Competition Matters For Visa, Mastercard But Only a Little, PSR Says

July 4, 2023
A new working paper published by the UK Payment Systems Regulator (PSR) says Visa and Mastercard often cite competition as a constraint to raising their fees but it does not really stop them from fee hikes.

A new working paper published by the UK Payment Systems Regulator (PSR) says Visa and Mastercard often cite competition as a constraint to raising their fees but it does not really stop them from fee hikes.

Late Friday (June 30), the PSR published its third working paper as part of its card scheme and processing fees market review.

Although the card giants often mention "competition", or the need for a fee to be "competitive", as a factor when they consider a fee change, the PSR says competition does not in fact seem to hold them back from increasing their fees.

“It appears clear from the cases we analysed that this constraint has not prevented Visa from making substantial increases to mandatory fees,“ the regulator wrote in the paper.

During this particular review, the PSR was looking at around 40 card fee changes, most of which increased revenue for the card brands, to understand the factors they consider when setting their fees.

The work has made the PSR form its “emerging thinking” that competition does not appear to be an impediment to mandatory scheme and processing fee changes.

It also finds that although the card schemes’ most frequently cited reason for setting a fee level was to reflect the value of their service, the documents do not include any quantitative estimate of this value.

“This lack of specificity is consistent with a lack of engagement with customers,” the PSR noted, pointing out that both Visa and Mastercard engage with customers primarily after they have already approved a fee rather than as part of the work that leads to a fee change proposal.

The PSR also found that the increase in revenue expected from fee changes comes mainly from acquirers rather than from issuers.

The asymmetry “is particularly marked for mandatory services”, the PSR noted.

A similar phenomenon was highlighted in the PSR’s previous working papers in February, when stakeholders told the regulator that competitive dynamics are very different on the issuing and acquiring sides of card transactions and there is no real competition on the acquiring side.

The PSR’s working paper "confirms what merchants have been saying for a long time: that they often bear the brunt, via their acquirers, of mandatory increases to card fees, and that these fees often come without consultation or justification", said Martha Southall, payments insights manager at retail payments consultancy CMSPI.

"In response, merchants need to be actively seeking out competitive levers to reduce the cost burden, as well as ensuring their providers are held to account on the accurate application of any fee change," she added.

The regulator said that its “emerging thinking” should not be taken as initial conclusions, which will be published in an interim report in the last quarter of 2023, with the final report expected to be handed down in the second quarter of 2024.

“We have not yet made any provisional or final decisions, including on potential remedies, as our market review is ongoing," the PSR emphasised.

Stakeholders can provide feedback on the working paper until August 11.

Scheme fees drawing regulatory attention?

Scheme and processing fees are parts of the merchant service charge (MSC) that merchants pay when they accept a payment card, which goes to the card brands such as Visa or Mastercard.

Unlike interchange fees, which typically make up the largest portion of the MSC, scheme fees are generally not regulated. As such, a strong UK crackdown on these fees could be of significance.

Some experts have sounded a note of caution with the PSR’s approach, arguing that there are legitimate costs that scheme and processing fees are meant to cover, such as network infrastructure costs and the costs of providing and managing the scheme.

“As we are seeing with open banking and A2A, to create and grow a sustainable service, there needs to be a body in the centre to maintain standards, fair pricing etc. This is basically a scheme,” Gary Prince, CEO of The Payment Firm, a UK-based e-money institution, told VIXIO.

“The schemes are derided and lambasted for all they do wrong, however when there isn't something central to manage everything their relevance and importance is noticed,” he added.

It remains to be seen whether the PSR moves to limit scheme fees or choose a similar approach to Australia — another market that has questioned scheme fees.

In 2021, the Reserve Bank of Australia raised the alarm against rising scheme fees, but decided not to regulate those fees, and instead ordered the card networks to share more detailed data on their scheme fees and scheme rules.

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