Card Acquisition Services: PSR Will Work On Increasing Search And Switching For Majority Of Merchants | Hogan Lovells

Importance of a well-functioning card acquisition market in the post-COVID-19 economy

The market review was launched long before the “extraordinary [economic] the impact ”of the COVID-19 pandemic has started to be felt. However, in its final report, the PSR points out that COVID-19 has led to an acceleration of well-established trends such as the growth of card payments, changing purchasing preferences (including the shift to online spending) and increasing card acceptance levels among (small) businesses means that it is even more important that the offering of card acquisition services work well for merchants in the future.

Impact of the regulation on interchange fees (IFR)

The IFR, which came into effect in 2015, capped interchange fees on most card transactions, but did not lower overall prices as interchange fees are only one component of Global Merchant Service Fee (MSC) that merchants pay to their card acquirers. In addition to the interchange fees, the MSC is also made up of the system fees (paid to the operator of the card payment system, e.g. Mastercard or Visa) and the acquirer’s net worth (this covers other costs and the acquirer’s margin). Rather than capping the MSC, the IFR relied on competition among card acquisition service providers to ensure that cost savings were passed on to merchants.

The PSR believes that additional measures are necessary because acquirers do not pass on the savings made by the IFR caps to merchants.

Plan fees

The PSR analysis concluded that during the period 2014-2018, the fees paid by acquirers to Mastercard and Visa had increased significantly and that a substantial part of these increases were not explained by changes. in the volume, value or composition of transactions.

Merchant segments

PSR used two main merchant segments within the card acquisition service offering to structure its analysis:

  • Small and medium-sized traders with annual card turnover of up to £ 10million. Almost all merchants fall into this segment, although they are only responsible for around 17% of the value of card transactions. The smaller merchants in this segment, with annual card turnover of up to £ 380,000, represent around 90% of the overall merchant population.
  • Large traders with an annual turnover of over £ 10million. This segment is dominated by a very small number of the larger merchants, with annual card turnover in excess of £ 50million, who are responsible for around 76% of the overall value of card transactions.

Summary of Findings

Small and medium-sized traders

PSR concluded that small and medium-sized traders face the following challenges:

  • Pricing issues: On average, these traders received little or no pass-through from IFR savings.
  • Loyalty penalty: New customers are likely to pay less on average than existing customers.
  • Successful negotiation when tried: Almost 90% of merchants who tried to negotiate with their supplier got a better deal.
  • Unlikely to change supplier: Although there are multiple vendors to choose from, many small and medium-sized traders do not look for vendors and rarely consider switching vendors. This could discourage acquirers wishing to serve particular merchant segments from entering the market and expanding competition, and could have the effect of weakening competition between existing suppliers.

The PSR has identified several obstacles to change:

  • Lack of transparency: Acquirers and independent sales organizations generally do not publish prices for card acquisition services. In addition, their pricing structures and approaches to overall rates vary widely. This makes it difficult for a trader to compare prices in the market.
  • Contracts of indefinite duration: The contracts with acquirers and payment facilitators for acquiring cards are for an indefinite period, which could mean that there is no clear trigger for a merchant (1) to think about research from another supplier who might offer better value or (2) negotiate with their supplier.
  • Point of sale terminals and contracts: Point-of-sale terminals and point-of-sale terminal contracts that prevent or discourage merchants from finding and switching to a new supplier. This can happen because a merchant typically cannot use their existing point of sale terminal with a new card acquirer. If they change card acquisition service providers, they may need a new point-of-sale terminal and cancel their existing point-of-sale terminal contract, which may incur an early termination fee. important. Point-of-sale terminal contracts may have different renewal terms than contracts with card acquirers and may be renewed automatically for successive fixed terms, which also makes it difficult to terminate a service contract. purchase of cards.

PSR believes that addressing these characteristics will improve outcomes for small and medium-sized traders.

Large traders

  • The market does not work for large traders with annual card turnover between £ 10million and £ 50million: Much like small and medium-sized merchants, large merchants with annual card turnover between £ 10 million and £ 50 million, on average, have little or no impact on IFR savings. Features that restrict the search and switching behavior of small and medium-sized traders also apply to this group.
  • Large traders with an annual turnover of over £ 50million: Larger traders have benefited from the all-wheel drive of IFR savings, and the PSR estimates that the benefit of the savings for these traders was around £ 600million in 2018. Although larger traders may face some high change costs (due to integrating complex systems), they generally perform well on pricing and PSR found no evidence that the market was not working well for these customers.

Potential remedies – any clues?

Although PSR plans to release a separate consultation on remedies in early 2022, there are some clues as to what types of remedies PSR may suggest. These could include:

  • demand greater transparency in pricing;
  • reduce the complexity of pricing structures to allow easier comparison between different providers;
  • mandatory end dates in card acquisition contracts or “prompts” to encourage merchants to consider switching; and
  • measures to ensure that the terms of the point-of-sale terminal contract are of the same duration or shorter than those of the merchant’s card acquisition service contract.

Next steps

Now that PSR has expressed its concerns, it plans to publish a remedy consultation in early 2022 outlining its opinion on the most appropriate remedies. PSR expects industry to play a key role in developing solutions that will increase merchant engagement and ultimately improve choices and prices.

Following the consultation on appeals, the PSR will publish its provisional decision on appeals (and potentially a draft opinion on appeals) for consultation later in 2022. A change is clearly on the horizon but, given everything work to be done in 2022, it is unlikely that any recourse provision will come into effect before 2023.

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