Card-acquiring services: PSR’s remedies proposals aim to trigger merchant engagement

Recap of key market review findings

The PSR’s final report identified several barriers to switching (or “features of concern”) for merchants with turnover up to £50 million per year:

• Lack of transparency: Acquirers and independent sales organisations do not typically publish prices for card-acquiring services. In addition, their pricing structures and approaches to headline rates vary significantly. This makes it difficult for a merchant to compare prices in the market.
• Indefinite contracts: Contracts with acquirers and payment facilitators for card-acquiring are for an indefinite period which could mean there is no clear trigger for a merchant to (1) think about searching for another provider who might provide better value or (2) negotiate with their existing provider. 
• POS terminals and contracts: POS terminals and POS terminal contracts that prevent or discourage merchants from searching for and switching to a new provider.  This can occur because a merchant typically cannot use its existing POS terminal with a new card-acquirer.  If it changes its card-acquiring services provider it may need a new POS terminal and to cancel its existing POS terminal contract – which can result in a significant early termination fee.  POS terminal contracts can have different renewal terms than contracts with card acquirers and may automatically renew for successive fixed terms which also makes it difficult to terminate a contract for card-acquiring services.

The PSR is confident that remedying these features will improve outcomes for small and medium-sized merchants.

For more on the PSR’s final report, take a look at our Engage article ‘Card-acquiring services: PSR to work on increasing searching and switching of majority of merchants’.

What remedies are being proposed?

The PSR is proposing four potential remedies, as summarised below. It invites card acquirers and, where relevant, POS terminal lease providers to develop detailed proposed specifications for the remedies and for any other measures they want to propose. Proposals should include supporting evidence of why they would be effective and proportionate.

Summary information boxes

• These would contain standardised key facts information setting out key price points and non-price service elements, both in bespoke, individual specific format provided to each merchant, and in generic format.
• Individual summary boxes could also give merchants information on options to migrate to other tariffs or switch provider.
• The generic summary boxes would be provided to all customers and potential customers on provider websites, enabling merchants to quickly assess pricing and service options across a range of acquirers.
• To help merchants in comparing the information, there would need to be a degree of standardisation across and between both types of boxes.
• In light of evidence gathered from work in other markets (eg a joint FCA/CMA report on consumer facing remedies from 2018), the PSR suggests that the summary information boxes would be most effective when used in combination with other tools (eg DCTs and trigger remedies) to help merchants compare and switch between offerings.

Stimulating digital comparison tools (DCTs) for merchants

• The PSR points out that DCTs are not well established in the card-acquiring market. Some of the current barriers to DCT market entry – most notably, unavailability of pricing information - would therefore need to be addressed.
• The PSR is not currently considering any direct intervention on pricing structures (see below) but some reforms to improve availability and accessibility of card-acquirer and ISO pricing information to third party intermediaries may stimulate DCT entry and development in this market. This might involve:
  • Provision of pricing and other comparable service information to DCTs by card acquirers;
  • Collation and presentation of comparative pricing and other service data updated regularly in formats which are easily usable by DCTs;
  • Enabling merchants to share their acquirer transaction data with third parties so this can be used by DCTs to assess merchant options, where merchants want to do this and have consented to it.
• Merchant confidence in the accuracy and impartiality of the DCT data is key to ensuring good consumer and merchant outcomes.
• Before issuing a provisional decision on remedies, the PSR may commission a study to assess the feasibility of DCTs for card-acquiring services.

Trigger messages

• This would consist of a standardised message sent by card acquirers to merchants ahead of the expiry of the initial minimum term, and then annually to trigger engagement. For contracts with no initial minimum term, or for which the initial minimum term has passed, annual trigger messages would still apply.
• As shown in other markets (eg the FCA’s work on current account switching and home insurance), the timing, content and method of delivery of the trigger messages will be important to their effectiveness in triggering engagement.

Addressing barriers to switching between card-acquiring services which arise from POS terminal leases

• The initial focus will be on investigating the effectiveness of removing technical barriers to POS terminal switching. If the PSR finds that this potential remedy doesn’t look likely to succeed, it will consider taking action to address contractual barriers directly.
• The PSR will start by looking in particular at portability of POS terminals when a merchant switches between card-acquiring services as a technical solution.

One size doesn’t necessarily fit all

There is an acknowledgement that some remedies are likely to be more effective for some merchants than others within the target merchant groups (ie, those with turnover up to £50 million per year). For example, information remedies may be relatively more beneficial to smaller merchants that are less able to absorb the cost of researching options. The PSR will bear this in mind in its further remedies work.

Some potential remedies are on the back burner for now

The PSR is keeping some potential remedies on its radar but is not planning to take them further at this first-stage consultation:

• Pricing simplification by providers: The PSR considers this to be a “credible option” to facilitate easier price comparisons by merchants but there would be associated risks, including to product and pricing innovation. If other remedies prove ineffective, the PSR will reconsider this one.
• Fixed-term contracts: The PSR acknowledges previous stakeholder feedback that imposing fixed-term card-acquiring contracts would create a risk that merchants who do not take action before the end of a contract would lose access to card-acquiring services. However, the possibility of introducing them as another trigger to engage merchants in searching and switching remains within the scope of the PSR’s work.

Monitoring framework to be set up

Looking further ahead, the PSR will establish a framework to monitor merchant and consumer outcomes in the card-acquiring market. It will use this to assess the effectiveness of the remedies put in place.

The framework will be developed through consultation with stakeholders, including providers of card-acquiring services, and merchants and merchant representatives. It will be separate to the PSR’s monitoring of compliance with the requirements put in place.

The PSR is not ruling out further interventions if it finds that the remedies do not meet its objectives to increase merchant engagement and ensure the market works better for them. The industry should therefore be prepared for the PSR keeping the regulatory spotlight on this market for some time to come.

Next steps

The consultation closes at 5pm on 6 April 2022. The PSR is also working on a cost-benefit analysis (CBA) for the proposed remedies. It makes it clear that this will be important to ensuring that the eventual outcomes are effective and proportionate. Its proposed approach to the CBA is published in the annex to the consultation, and it is inviting comments from stakeholders on this as well as the remedies.

Once this first stage of consultation is completed, the PSR will issue a provisional decision, including a draft remedies notice. Publication of the provisional decision will give all interested parties an opportunity to comment on its proposals and supporting analysis as well as the draft remedies notice.

The PSR will issue a final remedies notice following completion of consultation on the provisional decision. The final remedies notice will include information on implementation periods for any changes. Timing for both the provisional and final remedies notices is not very specific, with the consultation referring only to publication “in 2022”.

Please get in touch with any of the listed contacts if you would like to discuss the potential impact for your business.

Authored by Julie Patient and Virginia Montgomery