Opportunity for retailers to participate in card-acquiring market consultation

Online shopping now represents a significant part of the retail sector, meaning card payments are critical to many retailers' businesses.

The UK Payment Systems Regulator (PSR) is consulting on ways to make the card-acquiring market work better for retailers (CP22/1, January 2022). In particular, the regulator wants to find ways to encourage switching in the market, help retailers negotiate better deals with their existing acquirers, and reduce obstacles to retailers getting a better deal. The deadline for responding is 6 April 2022 and the PSR is keen to hear from retailers.

In light of this consultation, we consider what retailers can do to improve their position with regard to their relationships with acquirers.

How does the market currently work?

The overwhelming majority of retailers now accept payment by card. To do so, retailers will have a commercial contract with a provider which will enable the retailer to accept payments by card. The financial services which are provided to retailers to enable card acceptance are known as "merchant acquiring" services.

There are many variations of this model which all have broadly the same aim: to facilitate money moving from the shopper to the retailer. Historically, most merchant acquirers were high street banks, but that is no longer the case and there are now a wide range of participants in the market. This means that many retailers now access merchant acquiring service indirectly and do not have a direct relationship with a merchant acquirer. This is also an increasingly regulated sector. The Financial Conduct Authority, Prudential Regulation Authority, PSR and the competition authorities are all active in policing the market. All of this affects the content of terms and conditions between market participants, how they can treat the retailers, the fees they can charge (to some extent), and who can enter the market.

Why is the PSR consulting?   

The regular complaint from retailers is that payment firms seem to be taking an increasingly large slice of the amount that the shopper pays, but retailers are not able to raise their own prices to cover this for fear of deterring shoppers, and so are being squeezed.

The regulators are aware of this situation. The PSR recently took a detailed look at whether the merchant acquiring market was working for retailers and concluded that in many cases it is not. Their suspicion is that entrenched merchant acquiring relationships mean that retailers end up paying more to accept card payments.

The fees charged to retailers fall into three main categories:

1. Fees payable to the acquirer itself. These comprise the margin it charges to cover its own internal costs and make a profit. The fees may also include additional charges such as gateway and transaction processing fees, strong customer authentication (SCA) exemption fees, terminal rental fees, token fees or PCI (payment card industry) compliance fees. To an extent these can be negotiated with the acquirer as they are within its control. The PSR has found that 88% of small and medium-sized retailers who attempted to negotiate better terms with their existing acquirer were successful. Similarly, the National Federation of Retail Newsagents has estimated that where its members switched acquirers, they saved between £100 and £450 per month on the cost of card acceptance services, including the cost of terminal rentals. 
2. Fees charged to the acquirers by the card schemes. These comprise a wide and ever-growing variety of elements: transaction and authorisation fees, authentication fees, fees on chargebacks, exchange costs, "billable indicator" fees. Traditionally these have been almost impossible to negotiate, and this is an area that competition authorities around the world are concerned about. The PSR found that between 2014 and 2018 scheme fees more than doubled but, in its opinion, a substantial proportion of those increases could not be explained by changes in the volume, value or mix of the transactions.
3. Interchange fees. These are paid to the card issuer as an incentive for them to make cards available to shoppers. While the UK was part of the EU, UK retailers benefitted from a capped interchange fee on card payments made within the EU. Post-Brexit, interchange fees on card payments between the UK and the EU have been uncapped, and have risen accordingly. Some of the  platforms which are most used by UK shoppers, such as Amazon, are based in the EU. The result has been that UK merchants using EU platforms to sell to UK shoppers are seeing a significant cost impact from the uncapped interchange fees.

What can retailers do? 

• Shop around and be prepared to ask potential acquirers for a real life calculation of what they would have charged for actual card transactions accepted over the past few months, taking into account all ancillary fees. In this way, retailers can compare the offering effectively against their current acquirer and others in the market.
• Diarise annual reminders to revisit merchant acquiring arrangements. Most merchant acquiring relationships are open-ended, so there is no end trigger to remind the retailer to look at this. 
• Check whether there are any hidden termination costs – minimum periods and termination fees for terminal hire are particularly common.
• Take a look at the PSR's latest consultation and provide comments by 6 April 2022. The PSR wants to know what remedies would improve outcomes for retailers. In particular, it wants to find ways to encourage switching, help retailers negotiate better deals with existing acquirers, and reduce obstacles to retailers getting a better deal.

Osborne Clarke comment

The PSR is listening, has the power to force change on the market and is keen to hear from retailers. Its final recommendations could make a huge change to retailers who are feeling squeezed. However, even before the PSR issues its final report, retailers can help themselves by shopping around, exploring alternatives and researching the actual costs and value add that an acquirer will bring.