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 Acquirers Circling the Wagons?

Following its initial findings that merchants with up to £50m in card transactions are over-paying for acquiring services, the Payment Systems Regulator (PSR) has taken the unusual step of setting up a "confidentiality ring" to allow potentially affected parties to access the survey results.

The confidential material comprises:

• Raw data file containing the responsesof 1,037 small and medium sized merchants to questions in the merchant questionnaire;
  

• Raw data file key needed to interpret the variable names and values from the raw data file; and
  

• Data tables file providing weighted tabulations of the responses.
  

The confidential material can only be used: 

"in order to prepare submissions and make representations to the PSR in connection with the Market Review and, accordingly, to facilitate the exercise by the PSR of its statutory functions... and (if relevant) to prepare and conduct an appeal against any decision of the PSR in connection with the Market Review, including an appeal in which such parties are, or are intending to apply to be, an intervener."

The deadline for stakeholders to submit responses to the PSR’s consultation on the Interim Report is currently 5pm on 8 December 2020, but this will be extended to allow for access to the Confidentiality Ring, depending on when it opens and how long it lasts. A further announcement on that will be made in due course. Meanwhile, requests to join the Confidentiality Ring must be submitted to the Market Review team at cards@psr.org.uk by no later than 5pm on 4 December 2020... 

Regulator: Card Acquiring Too Costly for UK Merchants With Sales of Less Than £50m

The UK's Payment Systems Regulator (PSR) has found that services which enable retailers to accept credit/debit card payments ('card acquiring') cost too much for those with less than £50 million in annual card payments. It says those merchants should shop around or negotiate a better price with their current provider. In the meantime, the PSR is also considering certain regulatory changes below. Feedback should be emailed to cards@psr.org.uk by Tuesday 8 December 2020. Please let me know if I can assist you in either understanding and re-negotiating your acquiring terms and/or providing feedback to the PSR. 

Content of the report

The report provides a useful guide to the acquring industry (Chapter 3), how the various providers compete (Chapter 4), the analysis of pricing and quality outcomes (Chapter 5), as well as merchants’ ability and willingness to search and switch provider (Chapter 6). The problems and proposed solutions are discussed in Chapter 7.

What are the proposed changes?

The main changes being considered are:

1. whether all merchant service contracts for card-acquiring should have an end date, rather than simply being terminable on a certain amount of notice. This would apply to both acquirer and payment facilitator contracts with small and medium-sized merchants and large merchants with annual card turnover of up to £50 million. This might force merchants to re-tender for their acquiring business, but there is nothing stopping them doing that within the bounds of an existing contract. There is no substitute for a business having the internal discipline to revisit pricing on a regular basis.

2. where merchants with physical tills have a separate contract for their point of sale card terminals/devices ("POS terminals") the end dates for these contracts may not be aligned with the termination provisions of the acquiring service contract, so the PSR is considering:

• Limiting the length of POS terminal contracts to, say, 18 months.
  

• Banning the automatic renewal of POS terminal contracts for successive fixed terms.
  

• Declaring contracts for card-acquiring services and POS terminals as being 'linked', where they are sold together as a package by acquirers or Independent Sales Organisations (ISOs). This would enable the merchant to terminate both contracts at the same time without additional charge where, for example, the acquirer wishes to change the fees or other terms of the acquiring contract in ways that are not acceptable, or breaches the contract. But this would not apply where payment facilitators sell POS terminals to merchants separately. In those cases, it would be up to the merchant to negotiate the term and termination rights in the POS terminal contract to coincide with those provisions in the acquiring contract (to cover the situations where either the POS terminals or payment facilitator won't work with a new acquirer).

3. ISOs and acquirers could be required to facilitate price comparison by merchants, e.g. by providng pricing information in an easily comparable format (building on obligations on acquirers in the Internet Fee Regulation and the Payment Services Regulations 2017 to provide fee information to merchants).

Has the regulator got this wrong?

 

Probably not. The PSR has done plenty of homework here and the report seems thorough to me (over 20 years in payments, including spells working inside both a very large merchant and a very large acquirer). Its market research included consulting on the methodologies for: analysing whether the limits on interchange fees had been passed through; surveying merchants; and analysing acquirer profitability. The PSR also engaged with other regulators and all the various types of industry participants: acquirers, banks, ISOs, gateway providers, independent software vendors, online marketplaces, operators of card payment systems, payments consultancies, payment facilitators and trade associations.

 

In fact, as with most such iniatives in the financial services industry, this exercise is probably long overdue.

 

Please let me know if I can assist in your negotiations or feedback. 

Brexit Spells End To Cross-Border Interchange Fee Caps

UK consumers will lose another layer of protection after Brexit when dealing with EEA-based suppliers, as the government will no longer cap interchange fees where either the merchant's acquirer or the payment card issuer is based outside the UK.  This follows the erosion of other consumer protection measures for UK consumers buying from suppliers in the remaining EEA countries.

The proposed changes to the UK Interchange Fee Regulations for Brexit purposes would take effect on 30 March or end December 2020 (depending on whether there is a Withdrawal Agreement and related transition period). Among other things, the proposed Regulations:

• Limit the scope of the Regs from the EEA to the UK to transactions that take place only within the UK (both the acquirer and the card issuer are located in the UK), so cross-border card payments between the UK and the EEA will no longer be within scope of either the UK or EU interchange fee regs (i.e. payments made within the UK will continue to have caps on interchange fees, while payments where either the acquirer or the card issuer is based outside the UK (including in the EEA) will no longer be subject to the caps); and

• Allow for regulations setting lower caps on UK debit and credit card transactions, and a maximum cap for UK debit card transactions.

