It is official, cash is no longer ‘king’. Reports show that debit cards overtook cash as the most frequently used payment method in the UK for the first time last year, and the number of merchants accepting card payments is also on the up.
None of this is particularly ground-breaking news. Consumers are demanding the efficiency of contactless payments and are turning in droves to the internet as their market place of choice (we only have to look at the casualties on the high-street as evidence of this).
But are merchants (and ultimately consumers) seeing any of the benefits of this growth?
To answer this question, on 24 July 2018 the PSR published draft terms of reference (ToR) in respect of a market review into the supply of card-acquiring services.
What are the concerns?
Various stakeholders have expressed a concern to the PSR that the supply of card-acquiring services in the UK may not be working well for merchants and consumers. According to the draft ToR, this is linked to:
- acquirers not passing on the savings they make from interchange fee caps introduced by the Interchange Fee Regulation to smaller merchants;
- a general lack of transparency around the fees that merchants pay to accept card payments;
- an imbalance in the fees that card scheme operators charge to acquirers (‘scheme fees’), and the rules they set, in favour of large acquirers; and
- acquirers increasingly passing on a larger proportion of scheme fees to merchants.
A key influencing factor on the fees that merchants pay and the quality of service they receive from acquirers is the level of competition amongst card-acquirers. For this reason, the PSR proposes to focus on the barriers to entry (or expansion) in card-acquiring services; barriers faced by merchants looking to switch between or searching for alternative card-acquiring services; and the availability of services that facilitate merchant decision-making.
Scope of the review
The proposed market review will cover the supply of card-acquiring services by acquirers and payment facilitators to all merchants (irrespective of the type and size of the merchant).
There will be a particular focus on the supply of these services in relation to Mastercard and Visa, which according to the draft ToR accounted for over 98% of all UK debt and credit card payments in 2017 (by both volume and value), and represented 98% of UK cards in issue in 2017.
The market review will not cover:
- the supply of products and services that are related or ancillary to card-acquiring services, (except insofar as they may affect the supply of card acquiring services); and
- acquiring services for digital (non-cash) payment methods other than card payments (albeit testing whether merchants have credible alternatives to card-acquiring services will form part of the market review).
What might this mean for merchants and card-acquirers?
The first step is for the PSR to finalise the draft ToR for the market review following industry feedback. The deadline for comments is 5pm on 14 September 2018.
The final ToR are expected to be published before the end of 2018, which will include a timetable for the implementation of the market review.
The PSR has the power to take actions that are effective and proportionate to any detriment to service-users identified by the review. In that scenario, it has set out a number of possible outcomes, including:
- making new, or amending existing, general directions;
- making recommendations for industry initiatives or enhanced industry self-regulation;
- making proposals to the FCA;
- publishing guidance;
- carrying out an investigation into a potential breach of the Competition Act 1998; and
- making a market investigation reference to the Competition and Markets Authority.
Osborne Clarke comment
Given the retail industry is currently facing acute cost pressures from elsewhere, this proposal has been welcomed by retail industry bodies, including the British Retail Consortium.
Achieving a more equitable allocation of the cost savings arising from interchange fee caps as between card-acquirers and merchants is just half of the story, however. According to the PSR, the purpose of the review is to make sure that payment systems “work well for everyone”. Any new guidelines/recommendations should therefore ensure that any such cost savings are ultimately passed onto consumers – which was a key reason behind the European Commission’s adoption of the interchange fee cap in the first place.
This is not the first time card fees have been scrutinised, they have been the subject of litigation both here and abroad. At a time when card-acquirers also face the prospect of becoming VAT collectors and data gatherers for HMRC, this is yet another area they should keep an eye on, and respond to the consultation questions to ensure their views are fairly represented.