The Consumer Duty: impact on card acquirers and payment facilitators

On 31 July 2023, the new FCA Consumer Duty (the Duty) will come into force for all new and existing products and services open to customers. This includes payment services where customers are individuals, micro-enterprises or small charities.

Much has been written about the potential impact on firms such as banks and Payment Service Providers (PSPs) that issue cards to consumers. However, there has been much less commentary about what it might mean for the card acceptance market (including acquirers and payment facilitators). In this insight, we look at the impact of the Duty from their perspective.

Why might the Duty apply to acquirers and payment facilitators?

The Duty applies to products and services offered to retail customers, subject to how a “retail

customer” is defined in each sector’s sourcebook in the FCA’s Handbook. For payment services, in line with the Payment Services Regulations 2017, the Duty applies to business conducted with consumers, micro-enterprises and charities (as confirmed in the Final non-Handbook Guidance for firms on the Consumer Duty (Guidance)). This includes prospective customers.

The Handbook defines a micro-enterprise as an enterprise which:

a) employs fewer than 10 persons; and

b) has a turnover or annual balance sheet that does not exceed €2 million.

This may therefore capture a significant number of merchants recruited by payment facilitators - and potentially some merchants recruited directly by acquirers.

The FCA has recognised that the Duty applies to acquirers in respect of their ‘retail customer’ merchants. It also distinguished this from the application of the Duty to acquirers in relation to an issuer’s customers, which will depend on the circumstances and the extent to which an acquirer can materially influence outcomes for the issuers’ customers.

On the second point, parties in a distribution chain whose activities have a material influence over consumer outcomes are likely to be manufacturers or co-manufacturers under the Duty. However, ordinarily, providers of card acceptance services are unlikely to have a material influence over card issuers’ product designs. But there may be some circumstances where such firms could be seen to have a material influence over outcomes for card issuers’ customers – such as, for example, in the provision of disputes and chargebacks. This means parties will need to understand their role under existing arrangements and what that means under the Duty.

How might this impact on acquirers and payment facilitators?

At the centre of the Duty is new Principle 12, which requires firms to act to deliver good outcomes for retail customers. This requires firms to embed a focus of acting to deliver good outcomes in each of their business functions and to put customer interests at the heart of their business model and culture.

Firms will find that the Duty applies to in-scope merchants (with Principles 6 and 7 being disapplied for those customers), whereas for non-retail customers the Duty will not apply but Principle 7 may still apply. The FCA recognises that this complexity exists where products or services are bought by both retail and non-retail customers. The FCA expects firms to apply the rules in a pragmatic and proportionate way.

For example, they say, where it is possible and appropriate, firms might be able to develop different communications or support services for retail and non-retail customer groups. Equally, they might decide it is appropriate and proportionate to take a consistent approach for all customer groups (in other words, apply the higher standard across the board).

It is worth remembering that the Duty is underpinned by the concept of reasonableness. The FCA will consider what standard could reasonably be expected of a prudent firm carrying on the same activity in relation to the same services, taking appropriate account of the needs and characteristics of customers in the relevant target market. A firm offering card acquiring services to merchants (even if they are retail customers) might take the view that the reasonable standard to be applied in this market is different to that in markets which are more consumer focussed. This may be because the risk of harm to merchant customers is (generally) likely to be lower than in other areas where target markets may include cohorts of customers with characteristics of vulnerability (such as card issuing or lending to higher risk customers).

Nevertheless, firms will need to ensure they take a realistic view of what the reasonable standard should be and remember that (amongst other things) the FCA’s expectation is that firms should not look to exploit customers’ behavioural biases.

What about the Payment Systems Regulator (PSR)’s work on the card acquiring market?

As the PSR’s market review found, 43% of merchants reported that they never search for new providers. There is an interesting overlap between the concerns the Duty aims to address and the PSR’s more granular work on card acceptance for Visa and Mastercard scheme card-acquiring services.

The PSR found that while the market works well for merchants with an annual card turnover of over

£50 million, it does not work as well for the majority of merchants with lower turnovers. The PSR believes this is encouraged by a lack of transparency over pricing, a frequent inability to use existing point of sale terminals with new acquirers and indefinite contract terms.

