be willing and able to switch. The PSR found a reluctance amongst merchants to do so, and that a key barrier to switching is the length of initial terms of point of sale contracts (POCs) between merchants and card acquiring providers. The average POC has an initial period of three to five years and often automatically renews for successive fixed terms. According to the PSR, this leaves the merchant unable to terminate before the end of the minimum or renewal term without incurring early termination fees.

"Removing barriers"

In view of this, the PSR is proposing to make it easier to search and switch for a new provider or better deal, including requiring all contracts for card-acquiring services to have an end date, 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, and linking the contracts for card-acquiring services and POS terminals, where they are sold together as a package by acquirers or independent sales organisation (ISOs).

ISO and acquirer pricing of card-acquiring services discourages searching and switching due to the absence of published prices, and the PSR is considering enabling or enhancing tools to facilitate price comparison for merchants which are available in a readily accessible format.

Any remedies are contingent on the PSR's final report but the PSR has asked for stakeholder feedback on these provisional findings and potential remedies by 8 December 2020.