The UK’s Payment Systems Regulator (PSR) has published its long-awaited card acquiring market remedy directions. These will apply to the 14 largest merchant acquirers which together, account for 95% of the market. The remedies are expected to improve competition in the market for SME payment acceptance.
SMEs (defined as total card turnover <£50m) pay a total MSC of £2.5-£3 bn each year, according to the PSR which believes that switching savings can be considerable. Its report shows that merchants sticking with the same acquirer pay between 2 and 24bps extra compared with businesses that find a new provider. Yet only 9%-11% of SME’s switch acquiring services each year. With merchant survey evidence showing savings on headline rates of c.30% simply by negotiating hard with exiting suppliers, it’s clear that small businesses could gain considerably from a more competitive market.
The regulator’s analysis showed that three factors have been discouraging small businesses from switching acquirers.
Acquirers and ISO’s don’t publish their price lists. This is quite deliberate and makes price comparison between providers only possible by contacting each one independently. Getting a quote often involves a lengthy sales conversation which, according to evidence provided by acquirers to the PSR, typically involves a 20-60 min phone call or 60-90 minute face to face consultation. This is a clear barrier to switching.
Contracts are normally indefinite. Unlike insurance which typically sends a renewal letter every year, acquiring contracts don’t normally have renewal dates. Acquirers don’t need to make merchants sign new contracts because their terms and conditions allow price increases (or reprices as they call them) at regular intervals. A regular reminder to merchants would be a helpful prompt to shop around.
POS terminal contracts are often long (four or five years is not uncommon) with hefty penalties for early termination. It’s hard to think of a justification for this other than to fund hefty commissions for ISO salespeople.
The PSR chose only to address merchant service charges. It has not looked at scheme fees which many believe also pose serious competition questions.
So, here are the PSR’s three key directions. These apply to the 14 largest merchant acquirers which will also be responsible for ensuring their ISO’s follow the new rules.
Acquirers are obliged to publish summary boxes containing key price and non-price information. The information must also be made available to prospective customers via online quotation tools. The mandated information and format is shown below. This direction is welcome although there’s a clear risk that providers will reduce the headline prices shown in the summaries while increasing the price of items that are not so visible.
It’s arguable that this direction does not go far enough. Competition would be better served by obliging providers to make a full quote available online but, equally importantly, to expose pricing information to comparison shopping sites. If a business can buy mobile phones or insurance on uSwitch or Compare the Market, there’s no good reason why merchant acquiring cannot be bought and sold in the same way.
Send trigger messages to customers as a prompt to shop around. If the contract is indefinite, merchants will get these trigger messages monthly as part of their regular invoices. Although there’s a risk that merchants will become desensitised to this extra “clutter” and not act, there is evidence from similar regulations in the insurance industry that the approach can be effective. For example, obliging insurers to include the previous years’ premium with renewal letters did increase switching 3.2ppts so this approach can work among customers receiving a 5% or greater price rise.
Impose a maximum 18-month contract for a POS terminal with rolling monthly termination thereafter unless the merchant signs a new contract. This only applies to merchants with <£10m card turnover. ISOs are unhappy with this direction. One provider told the PSR that the “overall cost of sale via an ISO is around £800” including terminal and sales commission and this could not be recouped over just 18 months rental. Given terminals are c.£200-£300, the size of the sales commission itself appears strong evidence of market failure.
Since the directions only apply to 14 acquirers, ISO’s may be tempted to sign-up with smaller competitors, such as Borgun or Valitor, that have escaped regulation
Larger merchants (£10m-£50m card turnover) are assumed by the PSR to buy acquirer agnostic-terminals from the major POS gateway players. In recent years, many of these gateways have been purchased by acquirers. These acquirers have little interest in widening the selection of competitors available through their terminals. Examples include TLG/Barclaycard. YesPay/Worldpay and Sage Pay/Elavon. The PSR could have considered obliging POS terminal vendors to connect to any acquirer willing to pay reasonable costs.
The 18 month limit will apply to all new merchant contracts from January 2023. Acquirers have a further six months to implement the other two remedies.
