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UK merchants with annual card turnover of between £15,000 and £50m served by the five largest acquirers get little or no pass-through of the Interchange Fee Regulation (IFR) savings, meaning that the supply of card acquiring services is not working well for them, a Payment Systems Regulator (PSR) report has concluded.
The PSR has published its long-awaited final report into the card-acquiring market, setting out the regulator's conclusion that the supply of card-acquiring services does not work well for small and medium-sized merchants and large merchants with annual card turnover of up to £50m.
The PSR launched this review because of concerns that card-acquiring services may not offer value for money for merchants.
“More can be done to make comparisons easier, which will help merchants consider their supply options more frequently, shop around, and potentially make savings,” said Genevieve Marjoribanks, the PSR’s head of policy. “In turn, this is good for their customers who may also see the benefit of those savings.”
Specific concerns raised included that acquirers might not have passed on savings they made from the interchange fee caps introduced by the IFR, lack of transparency around the fees merchants pay to accept card payments and the difficulty merchants have comparing and switching providers.
Failure to pass on interchange savings — the proportion of the merchant service charge that goes to the issuer — will be a particular concern for the PSR. Given that two of the top five acquirers are also banks, the effect of interchange fee regulations appears to have been to simply shift the revenue from one part of the bank’s profit centre to another. The big concern, however, is that the part of the market the legislation was trying to remedy — to improve competition and lower fees paid by merchants and consumers — will have had little or no effect.
According to the PSR, “some acquirers had told us that the explanation for lack of IFR pass-through could be that they invested the savings in providing higher quality of service to their customers rather than lower prices”. It will be seen whether this argument washes when the PSR publishes proposed remedies and consultation in early 2022.
Shopping around
Given their size, many smaller merchants typically deal with payment facilitators, rather than merchant acquirers. According to the PSR, payment facilitators serve 80 percent of merchants that only or mainly sell face to face with annual card turnover below £15,000. Payment facilitators, such as Stripe, Square and PayPal (including its recently acquired Zettle), act as aggregators, facilitating payments for their merchant customers while operating as the master merchant in the eyes of the acquiring bank. Payment facilitators solved a problem for smaller merchants by offering a low price of entry to card acceptance (including low set-up fee). However, typically this comes at a cost in terms of the high fee per transaction they charge their customers.
For acquirers that service small and medium-sized merchants, i.e., with annual card turnover of up to £1m, Independent Sales Organisaitons (ISOs) are a significant customer acquisition channel. ISOs are an outsourced sale function for merchant acquirers acting as an intermediary between them and the merchant customer. According to PSR, they accounted for more than 50 percent of all customers onboarded in 2018.
In recent years, there has been increased competition among acquirers and payment facilitators to attract merchants; however, the PSR found despite potential savings that could be made, small and medium-sized merchants are not regularly searching, considering switching providers, or negotiating with their current provider. In particular, the PSR noted existing customers tended to pay a higher fee than new customers. It also noted that merchants that did try to negotiate fees with their provider, 90 percent got a better deal.
There are mitigating reasons for this. According to the PSR’s review, acquirers and ISOs — who contract with merchants on behalf of acquirers — do not typically publish their prices and their pricing structures. For those that do, approaches to headline rates advertised can vary significantly.
Therefore, it is difficult for a merchant to compare prices for ISOs, acquirers and payment facilitators.
In addition, the indefinite duration of acquirer and payment facilitator contracts for card-acquiring services fail to provide a clear trigger for merchants to think about searching for another provider and switching.
Point-of-sale (POS) terminals and POS terminal contracts can also prevent and/or discourage some merchants from searching and switching provider.
One reason why this may occur is that a merchant may need to invest in a new POS terminal if it switches provider of card-acquiring services but could be penalised by a significant early termination fee for cancelling its existing POS terminal contract.
The PSR’s consultation on remedies in early 2022 will aim to achieve the goal of encouraging merchants to search and switch, or negotiate a better deal with their existing provider, as well as to reduce the obstacles to getting a better deal.
“We expect the payments industry to help us develop effective and proportionate measures that increase merchant engagement and ultimately improve choice and prices,” said Marjoribanks.
