Will the regulator’s remedies fix the card-acquiring market for SMEs?

The Payment Systems Regulator (PSR) is consulting on remedies to address its findings that the payment card-acquiring market does not work well for merchants with turnover of up to £50m a year. Responses to the consultation are due on 6 April 2022. In this article, financial services and payments specialist Simon Deane-Johns explains the remedies the PSR is recommending, which seem likely to improve the experience of all participants.

Key problems in the card-acquiring market

The PSR identified three features of the acquiring market that restrict the ability and willingness of merchants to shop around for acquiring services and switch between card-acquirers to get a better service at better prices:

• Lack of published pricing for card-acquiring services: pricing structures and approaches also differ, making it hard to compare prices across independent sales organisations (ISOs), acquirers and ‘payment facilitators’ who gather together transactions from small merchants (those with the GBP equivalent of less than 1 million USD turnover each year).
• The indefinite duration of acquiring service contracts: there is no clear trigger for merchants to think about shopping around and switching.
• Point of sale (POS) terminals and leases: terminals won’t work with a new card-acquirer, so need to be replaced; and there may be a charge for terminating an existing terminal lease (which spreads the cost of terminals over a period of up to five years while the related acquiring contract has a minimum term of 12 months).

Remedies being considered

To help resolve these problems, the PSR is considering four remedies in combination:

1. Summary information boxes
2. Boosting the use of digital comparison tools by merchants
3. Trigger messaging
4. Removing barriers to switching that arise from POS terminals/leases

The combination is important. Summary boxes may not work as expected, and transparency is more effective to aid shopping around and switching when combined with remedies that facilitate service comparison, personalised information on product use and trigger remedies. Price simplification may also be required if other remedies prove ineffective.

To aid in the design of the remedies, the PSR is asking card-acquirers to provide:

• mock summary boxes and trigger warnings;
• technical specifications for summary boxes, trigger warnings, the submission of data to digital comparison tools (DCTs) and POS terminal portability; and
• an explanation of system changes required.

Summary information boxes

Acquirers would have to provide standardised information setting out key price and non-price features, in the following formats:

• Bespoke individual summary: tailored information for each merchant about the pricing and other service information, with consumption data and information on options to migrate to other tariffs or how to switch acquirer.
• Generic summary: information for all customers and potential customers on acquirer websites to enable merchants to quickly assess pricing and service options across a range of acquirers.

Boosting DCTs for merchants

DCTs are simply online intermediary services used to compare and potentially to switch or purchase products from a range of providers. DCTs are not as well established in the acquiring market as they are in consumer markets, such as loans, insurance and utilities. The PSR found that merchants tend to land on ISO ‘lead-generation’ websites when looking for an acquirer.

To work effectively, experience from consumer markets shows that DCTs for card acquiring should cover both pricing and non-price service elements. This would involve:

• acquirers publishing and updating their pricing and other service data regularly in formats which are consistent and easily usable, so DCTs could collate comparative pricing and other service data; and
• merchants being able to share their acquirer transaction data, so that DCTs and other third parties could:
  • determine the key service parameters, such as brand and category of card, types of transaction (e.g. card-present/not-present, MOTO), frequency of each transaction type; and
  • use the merchant’s specific transaction data to calculate whether the merchant would be better off with a different acquirer.

It would also likely improve merchant trust in DCTs if the PSR were to audit DCTs’ comparison methodologies and tools (as Ofcom does, for example). The PSR plans a feasibility study in this respect.

Trigger messages

The PSR is considering fixed-term contracts, so that the expiry acts as a trigger for comparing switching options; but also trigger messages such as a cheaper tariff becoming available . Information items in the messages could include how much the contract price has increased, how much would be saved by switching to the lowest tariff and how to switch to new POS terminals.

The PSR also notes that the FCA’s work on current account and home insurance switching suggests that SMEs will respond better to personalised information on the financial impact of switching, as well as non-price benefits. Ofcom’s experience also suggests that such messages should be kept short and simple, action-focussed, personalised, designed to remind customers, enable them to plan ahead and give them a deadline, and be tested with a target audience. Visual presentation of information was helpful where complete, precise, specific and jargon-free. Trigger information is best presented when customers log in to their account, whereas calls and text messages are not as effective for communicating this type of information.

POS terminals as technical barriers to switching acquirers

POS terminals are the devices used by merchants to capture card details from customers when a transaction is made. POS terminals may be offered by or through an acquirer or separately by an ISO, but they typically operate with only one acquirer. So a merchant wishing to switch acquirer will also need to terminate both the ‘merchant service’ contract for card-acquiring as well as a lease for their POS terminal. But card-acquiring contracts are usually for a term of 12 months, while POS terminal leases last up to five years and renew automatically for up to 18 months, and may involve termination charges. In addition, merchants and their staff may be used to a certain POS terminal, so may be reluctant to switch to a different unit offered by a different acquirer.

The PSR is looking at both the contractual and technical barriers to switching POS terminals and contracts, but has a preference for removing technical barriers first.

The technical barriers include physical reconfiguration that may be required to make a POS terminal work with a new acquirer’s systems; certification required by each new card-acquirer and for each payment scheme; and the fact that the new acquirer’s terminal manager may not support terminals from a previous acquirer (changing terminal manager will require unlocking and resetting cryptographic keys).

Technical remedies could involve requiring a new acquirer to replace the merchant’s POS terminals, but the PSR would prefer to focus initially on trying to ensure that POS terminals are portable between acquirers.

Will switching be made easier in the future?

Merchants do not need to wait for the PSR remedies to switch acquirers, but the problems and remedies do show the kind of effort required to search for the right acquiring service and organise a switch. Even large merchants struggle with the challenge of switching, and they retain experienced consultants to help determine the service/features required; the most efficient way to meet those needs; and to evaluate which acquirers can genuinely deliver and at what price.

The process is time-consuming and frustrating for acquirers as well. And even at the smaller end of the market there is plenty of scope for both the merchant and the acquirer to misunderstand the merchant’s requirements and the acquirer’s ability to deliver.

The kind of remedies that the PSR is recommending therefore seem likely to improve the experience of acquirers, payment facilitators, ISOs and merchants alike.