Payments regulator proposes new measures promoting competition in UK payments markets

Following its announcement in July 2018 of its review of card-acquiring services, the Payment Services Regulator (PSR) has recently published its interim report, including proposed new measures which, if enacted, will have a significant impact on acquirers and merchants alike.

The UK payments sector handled transactions totalling £83 trillion in 2019 and continues to expand, with cards and mobile payments playing an increasingly central role even before the onset of Covid-19 as an accelerating factor. Accordingly, card acquiring providers are continuing to fall under the regulatory spotlight as the PSR, formed in 2015, examines this evolving and dynamic market.

The PSR’s current review is targeted towards the level of competition among acquirers and the resulting impact on merchants. Amid concerns that card-acquiring services may not offer value for money to merchants, the PSR is keen to ensure that merchants (and ultimately the consumers who buy from them) are getting the best deal they can.

The PSR’s findings

In its interim report, the PSR identified two types of providers of card acquiring services: 

• Acquirers, the five largest of which are Barclaycard, Elavon, Global Payments, Lloyds Bank Cardnet and Worldpay; and
• Payment facilitators, the largest of which are PayPal, Square and SumUp.
  
  

The PSR report has provisionally concluded that, while the market works well for the largest merchants, i.e. those with an annual card turnover in excess of £50m, it works less well for small and medium sized merchants. Despite new card acquiring service providers entering the market, the PSR has found that those merchants still face barriers stopping them from shopping around and obtaining better deals from acquirers and/or payment facilitators. 

The proposed new measures

In order to tackle those barriers, the PSR has proposed the following measures in order to help smaller and medium sized merchants obtain the benefit of more competitive pricing for the services they receive:

• Requirement for a fixed end date in contracts for card acquiring services where card turnover is no more than £50 million, in order to encourage merchants (except those largest ones for whom the market is working well) to shop around for services more frequently.
• Measures to prevent contracts for the supply of point of sale (POS) terminals acting as a barrier to switching providers, which may include term length limits, restrictions on auto-renewal provisions, and linking separate contracts where POS terminals and card acquiring services are provided by the same acquirer.
• Measures making it easier for merchants to research and compare pricing, such as a requirement for acquirers (including ISOs who sell services on their behalf) and payment facilitators to publish their pricing in a clear and comparable format.

The potential impact

The proposed requirements could have a profound impact upon the established business models of acquirers and represent a further shift to a regulatory landscape which is already evolving as a result of PSD2 as well as the requirements for Strong Customer Authentication (SCA).

While the PSR’s review is open for consultation until 8 December 2020 (with the final report due to be published in 2021), acquirers and payment facilitators considering the proposed changes may wish to start thinking about their potential impact now. 

In particular, if the proposed changes are enacted, both future service offerings and existing contracts will be affected and the market may become less consolidated as merchants take advantage of their increased ability to choose.

In any event, the PSR’s desire for pricing to become more open and comparable means that acquirers may need to reconsider their traditional pricing structures to offer merchants lower rates and greater flexibility. In this context, innovative added value offerings will increase in importance as a key driver of winning and retaining business.

As we have seen with other recent regulatory initiatives in the FS sector, for example Open Banking, these changes have the potential to make the merchant customer base less entrenched and more mobile, heightening the need for acquirers and payment facilitators to provide a high quality service that meets their customers’ needs.

Should you wish to discuss the proposed changes in more detail, or the ways in which TLT’s specialist Payments and FS Regulatory teams may be able to help, please contact Tim Waller.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.