The PSR is to consider whether there is effective competition in the market and makes clear that further reviews of the payments ecosystem could be triggered by its findings.
By Brett Carr, Stuart Davis, and Christian McDermott
The Payment Systems Regulator (PSR) has issued Draft Terms of Reference for a market review into the supply of card-acquiring services.
The PSR will use its powers under the Financial Services (Banking Reform) Act 2013 to carry out the market review in line with its statutory competition, innovation and service user objectives.
Effective competition in the payments market is a focus of the PSR, and this review follows shortly after dawn raids reported by the PSR in February 2018 as part of its first action under the Competition Act 1998.
- The PSR is taking these steps to investigate concerns that savings from the interchange fee cap are not being passed on to merchants, there is a lack of transparency around the fees paid by merchants to accept card payments and there are barriers to the substitution of acquirer service providers, which all point to competition not working well in the card-acquiring market.
- A range of actions is open to the PSR, which could see it give directions to the market and its participants, make proposals to the FCA or make a market investigation reference to the CMA.
Scope of review
The PSR is to examine the supply of card-acquiring services by acquirers and payment facilitators (a payment facilitator being an intermediary between the acquirer and (typically) smaller merchants).
The review will focus largely (but not exclusively) on acquiring services in relation to Visa and MasterCard services, as they are reported to hold over 98% market share of cards issued between them.
The review will not focus on other services related to card-acquiring services, for example the provision of terminals. Neither will the provision of non-card based acquiring services be examined.
The PSR’s proposed approach
The PSR identifies three specific issues of interest:
- Barriers to entry or expansion in card-acquiring services — including scheme fees and rules.
- Barriers to switching or searching faced by merchants — including whether comparisons between service providers can be made, the fees, contractual and technical barriers.
- Availability of services that facilitate merchant decision-making — including the extent of transparency and availability of comparison services.
Of interest to most merchants and acquirers will be the PSR’s commitment to collect detailed data and analyse how the level of fees merchants pay have responded to changes in the fees acquirers pay to card scheme operators and card issuers (as a result of the Interchange Fee Regulation caps). The PSR will also explore the factors that determine the level of scheme fees. However, given the focus on card-acquiring services, the PSR will not look at whether scheme fees are excessive.
Possible further reviews
Whilst not confirming whether it is considering any other specific market reviews, the PSR (on multiple occasions), identifies the potential for further reviews to be undertaken following this examination.
The PSR notes that when undertaking its assessment of fees, if it finds evidence of potential harm that does not relate to the supply of card-acquiring services, it will consider undertaking further work to investigate such harm separate to this market review.
In light of the work that will need to be done next year to feed into the Interchange Fee Regulation review (which will need to have been undertaken by June 2019), it is possible that information could be harvested by way of further market reviews.
Responses to the draft Terms of Reference are requested by 14 September 2018. The PSR plans to publish the final Terms of Reference by the end of the year, which will also set out the PSR’s planned timetable of work for the review.
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