Understanding Card Scheme Fees: Payment Systems Regulator Report

The Payment Systems Regulator has issued a consultation paper/interim report burrowing further into the apparent lack of competition between the two major card schemes and potential harm to customers, particularly on the acquiring side. The PSR identified in a previous report that the card acquiring market wasn't working for UK merchants whose turnover is less than £50m, with one problem being the inability to compare pricing. This report reveals that fees charged by the two main card scheme operators have increased 30% in real terms over 5 years, with no link to improvement in service quality. The report looks at how the scheme operators deal with both their card issuing and acquiring members, but tends to focus on problems that acquirers have in understanding fees imposed on them, since they represent about 75% of the operators' net scheme/processing fee revenue. The specific problems and the proposed remedies are outlined below. There’s an opportunity to respond to the consultation by 31 July. Please let me know if I can help you understand the potential commercial or regulatory impact in your case.

In particular, the report sets out a number of areas where the quality of service is leading to poor outcomes for acquirers and merchants, including a lack of transparency in billing information for mandatory and optional fees, and as to the triggers of (potentially avoidable) 'behavioural fees' (intended to deter certain practices or incentivise the adoption of specific technical solutions):

(a) acquirers often experience difficulties accessing, assessing and acting on information they receive from Mastercard and Visa – which requires time to query, and some even employ consultants or pay for additional reporting or other services from the schemes themselves to understand pricing and fees charged;

(b) as a result, many acquirers aren't able to adopt a very sophisticated assessment of the impact of scheme/processing fees - and even where they can pass fees on contractually they may decline to do so or ‘misbill’ (either under/over bill) merchants;

(c) A large majority of acquirers described issues relating to the transparency of information on mandatory and optional fees - in fact acquirers reporting such issues accounted for over 90% of the total acquiring market;

(d) Poor outcomes for acquirers include:

• Acquirers have difficulty understanding behavioural fees, which may also be distorting the behaviour and responses of acquirers and merchants, and limit the point of the behavioural fees;
• Acquirers also find it difficult to understand mandatory and optional scheme and processing fees and how they apply, including whether certain services (and therefore the fees) are optional or mandatory;
• Acquirers have problems accessing and clarifying information with the scheme operators, in a timely fashion or sometimes at all.

(e) remedies include requiring Mastercard and Visa to:

• Develop and publish a pricing methodology to explain how the prices of these services relate to costs, together with obligations to document decisions;
• Demonstrate that a service is ‘optional’, i.e. that viable alternatives to supply by the two card schemes exist;
• Provide acquirers and merchants with more accurate and relevant information about behavioural fees, so they can be avoided or at least their cost can be correctly allocated;
• Consult more widely before introducing new services or making changes to prices.
• Provide bespoke materials to help specific businesses understand the scheme services being supplied;
• Improve the quality and timeliness of information provided to acquirers, including billing information.

Please let me know if I can help you understand the potential commercial or regulatory impact in your case.

Card Acquiring Remedies for SMEs

After finding that the UK card acquiring market was not working for businesses with a turnover of £50 million, you might have expected that the Payment Systems Regulatory would have come out with some pretty heavy remedies. While apparently simple, however, these remedies should strike at the heart of the problems, as previously discussed:

• Summary boxes containing key, bespoke information on price and non-price factors must be sent/displayed individually to each merchant for use in connection with... 
• New online quotation tools, which acquirers must provide to help merchants compare all available offerings. 
• Trigger messages must also be sent/displayed to prompt merchants to shop around, timed to coincide with the expiry of minimum contract terms or, where contracts are indefinite, provided at least once every 30 calendar days. 
• Lease/hire contracts for point-of-sale (POS) terminals must be limited to an initial term of 18 months, after which they should be terminable on a maximum of one-month's notice.

The regulator has directed 14 firms to implement the changes to POS terminal contracts from January 2023, and the remedies for summary boxes and trigger messages from July 2023. 

The independent sales organisations (ISOs) of those firms must also ensure they are compliant with the requirements. 

The PSR will monitor compliance and the impact of the remedies to determine whether any further action is required. 

I've advised merchants of all sizes and card acquirers, ISOs and payment facilitators; and these initiatives should aid the work required to search for the right acquiring service and organise a switch. 

If you need assistance, please let me know.

How To Fix The UK Card Acquiring Market for SMEs

The Payment Systems Regulator (PSR) is consulting on remedies to address its findings that the payment card acquiring market does not work well for merchants with turnover of up to £50m a year - by far the majority by number! Responses to the consultation are due on 6 April 2022. If my experience of working in the card acquiring market for several decades is anything to go by, the kind of remedies that the PSR is recommending seem likely to improve the experience of all participants...

Key Problems in the Card Acquiring Market 

The PSR identified three features of the acquiring market that restrict the ability and willingness of merchants to shop around for acquiring services and switch between card acquirers to get a better service at better prices: 

• Lack of published pricing for card-acquiring services: pricing structures and approaches also differ, making it hard to compare prices across independent sales organisations (ISOs), acquirers and ‘payment facilitators’ who gather together transactions from small merchants (those with the GBP equivalent of less than 1 million USD turnover each year).
  

• The indefinite duration of acquiring service contracts: there is no clear trigger for merchants to think about shopping around and switching. 
  

• Point of sale (POS) terminals and leases: terminals won’t work with a new card-acquirer, so need to be replaced; and there may be a charge for terminating an existing terminal lease (which spreads the cost of terminals over a period of up to 5 years while the related acquiring contract has a minimum term of 12 months). 

