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The Payment Systems Regulator (PSR) has issued a call for evidence as part of its investigation into whether there is enough competition in the card scheme and processing market.
The document lays out the views of several industry players they shared with the PSR as part of the authority’s initial engagement with the sector.
During that exercise, several stakeholders raised concerns about the difference in the level of competition between issuing and acquiring, the impact of the lack of transparency in scheme fees and whether the card networks could leverage their “must-take” status when setting prices.
The call for evidence is part of the PSR’s ongoing market review, which was opened last June after the regulator found that scheme and processing fees had increased significantly between 2014 and 2018, a trend that it believes has continued.
“Cards are the most popular way for people to make payments in the UK, so it’s essential the market delivers good outcomes,” Chris Hemsley, managing director of the PSR, said.
“This affects people and businesses across the country: whether they’re small businesses that accept card payments, or somebody paying for their weekly groceries.”
“We’ve been discussing these issues with a wide range of stakeholders, to understand their views and concerns. This will help us to take this important work forward as quickly as we can,” the PSR chief added.
‘No real competition’ on acquiring side
Some stakeholders noted that there are different competitive dynamics on the issuing and acquiring sides of card transactions.
Although Mastercard and Visa continue to be in a particularly strong bargaining position with respect to acquirers and merchants, they might have to make concessions in negotiations with issuers.
That is largely due to the fact that both Visa and Mastercard are near-universally accepted by merchants, which means acquirers must join both schemes. This gives acquirers a limited ability, particularly smaller acquirers, to negotiate better terms with the card networks.
These stakeholders told the PSR there is “no real competition” between Visa and Mastercard on the acquiring side and any sort of alternative payment methods either rely on these card schemes, such as PayPal, Apple Pay and Google Pay, or are still in their infancy, such as Pay by Bank.
By contrast, on the issuing side, despite having high penetration, the card networks must compete to grow their cardholder base.
That is because consumers typically see Visa and Mastercard as interchangeable and accept the one offered by their bank.
This means that the card networks mainly compete for the same pool of cardholders and they put their competitive efforts into attracting issuers.
The document also raises that, should Visa and Mastercard face some competitive pressure, they may be able to increase the aggregate fees charged across both sides of the market and offset the increase for some issuers by offering rebates and incentives.
Complexity of scheme fees and ‘must-take’ status called out
Several stakeholders also complained about the complexity of the scheme and processing fees. Some argued lack of price transparency is a symptom of competition not working well, while others said it reduces the competitive pressure in various parts of the card payments value chain.
For example, it makes it difficult for acquirers to anticipate their own costs and set their own margins, which makes them less motivated to compete for new merchant customers.
Additionally, acquirers may factor in this uncertainty when pricing downstream and charge merchants higher prices.
Several people highlighted that “Mastercard and Visa-branded cards have long been defined as ‘must-take’ for merchants” and acquirers.
Indeed, the PSR pointed out that 75 percent of personal spontaneous and cash payments, which include retail payments, were made by debit or credit card in 2021. Visa and Mastercard accounted for around 99 percent of all UK debit and credit card payments in the same year, both by volume and value of payments.
Other market players suggested that as Visa and Mastercard do not effectively compete with each other in terms of card acquiring (i.e., acquirers need to accept both), they should be regarded from a competition perspective as two separate brand-specific markets.
In these markets, the two scheme operators effectively act as monopolists when setting the conditions to access their own networks and the associated fees.
“UK merchants have little choice but to accept both Mastercard and Visa card brands, acquiring services for the different card brands are not substitutable,” they argue, stressing that both companies leverage that position to charge high fees.
Although there is competition in such areas, for instance, merchants can choose to process a card payment on a competing network, there are certain fees that are “unavoidable”, the rise of which could signal the lack of strong competition, they told the PSR.
The PSR has also engaged with Visa and Mastercard, which told the regulator the payments ecosystem is thriving and is “characterised by intense competition, innovation and positive outcomes for service users”.
The card networks argued the wide acceptance of Mastercard and Visa-branded cards is a key driver of the value in the payments sector and their open standards and protocols enable others to enter the payments sector.
The call for evidence was published to seek further input from industry participants on these views. Interested parties can submit comments to the PSR until April 11.
