Card-acquiring services play a crucial role in the payments sector
When a customer makes a card payment, the merchant uses card-acquiring services to accept it. These services are critical to the UK economy because they enable consumers and businesses to use their cards to pay for goods and services.
There are around 157 million cards issued in the UK and 65% of all payments made by consumers in 2021 were made using credit or debit cards.
Card-acquiring services’ crucial role in the payments sector means they must work well for merchants, and ultimately consumers.
Card acquiring market review
Back in July 2018 the Payment Systems Regulator (PSR) announced that they were going to carry out a market review into the supply of card-acquiring services following concerns they held that this market may not be working well for merchants, and ultimately consumers.
In November 2021 the PSR published their final report for card-acquiring services which included three features of concern in relation to how the market operates for merchants with turnovers of up to £50 million per year. At the time the PSR stated that these areas of concern restrict merchants’ ability and willingness to search and switch between card acquirers.
The three features of concern identified by the PSR were:
- Acquirers and independent sales organisations (ISOs) do not typically publish their prices for card-acquiring services. Their pricing structures and approaches to headline rates vary significantly, which makes it difficult for merchants to compare prices for ISOs, acquirers, and payment facilitators.
The indefinite duration of acquirer and payment facilitator contracts for card-acquiring services may explain, at least in part, why many merchants do not consider switching or searching for other providers regularly. This is because they do not provide a clear trigger for merchants to think about searching for another provider and switching.
Point of Sale (POS) terminals and POS terminal contracts that prevent or discourage merchants from searching and switching provider of card- acquiring services. This can occur because of a combination of two factors:
A merchant typically cannot use its existing POS terminal with a new card acquirer. If it switches provider of card-acquiring services, it may need a new POS terminal and to cancel its existing POS terminal contract.
o A merchant could incur a significant early termination fee when cancelling its existing POS terminal contract, even if no such fee would apply when cancelling its card-acquiring services contract.
The PSR concluded that remedying these features of concern will improve outcomes for these merchants by:
- Encouraging them to search and switch, or negotiate with their existing provider
- Reducing the obstacles to switching
- Subsequently creating incentives for suppliers of card-acquiring services to develop and offer better deals for merchants through competitive pressure, as merchants become more engaged and shop around more actively with better information.
Decision on measures to improve card services for businesses
Some four years after announcing the market review (October 2022) the PSR have published their decision on measures to improve card services for businesses.
There is, of course, no better thing to immerse yourself in the final decision on the card-acquiring market review but if time is against you here’s a quick summary of all you need to know.
Remedies for card-acquiring in the UK – 10 things you need to know…….
1: The PSR have published three remedies to address the features of concern identified in the card-acquiring market
- Summary boxes containing bespoke key price and non-price information, which card-acquiring service providers must send individually to each merchant and make available in their online account. Merchants will be able to use the summary boxes alongside new online quotation tools, which providers will be required to make available. This will help merchants compare all available offerings.
- Trigger messages to prompt merchants to shop around and/or switch to be sent by providers of card-acquiring services to their merchant customers and shown prominently in their online account.
- A maximum duration of 18 months on POS terminal lease and rental contracts, and maximum monthly renewal thereafter.
These remedies will be implemented through specific directions given to the most significant providers of card-acquiring services to the merchants that the PSR are seeking to protect.
2: The PSR have given specific directions to the 14 most significant providers of card-acquiring services to the merchants that the remedies seek to protect.
These providers cover 95% of transactions) and will include the firms’ associated companies and their contracted ISOs.
For ease of reference the 14 providers are:
- Adyen UK Limited
- Barclays Bank PLC
- Chase Paymentech Europe Limited
- Elavon Financial Services DAC
- EVO Payments International GmbH, Branch UK
- First Data Europe Limited
- First Merchant Processing (Ireland) DAC
- GPUK LLP
- Lloyds Bank plc
- PayPal (Europe) Sarl et Cie SCA
- Square UK
- Stripe Payments UK Ltd
- SumUp Payments Limited
- Worldpay (UK) Limited
All remedies will apply to the directed providers and any ISOs that they have a contract with to provide services to merchants.
3: There are different merchant card turnover thresholds for each of the remedies
The remedies addressing price transparency (summary boxes and online quotation tools) and the indefinite nature of some contracts (trigger messages) will apply to the directed providers in respect of their merchant customers with card turnovers of up to £50 million.
The remedy addressing POS terminals and POS terminal contracts will apply to the directed providers in respect of their merchant customers with card turnovers of up to £10 million.
4: Remedies to address the feature of concern that acquirers and independent sales organisations (ISOs) do not typically publish their prices for card-acquiring services
Directed providers must provide bespoke summary boxes to every merchant customer with an annual card turnover of up to £50 million.
Summary boxes must be provided in the format prescribed by the PSR. The format together with advice to providers and merchants on how to use it to ensure merchants receive consistent and comparable information from their provider has been published on the PSR’s website.
Providers must include the summary boxes in merchants’ monthly billing information and show them prominently in the merchant’s online account.
The PSR have mandated online quotation tools. Information generated through use of online quotation tools must be provided to merchants in the same format the PSR have prescribed for the summary box.
The online quotation tool must be shown prominently on each provider’s and ISO’s website – a merchant can then obtain an indicative quote for card-acquiring services by entering information into the calculator.
The summary box and online quotation tools must be transparently linked and the opportunity to use online quotation tools will be signposted from every merchant’s summary box.
5: Remedies to address the indefinite duration of acquirer and payment facilitator contracts for card-acquiring services
Directed providers must send trigger messages to every merchant customer with an annual card turnover of up to £50 million.
Trigger messages must conform to the PSRs format and is available on the PSRs website. The PSR state that this will be important to ensure that merchants are given consistent prompts and information, irrespective of their provider or services they consume.
Trigger messages must be included in the monthly invoice sent to the merchant.
Where the merchant has a contract with a minimum term (initial or renewed), the trigger message must be included with the invoice sent closest to the date which is 30 calendar days before the expiry of the minimum term.
Where the merchant has a contract with no minimum term (that is, one which lasts for an indefinite period), the trigger message must be sent with each invoice at least monthly.
Trigger messages must also be shown prominently to the merchant in their online account.
Where the merchant has a contract with a minimum term (initial or renewed), the trigger message must be continuously available online between the date 30 calendar days before the expiry of the initial minimum term and the date on which the initial minimum term expires.
Where the merchant has a contract with no minimum term, the trigger message must be shown prominently to the merchant in their online account.
6: Remedies to address POS terminals and POS terminal contracts that discourage merchants from searching and switching provider of card-acquiring services
The PSR have mandated that duration of POS terminal lease and rental contract initial minimum term periods should be no greater than 18 months; and that, after the expiry of initial minimum terms, contracts that do not terminate immediately at the minimum term must move to rolling renewal terms of no greater than 31 calendar days. This remedy will apply to every merchant customer of the directed providers with an annual card turnover of up to £10 million.
This Remedy will apply to all terminal lease and rental contracts entered into after the implementation deadline.
For existing contracts, any initial minimum term will be able to complete before moving to rolling renewal terms of no greater than 31 calendar days – existing contracts with no initial minimum term must move to these renewal terms after a maximum of 18 months.
Any exit or termination fees for POS terminal lease and rental contracts will be required to be cost based, fully explained and transparent to merchants before they enter into their contract.
Directed providers will need to ensure that POS terminal lease or rental providers supplying their merchant customers comply with the requirements of the remedy.
Where merchants procure POS terminals from a third party, independently of the PSP providing them with card-acquiring services (that is, the POS terminal supplier to a merchant has no contractual relationship with the merchant’s card-acquiring service provider or ISO selling that provider’s services) the requirements will not apply (although the PSR state that this is not common for the segment of the market they are considering (merchants with annual card turnovers of up to £10 million).
7: The three remedies will work individually or in combination
The PSR state that the Cost Benefit Analysis work they have undertaken show that the remedies they are proposing will work effectively and proportionately individually, in combinations or as a package.
The PSR state that whilst each remedy would be effective and proportionate individually, they have concluded that they will be more so in combinations and as a package. For example, the limit on duration of POS terminal lease and rental contracts will reduce current barriers to switching between card-acquiring services. Merchants will be more likely to explore opportunities to switch as they receive information in their summary box and are prompted by timely trigger messages. They will be able to compare between their options using quotation tools.
8: Implementation period for the remedies
Implementation periods for the summary box, online quotation tool and trigger message remedies will be nine months after the specific directions are given. The PSR believes that this period will allow for reasonable systems changes, taking account of normal systems maintenance and scheduling of systems freezes.
Given that the 18-month limit on the initial term of POS terminal lease and rental contracts is a contractual reform which does not require systems development the PSR have decided that three months after the specific directions are given is an appropriate implementation period for this remedy. The Remedy will apply to all contracts entered into after the implementation deadline.
For existing contracts, any initial minimum term will be able to complete but existing contracts with no initial minimum term must move to rolling renewal terms of no greater than 31 calendar days after a maximum of 18 months.
9: Implementation dates
The PSR have published the following implementation dates:
Specific Direction 14 (card-acquiring – provision of information (summary box)): 6 July 2023.
Specific Direction 15 (card-acquiring – trigger messages): 6 July 2023.
Specific Direction 16 (acquirer POS terminal lease extent): 6 January 2023.
10: Evaluation and monitoring of the remedies
The PSR are considering how to develop a framework to evaluate merchant and consumer outcomes in the card-acquiring market. The PSR state that they could use this to assess the effectiveness of the remedies, and if they are still required considering market developments.
Also, the PSR state that the framework could also be used to implement a proportionate means to monitor compliance
The PSR will engage with industry on the development of an appropriate framework, including possible trials, during the implementation period.
Interestingly the are not asking for regulatory returns from directed providers as part of the specific directions. Also the PSR state that they are mindful of the need not to require information from directed providers which would have a significant impact on their IT systems or require material system changes.
Cost benefit analysis
For the purposes of this quick summary we have omitted any detail relating to the Cost Benefit analysis undertaken by the PSR. Details of the full cost benefit analysis can be found in Annex 1 of the PSR’s Card-acquiring market remedies final decision document.
In the future
The PSR state that they will keep the companies directed under review and may extend the mandate by directing the card schemes, Mastercard and Visa, to mandate all acquirers who are members of their schemes to adopt the remedies, if necessary.
Card-acquiring market remedies – final decision
Here’s a link to access the PSR’s published final decision on the card-acquiring market review.
Remedies for card-acquiring in the UK – 10 things you need to know