Ian Taylor explains what is behind the Payment Services Regulator’s announcement on Tuesday of a review of card-acquiring services 

The Payment Services Regulator (PSR) announced a ‘Market Review into the supply of card-acquiring services’ on Tuesday in light of complaints about the rising costs to retailers of accepting card payments.

The PSR’s proposed terms of reference for the review report: “Concerns about the costs of card payments for merchants [and] concerns that acquirers are holding on to savings they made from interchange fee caps.”

Interchange fees are the charges levied between banks for accepting card transactions.

The PRS suggests: “Some merchants – especially smaller merchants – are suffering significant harm.”

The EU’s Interchange Fee Regulation (IFR), which sits alongside the EU Payment Services Directive (PSD2) which came into force from January, capped interchange fees on consumer debit and credit-card transactions and set out rules for applying these.

It was meant to reduce the costs of card payments for merchants as well as consumers.

However, the IFR did not cap the fees merchants pay to card acquirers. It assumed competition between the acquirers would limit any tendency to increase fees. In practice, this has not happened.

The card acquirers provide card payment-processing services to merchants, such as agents and tour operators.

They operate separately from card issuers which supply credit and debit cards to consumer cardholders.

Both issues and acquirers work with card-scheme operators, of which the biggest are Mastercard and Visa.

The PSR notes: “Interchange fees typically make up the largest portion of the fees merchants pay to acquirers.

“So the harm to smaller merchants from acquirers holding on to the benefits of the IFR interchange fee caps could be significant.”

The review will consider the following:

• Acquirers not passing on to merchants the savings they made from the IFR cap on interchange fees.
• A lack of transparency around the fees merchants must pay to accept card payments.
• Barriers “making it hard” for merchants to compare and switch card acquirers.
• Barriers to “services that would help merchants compare and switch” acquirers.
• The fees card-scheme operators charge to acquirers (‘scheme fees’), and the rules they apply, which “favour larger acquirers”.
• A “significant” increase in the scheme-fee portion of fees merchants pay to acquirers.

The PSR will focus the review on services in relation to Mastercard and Visa cards which account for 98% of all UK debit and credit card payments.

However, there is little hope of speedy reductions in the cost of card processing. The review is not likely to be completed until mid-2020 at the earliest.

The PSR said it plans to finalise the terms of reference for the review by the end of this year and only begin the review next year.

The review is then set to take 12 months.

The regulator will publish both an interim report and a final report “containing our confirmed findings and, where appropriate, the action we propose”.

It will set aside a further six months after that to review any remedies.

The PSR was established in 2015 and works alongside the Treasury. It has promised a detailed review timetable by the end of this year.

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