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. 

Of Card Payments, Consumer Protection, SMEs and Merchant Aggregators

Consumer advocates have raised the issue of some uncertainty about which credit card transactions benefit from the statutory right to pursue the card issuer if a merchant makes a misrepresentation or breaches the contract for sale of an item (see the April article from MoneySavingExpert). Many do not realise that the uncertainty arises from arrangements that enable small businesses to accept card payments, overlooking important benefits to SMEs and consumers alike. If SMEs (which represent 99% of UK businesses) cannot accept card payments, consumers may find it less convenient to deal with them, threatening their livelihoods and over half the UK's new jobs, while also reducing consumer choice and competition for large retailers. The statutory right is also subject to exceptions that mean the transaction might not be covered anyway. Yet cardholders still have 'chargeback' rights under their card terms, which are more generous and involve less hassle than making a statutory claim.  So, my own view is that the benefit of enabling small traders to offer their customers the convenience of paying by card outweighs the potential lack of a statutory claim against the card issuer, because the cardholder has the greater comfort of being able to initiate a chargeback anyway. 

Statutory Rights

Consumer credit transactions that involve the borrower (e.g. a credit cardholder), the creditor (e.g. a credit card issuer) and a supplier (merchant) under the same agreement benefit from a provision of the Consumer Credit Act (CCA) that makes the creditor liable for any misrepresentation or breach of contract relating to the sale of the item (section 75). Various exclusions apply. For instance, it only covers items over a £100 up to £30,000 and it does not cover or must be more than Another provision covers transactions where the credit agreement did not directly involve the supplier but was specifically linked to the sale of a specific item (section 75A). Again, however, there are exceptions and it only applies to transactions for an amount exceeding £30,000 up to £60,260, so it is unlikely to be relevant to card transactions.

Chargeback Rights

Under rules governing the operation of the card schemes, such as MasterCard, card transactions can be reversed or 'charged back' in various cases including cardholder dispute within 180 days of the transaction. This right is wider than the statutory right under section 75 of the CCA because it applies to debit card transactions as well as credit card transactions, and the reasons for initiating a chargeback go well beyond the scope of the statutory right (see the list of reasons on page 54).

Merchant Aggregators

Card schemes operate by enabling issuers to issue payment cards that can be presented to participating merchants, who send the transaction data to an 'acquirer' who then obtains payment from the relevant card issuers via an 'interchange' process run by the card scheme operator. 

Typically, the merchant must have a direct contract with an acquirer, but that is expensive to set up and administer in the case of small merchants. 

So to give cardholders the convenience of being able to pay small merchants, the card schemes allow approved intermediaries (MasterCard calls them "Payment Facilitators", for example) to represent  small businesses more efficiently and cost effectively under a single contract with the acquirer, enabling those 'submerchants' to accept card payments where their annual transaction volume is less than $1m or local currency equivalent (increased from $100,000 a few years ago). WorldPay, the UK's largest card acquirer, explains its aggregator program here, for example; and MasterCard has a global list of approved Payment Facilitators by region.

In addition, department stores and e-commerce marketplaces may be treated by the card schemes as the merchant, where the obligation to pay the price of an item offered by a third party seller is satisfied by paying the store or marketplace operator rather than the seller directly. Where problems arise in that context, even though section 75 claims would not be possible, the cardholder typically has the right to either use the marketplace's own dispute resolution and compensation process or, in any event, to initiate a chargeback (large third party sellers will also have their own returns and complaints resolution and compensation process). Such 'master merchant' relationships are also important channels for small businesses to gain access to larger markets, again improving convenience, consumer choice and competition.

The point in all these cases is to weigh the benefits to consumers of convenience, increased choice and competition - as well as the benefits to SMEs who are able to access a wider market, grow and create more new jobs - against the loss of the relatively narrow rights under section 75 compared to chargeback rights and other remedies.