Competition in Payments: One Size Does Not Fit All
by Andrew Cregan, Head of Finance Policy, British Retail Consortium
The retail industry will be pleased to see competition featured as one of the three key themes of the PSR’s future strategy, currently under development for consultation later this year.
The previous PSR Strategy delivered big changes for interbank payments, with plans to create a New Payments Architecture, and taking action to improve competition targeted at appropriate layers of its stratified model.
This time around, it appears the crosshairs of the Strategy will fall on card payments. Already the PSR is in the midst of its review into card-acquiring market, and the UK’s departure from the EU allows greater sway for both the Government and its payments regulator to exercise an autonomous national approach to tackling long-standing problems in Europe’s largest card market.
This is good news for UK merchants and consumers. All merchants need card-acquiring services to accept card payments, which accounted for 80% of UK retail spending prior to the pandemic that has led to even greater dependency on card payments. Card fees are a key cost of doing business for all merchants, with the costs of these services ultimately reflected in consumer prices.
Retailers are one of the most significant end user groups for card payments, processing more than 51 million transactions per day and around £394 billion per year for products & services sold in store, online & over the phone. A priority for the British Retail Consortium has therefore been to ensure an innovative, transparent and competitive payments market for all retail end users and their customers.
Retailers can rally behind the outcome that the PSR is looking to achieve in this strategy, of effective competition at all levels of the supply chain that can protect people and businesses, with focused economic regulation acting where competition is not enough.
A stratified model, similar to that of the New Payments Architecture, can be used to break down the changes needed to ensure effective competition at the various layers of the card payment ecosystem: issuing, card scheme services, acquiring, and value-added merchant services.
- Issuing: The Interchange Fee Regulation (IFR) intended to slash the excessive charges levied on merchants and their customers – collected by card-issuing banks, going a long way to tackling the perverse incentives of a market that drives costs up rather than down. Yet interchange fees still remain a significant component of merchants’ card costs and difficult to justify with schemes operating successfully in Europe and Canada with zero interchange fees. Perverse incentives continue as card schemes use thinly veiled circumventions of the IFR to woo card-issuing banks with alternatively labelled kickbacks that have a similar impact on the costs borne by end users.
- Card schemes: Clearly the least competitive layer of the card payments ecosystem, with a duopoly controlling 98% of the UK market. The card schemes levy hundreds of fees on transactions across countless variables making it impossible for even the largest merchant to accurately forecast card costs, and consumers ultimately pay the bill in the form of higher prices. Complex billing structures have further become a powerful tool to bamboozle political, regulatory or legal attempts to rein in increasing abuses of the schemes’ dominant market positions, which has seen scheme fees billed to merchants double since implementation of the IFR. The evident lack of competition among cards schemes – or even a market mechanism to exert a downward pressure of costs – demands a measure of public intervention as exists for telecoms, energy, and water services to correct the failure in the market.
- Acquiring: The PSR are already carrying out a market review into card-acquiring services following concerns that the supply of these services may not be working well for merchants, and ultimately consumers. The interim report demonstrates the thoroughness of the PSR’s work, confirms that card scheme services are adversely affecting the supply of card-acquiring services more than any other factor, and recognises a lack of transparency around fees and complexity of comparing prices. Shopping around is part of the answer, identified by the report, but for large merchants with their own legacy systems, this can be a costly and time-consuming exercise not to be repeated often. Smaller merchants can be subject to onerous restrictions.
- Value-Added Merchant Services: Whilst non-regulated providers such as gateway services have been around for some time, there are a growing number of services now being offered by third parties that purport to help merchant conversion – particularly in response to the incoming Strong Customer Regulation (SCA) requirements.
There are numerous providers of card-acquiring and value-added merchant services in the UK, where enhanced competition could play a major role in driving better outcomes for merchant end users and, in turn, consumer welfare. Other layers of the card payment ecosystem lack effective competition, or even the market forces to drive down costs. Here a different approach must be taken.
There is a harmful lack of competition in retail payments, dominated in the UK by two parallel monopolies controlling almost the entirety of the UK card market. Open banking is too often cited as the remedy, yet we all know that – if successful – this solution has a long road ahead before its impact is felt. In the meantime, the adverse impacts of a lack of competition cannot be left untreated.