In October 2022, the PSR published its final decision on remedies to improve transparency and comparability, to facilitate switching of card-acquiring service providers and to make it easier to exit point of sale (POS) terminal contracts (see our insight here). These include bespoke summary boxes alongside online quotation tools, trigger messages to prompt merchants to renegotiate or consider switching, and 18-month maximum initial terms for POS terminal leases. The PSR has applied these requirements to the 14 named PSPs under a specific direction (which account for circa 95% of the retailer transactions in the UK). The named PSPs had to implement the limitation on the length of term of POS terminal contracts (Specific Direction 16) by 6 January 2023. The information requirements (Specific Direction 14) and new obligations to provide prompts to merchants (Specific Direction 15) have an implementation deadline of 6 July 2023. Any PSPs outside this cohort may wish to consider if they should voluntarily comply with these requirements in respect of merchants that are in-scope of the Duty.

In its industry response to the FCA’s second consultation on the Duty (CP21/36), banking trade body UK Finance asked the FCA if compliance with the PSR’s final remedies would be sufficient to demonstrate compliance with the Duty. The FCA has not specifically responded to this. Whilst complying with the PSR’s final remedies should help acquirers and payment facilitators meet the Duty outcomes, it will not necessarily be enough in isolation. For example, prices must not just be transparent: they must also represent fair value. Exit fees and other obstacles to exit from contracts must comply with the Duty’s consumer support outcome, and communications generally should facilitate understanding, not just those relating to pricing and switching.

What should acquirers and payment facilitators do to prepare?

Clearly, acquirers and payment facilitators cannot ignore the Duty. If they are banks, they will be familiar with it already for other business lines; if not, they may have given it less thought. The Duty builds on the FCA’s 2019 decision to bring payment services firms into scope for its Principles.

Principle 6 in particular, which requires firms to treat customers fairly, is outcomes-focused. But the FCA is clear that the Duty goes beyond Principles 6 and 7 and sets higher standards.

The Duty will require PSPs to act to deliver good outcomes for in-scope merchants, act in good faith, avoid foreseeable harm and enable merchants to pursue their financial objectives. Firms must also ensure their products aimed at small merchants are fit for purpose, represent fair value and that merchants understand firms’ communications so they can make informed decisions. Acquirers and payment facilitators must also provide support to enable merchants to realise the benefits of their services and ensure they are not hindered from acting in their interests (for example, by sludge practices).

Some of the particular areas which payment firms may wish to consider are:

• Reviewing their standard merchant services terms for in-scope merchants, to ensure they are compliant with the Duty.
• How to ensure others acting on their behalf and interacting with in-scope merchants (for example, ISOs) describe their acquiring services fairly and accurately and distribute these to the right target market. 
• Reviewing the customer journey for in-scope merchants through the consumer lens.
• Reviewing referral arrangements with third parties to ensure they are fully compliant with the outcomes of the Duty.
• Carefully considering the FCA’s guidance on vulnerable customers and having particular regard to customers with characteristics of vulnerability or protected characteristics or potential cohorts of such groups. Whilst the risk of harm is likely lower in this market than others, firms should still consider if they could have potentially vulnerable customers (particularly in some sub-sectors).
• Customer support being as clear and transparent as possible with regards, for example, to the process and timeframes for disputing chargebacks.
• Evidencing the outcomes that customers are receiving is a key part of the Duty. Firms will therefore need to ensure that they have policies and procedures in place which facilitate this, and that relevant data and outcomes are captured including (but not limited to) data about complaints. Firms will also need to be ready to act promptly where poor customer outcomes are identified.

Banks with many product lines will be familiar with the Duty. If they also offer acquiring services, they should take account of the considerations above. For new and existing products, the Duty will kick in on 31 July 2023. It seems unlikely that acquirers and payment facilitators will have many customers falling into the closed book cohort (for which firms have an extra 12 months for implementation), as their core services are likely to remain available for new sales and renewals.

Please get in touch if you require any assistance or advice on this.

Co-authors: Noline Matemera & Edward Thomson

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.