Remedies Being Considered 

To help resolve these problems, the PSR is considering four remedies in combination: 

• Summary information boxes 
• Boosting the use of digital comparison tools by merchants 
• Trigger messaging 
• Removing barriers to switching to that arise from POS terminals/leases.
  

The combination is important. Summary boxes may not work as expected, and transparency is more effective to aid shopping around and switching when combined with remedies that facilitate service comparison, personalised information on product use and trigger remedies. Price simplification may also be required if other remedies prove ineffective. 

To aid in the design of the remedies, the PSR is asking card acquirers to provide: 

• mock summary boxes and trigger warnings; 
• technical specifications for summary boxes, trigger warnings, the submission of data to DCTs and POS terminal portability; and 
• an explanation of system changes required. 

Summary information boxes 

Acquirers would have to provide standardised key facts information setting out key price and non-price features, both in bespoke format provided to each merchant, and in generic format which would be published more widely: 

• Bespoke individual summary: tailored information for each merchant about the pricing and other service information, with consumption data and information on options to migrate to other tariffs or how to switch acquirer.
  

• Generic summary: information for all customers and potential customers on acquirer websites to enable merchants to quickly assess pricing and service options across a range of acquirers. 

Boosting digital comparison tools (DCT) for merchants 

DCTs are simply online intermediary services used to compare and potentially to switch or purchase products from a range of providers. DCTs are not as well established in the acquiring market as they are in markets for consumer services such as loans, insurance and utilities. The PSR found that merchants tend to land on ISO ‘lead-generation’ web sites when looking for an acquirer. 

To work effectively, experience from consumer markets shows that DCTs for card acquiring should cover both pricing and non-price service elements of card-acquiring services. This would involve: 

1. acquirers publishing and updating their pricing and other service data regularly in formats which are consistent and easily usable, so DCTs could collate comparative pricing and other service data; and 
2. merchants being able to share their acquirer transaction data, so that DCTs and other third parties could: 

• determine the key service parameters, such as brand and category of card, types of transaction (e.g. card-present/not-present, MOTO), frequency of each transaction type; and 
• use the merchant’s specific transaction data to calculate whether the merchant would be better off with a different acquirer. 

It would also likely improve merchant trust in DCTs if the PSR were to audit DCTs’ comparison methodologies and tools (as Ofcom does, for example). The PSR plans a feasibility study in this respect. 

Trigger messages 

A ‘trigger message’ would be a standardised message sent by acquirers to merchants ahead of say, the expiry of the initial contract term, to prompt a search of the market and switching. 

 The PSR is considering fixed term contracts, so that the expiry acts as a trigger for comparing switching options; but also trigger messages such as a cheaper tariff becoming available. 

Information items in the messages could include how much the contract price has increased, how much would be saved by switching to the lowest tariff and how to switch to new POS terminals. 

The PSR also notes that the FCA’s work on current account and home insurance switching suggests that SMEs will respond better to personalised information on the financial impact of switching, as well as non-price benefits. Ofcom’s experience also suggests that such messages should be kept short and simple, action focussed, personalised, designed to remind customers and give them a deadline, designed to help customers plan, and be tested with a target audience. Visual presentation of information was helpful where complete, precise, specific and jargon free. 

Trigger information is best presented when customers log-in to their account, whereas calls and text messages are not as effective for communicating this type of information.

POS Terminals as Technical Barriers to Switching Acquirers 

Point of Sale (POS) terminals are the devices used by merchants to capture card details from customers when a transaction is made. 

POS terminals may be offered by or through an acquirer or separately by an ISO, but they typically operate with only one acquirer. So a merchant wishing to switch acquirer will also need to terminate both the ‘merchant service’ contract for card-acquiring as well as a lease for their POS terminal. But card-acquiring contracts are usually for a term of 12 months while POS terminal leases last up to five years and renew automatically for up to 18 months, and may involve termination charges. 

In addition, merchants and their staff may be used to a certain POS terminal, so may be reluctant to switch to a different unit offered by a different acquirer. 

The PSR is looking at both the contractual and technical barriers to switching POS terminals and contracts, but has a preference for removing technical barriers first. 

The technical barriers include physical reconfiguration that may be required to make a POS terminal work with a new acquirer’s systems; certification required by each new card-acquirer and for each payment scheme; and the fact that the new acquirer’s terminal manager may not support terminals from a previous acquirer (changing terminal manager will require unlocking and resetting cryptographic keys). 

Technical remedies could involve requiring a new acquirer to replace the merchant’s POS terminals, but the PSR would prefer to focus initially on trying to ensure that POS terminals are portable between acquirers. 

Conclusion

Merchants don't need to wait for the PSR remedies to switch acquirers, but the problems and remedies do show the kind of effort required to search for the right acquiring service and organise a switch. I've advised merchants of all sizes and card acquirers, ISOs and payment facilitators. Even large merchants struggle with the challenge of switching, and they retain experienced consultants to help determine the service/features required; the most efficient way to meet those needs; and to evaluate which acquirers can genuinely deliver and at what price. 

But that process is time-consuming and frustrating for acquirers as well. And even at the smaller end of the market there is plenty of scope for both the merchant and the acquirer to misunderstand the merchant's requirements and the acquirer's ability to deliver.

The kind of remedies that the PSR is recommending therefore seem likely to improve the experience of acquirers, payment facilitators, ISOs and merchants alike.