Payments: card acquiring market review

What PSPs need to know about the PSR’s proposed remedies

On 29 June 2022, the Payment Systems Regulator (PSR) published its provisional decision on remedies, as part of its review of the card-acquiring market. In summary, the PSR proposes to mandate three remedies to address the features of concern it had identified in relation to how the market operates for most merchants. It intends to implement these remedies through specific directions given to 14 payment service providers (PSPs).

In this insight, we summarise the remedies and assess what this means for PSPs. This is the latest developments in the PSR’s review into the market, which was first announced in July 2018.

The PSR is seeking comments from stakeholders by 3 August 2022.

Background: why are remedies being proposed?

In November 2021, the PSR published its final report on its market review into the supply of card-acquiring services (the Report). The Report concludes that the supply of card-acquiring services does not work well for merchants with an annual card turnover of under £50 million. See our December 2021 insight for more: Payments System Regulator kicks off card acquiring industry shake-up with final report - TLT LLP.

The PSR identified three features that both individually and in combination restrict small and medium sized merchants’ willingness and ability to compare and switch between acquirers:

• Lack of Transparency. Acquirers and independent sales organisations (ISOs) don’t typically publish their prices, and their pricing structures and approaches to headline rates vary significantly. This makes it difficult for a merchant to compare prices for ISOs, acquirers and payment facilitators.
• Indefinite contract terms. The indefinite duration of acquirer and payment facilitator contracts for card-acquiring services do not provide a clear trigger for merchants to consider switching provider.
• POS terminals and contracts. Point of Sale (POS) terminals and POS terminal contracts can prevent or discourage merchants from changing their provider of card-acquiring services. These contracts typically have longer minimum terms than acquirer contracts and the POS terminals are often not compatible with different acquirers. Merchants can often incur significant early termination fees cancelling their existing POS terminal contracts.

In January 2022, the PSR issued a consultation on remedies. The regulator confirmed that four remedies were under consideration to address the above. Following industry feedback, the PSR has now published its provisional decision. The PSR is going to implement three of the remedies on which it consulted, but with modifications.

What remedies are proposed?

The PSR’s provisional decision is to mandate the following for the 14 most significant providers of Visa and Mastercard scheme card-acquiring services:

1. Provision of information:

• Summary boxes: containing bespoke key price and non-price information to be sent to merchants and made available in their online accounts. These will be in a prescribed format.

• New online quotation tools: providers will need to make these available so merchants can make comparisons more easily (i.e. with the bespoke summary boxes).

2. Trigger messages: directed PSPs will need to provide these in a prescribed form at specified points (linked to minimum contract term expiry dates or, if indefinite contracts, every 30 working days).

3. Maximum 18 month term for POS terminals: will be introduced for POS terminal lease and rental contracts (where arranged through relevant PSPs), with notice periods limited to one month after renewal.

These remedies will apply to the directed PSPs in respect of their merchant customers with a turnover of up to £50 million, except for the POS terminal remedy – which will apply with respect to merchants with a turnover of up to £10 million.

What does this mean for acquirers and payment facilitators?

The PSR will issue specific directions to 14 named PSPs, who it has identified as the most significant providers of card-acquiring services to the merchants it is looking to protect. The list covers 95% of retailer transactions in the UK and includes the largest acquirers and payment facilitators.

The regulator will not issue a general direction to the whole market and so payment service providers who are not included in the specific directions will not be impacted.

In addition to directly tackling the remedies within their own organisational processes, the directed PSPs will be required to ensure that ISOs with whom they deal apply the applicable directions. They will also need to ensure compliance by any POS terminal lease and rental providers with whom they work, so the wider, knock-on implications of the remedies should not be overlooked.

Where appropriate, the relevant PSPs will need to ensure that commercial terms with these third party organisations are updated. They may also wish to revisit what oversight arrangements they have in place.

The stakeholder submissions revealed some industry scepticism as to some of the remedies proposed. In particular, some respondents were concerned that the regulator is seeking to apply solutions more typically seen in the B2C space to a more complex B2B market.

PSPs will at least take comfort that the PSR has opted not to pursue all of the remedies initially under consideration. In particular:

• The proposed requirement for PSPs to publish generic summary boxes will not be mandated because it is doubted they will deliver merchant benefit.

• Stimulating online digital comparison tools is not something the PSR will pursue at this point. And so the PSR will not mandate that acquirers provide information to such providers. This is because they consider the information remedies they intend to introduce will address their price transparency concerns.

• The PSR will not pursue technical remedies to require POS terminals to be interoperable between different PSPs, because of the complexity and changing technological landscape.

As always, there will be a cost to the industry of regulatory change. The PSR estimates it will cost £40.8 million – £58.5 million to implement (a cost which it believes will be offset by the savings merchants make).

The directed PSPs will have three months to implement the measures after the final directions are given.

The specific direction will only apply to participation in the Mastercard and Visa card schemes.

What’s next?

The PSR is seeking comments by 3 August 2022. It will then issue its final decision later in the year and proposes to provide the directed PSPs with three months in which to implement the changes.

We will continue tracking the developments and further updates will be published later in the year.  If you are a PSP or otherwise require advice on the impact of these changes, please do get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions