UK Regulator Raps Schemes for Raising Fees and Concludes that Card-Acquiring Services Market “Does Not Work Well”
By Richard Pike, Simon Yeung and Andreas Killi
A comprehensive government review has concluded that the card-acquiring services that enable merchants in the UK to accept card payments is not working well for a significant number of merchants.
The UK’s Payment Systems Regulator (PSR; the economic regulator of the payment systems industry in the UK) published its final report on its market review into card-acquiring services in the UK on 3 November 2021. The review focuses on whether the supply of card-acquiring services is working well for merchants, and ultimately consumers.
The PSR conducted the market review due to concerns that card-acquiring services were not offering value for money for merchants. It concluded that, although the supply of card-acquiring services works well for the largest merchants (those with an annual turnover of above £50 million) on interchange plus plus (IC++) contracts with their acquirers, it does not work well for other merchants, due to issues and barriers hindering their ability to search and switch acquirers (such as opaque pricing structures and contracts).
The PSR also found that Mastercard and Visa scheme fees have increased significantly between 2014 and 2018, and that the increases are not explained by changes in the volume, value or mix of card transactions. The report noted that merchants pay those increases. In addition, merchants have not experienced cost savings from lower interchange fees as a result of the Interchange Fee Regulation (IFR).
The PSR is planning to publish a remedies consultation in early 2022 to address the problems identified. There are indications that the PSR has in mind additional requirements for transparency and “nudge” type remedies to prompt switching between acquirers. The PSR has not given any direct indication that it will move to regulate the level of scheme fees, but there are hopes that the European Commission may take action following its review of the IFR. The level of scheme fees may also be impacted by pending damages litigation in the English courts.
Background and importance of the report
The PSR report is the first report to comprehensively cover the card-acquiring sector in the UK and is both timely and important as card use in the UK has been growing strongly in recent years. COVID-19 has only accelerated the growth of card use, both in the number of online transactions and in store.
The cost of card usage is a material burden on merchants. To accept card payments, merchants need to buy and use card-acquiring services provided by acquirers or payment facilitators. The role of acquirers and payment facilitators is to:
- accept card transactions under one or more card payment systems;
- support the merchant with the authentication, authorisation, clearing and settlement of payments through the payment systems;
- settle the transaction with the merchant (transfer to the merchant the funds for the payment less any fees); and
- ensure merchants comply with scheme rules.
There have been growing concerns that card-acquiring services are not offering value for money to merchants, and that merchants are not seeing savings from reduced interchange expected under the IFR. If the supply of card-acquiring services is not working well it may ultimately result in higher prices for consumers.
Findings regarding fees
Despite the IFR capping interchange fees on most card transactions, the PSR concluded that, on average, merchants (comprising small to medium merchants and large merchants with card turnover of up to £50 million per year, as well as the largest merchants on standard or blended acquiring contracts) received little or no benefit from the IFR, indicating card-acquiring services not working well for these merchants and that competition in the acquiring sector is insufficient to discipline these practices. The only beneficiaries of the interchange caps introduced by the IFR were the largest merchants on IC++ contracts.
The PSR found that Visa and Mastercard scheme fees more than doubled between 2014 and 2018, over the period when the IFR caps came into force. Based on its econometric analysis, a substantial proportion of these increases are not explained by changes in the volume, value or mix of card transactions. These findings were made despite the PSR’s terms of reference expressly excluding any assessment of whether scheme fees are excessive. The PSR found that the increases in scheme fees were paid by merchants in all turnover groups.
Reaction to PSR findings and increased fees
Since the release of the PSR’s report, the subject of Visa and Mastercard scheme fees has received substantial media attention in the UK, coming at the same time that the schemes are proposing to increase interchange fees for EU merchants for transactions by UK cardholders following Brexit. Amazon is also challenging the level of Visa’s fees by refusing to accept Visa credit cards in the UK starting in January 2022.
In addition, the emergence of alternative solutions to using Visa and Mastercard-branded payment cards for merchants and consumers, such as account-to-account payments, Open Banking and buy now pay later, means third-party providers can move money directly from consumers’ bank accounts to merchants, increasing pressure on the main card schemes. None of those solutions, however, have eroded the market dominance of the Visa and Mastercard schemes.
Internationally, domestic card payment networks, with much lower interchange and scheme fees, are also challenging Visa and Mastercard in China, India, Australia, Germany and Russia.
Whether these challenges to the traditional payment schemes succeed is uncertain, and in the meantime, the scheme fees that Mastercard and Visa charge will continue to be important.
Written by Richard Pike, Simon Yeung and Andreas Killi
Edited by Gary J. Malone
 Richard Pike is a partner, Simon Yeung is of counsel and Andreas Killi is a paralegal in the London office of Constantine Cannon LLP.
 Market review into card-acquiring services: final report (November 2021) available at https://www.psr.org.uk/media/p1tlg0iw/psr-card-acquiring-market-review-final-report-november-2021.pdf