Changes to #MIF Regulation

Worth noting that the text of the Merchant Interchange Fees Regulation dated 16 January 2015 differs substantively from the version published on 31 October 2014 and considered by MEPs on 17 December. Troubling that no mark-up has been provided. However, I have done the work and updated my previous summary accordingly.

MEPs Agree To Cap Card Fees (#MIFs)

Based on the recent deal amongst MEPs, it looks like the Merchant Interchange Fees (MIF) Regulation will sail through the EU Parliamentary process in early 2015.

Card Scheme MIF Regulation [Updated 20 Jan 2015]

In addition to a new Payment Services Directive (PSD2), the Beurocrats have been busy on a Regulation aimed at payment card transactions - mainly to cap merchant interchange fees, but also to introduce some 'business rules' (MIF Regulation). Unlike PSD2, the MIF regulation will take effect directly in each member state, rather than having to be implemented into national law first. The caps on fees described below apply from 6 months after the regulation enters into force, while the grace period for the business rules is 12 months after the regulation enters into force. The MIF regulation must be reviewed by the Commission four years after entering into force, with any recommendation to amend the fee cap. Underlining and strike-through reflects changes made to the MIF Regulation since October 2014.

Capping fees:

The January 2015 version of the MIF Regulation (updating the October 2014 version) caps the hidden interchange fees that card issuers receive from merchant acquirers for cross-border all debit card transactions at 0.2%. However, for domestic debit card transactions, Member States may apply either a lower cap per transaction and a fixed maximum fee amount, or allow payment service providers (PSPs) to apply a per transaction fee of up to €0.05 in combination with a maximum percentage rate of no more than 0.2%, provided that the interchange fees of the payment card scheme does not exceed the fee is capped at a weighted average of 0.2% of the annual transaction value of the domestic debit card for all transactions within each payment card a scheme, or 0.2% per transaction. But for 5 years, Member States may allow PSPs to apply to domestic debit card transactions a weighted average interchange fee of up to 0.2% of the annual average transaction value of all domestic debit card transactions within each payment card scheme, or a lower weighted average if they wish.

The interchange fee for each credit card transaction is to be capped at 0.3%, although member states can reduce this for domestic transactions.

If domestic payment transactions are not distinguishable as debit or credit card transactions by the payment card scheme, the provisions on debit cards or debit card transactions apply. However, for 1 year after the fee caps apply, Member States may rule that up to 30% of the indistinguishable transactions are considered to be credit card transactions to which the credit card cap shall apply.

At these levels, the authorities believe that retailers should not be allowed to impose additional charges for use of cards that are subject to the caps (such 'surcharging' is controlled by PSD2). However, cards issued to businesses ('commercial cards') and those issued by 'three party payment schemes' (like Amex) are exempt from the caps. That's because businesses are thought to be able to fend for themselves (unlike consumers); and in a three party scheme all fees are charged by the scheme operator, so both the consumer and the merchant know who's paying what to whom. In those cases, then, the merchants can charge for the pain of accepting such cards and it's up to the scheme operators whether to lower their fees. But there are certain limits to the exemption for three party schemes.

In addition, the caps will not apply to 'limited network' payment instruments (like gift cards) which:

• allow the holder to acquire goods or services only within a limited network of service providers under direct commercial agreement with a professional issuer; or
• can only be used to acquire a very limited range of goods or services; or
• instruments valid only in a single Member State provided at the request of an undertaking or public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer.

Confusingly, however, there's a similar exemption under PSD2 which carries an additional limitation that “The same instrument cannot be used to make payment transactions to acquire goods and services within more than one limited network or to acquire an unlimited range of goods and services”. So it's conceivable that a scheme may be exempt from the need to be authorised under PSD2, yet have its interchange fees regulated under the MIF Regulation.

Business Rules:

The MIF Regulation has some additional 'business rules':

1. there can't be any territorial licensing restrictions on scheme membership within the EU;
2. card schemes (other than three party schemes) must: ensure their system is technically interoperable with other systems of processing entities within the EU; must separateensure the rule-making entity is independent from entities providing payment processing and other services; eliminate cross-subsidies among scheme services; and not make any one service conditional on taking or providing another;
3. all card schemes must:

• allow 'co-badging', so that a single card can be accepted under multiple schemes;
• enable co-branded instruments on the same card, if possible, but give clear and objective information on the different instruments and their characteristics;
• not discriminate between issuers or acquirers concerning co-badging of payment brands or applications or in terms of reporting, fees or other obligations, routing of transactions or by using mechanisms that limit the choice of application by payer and payee when using a co-badged instrument (though prioritising is okay);
• not charge fees on a blended basis for different card types, unless requested;
• not insist that all their types of cards are honoured if a merchant only wants to accept some of them (and so must enable customers to readily distinguish between the different types of cards offered by the scheme);
• not prevent retailers ‘steering’ customers toward using a preferred payment method, without prejudice to rules under the PSD or the consumer rights directive.

While the MIF Regulation is reasonable advanced, the UK Payment Systems Regulator (PSR) recently warned that if the adoption of the MIF Regulation is delayed, or the implementation of its domestic fee caps is deferred from the caps on cross-border interchange fees, it will consider taking action in advance of the Regulation; and that it may still consider whether it is appropriate to take any further action even if the MIF Regulation is adopted.

In other words, official trust in card schemes is low.