PSR‘s concern: potential imbalance in current structure

Scheme and processing fees, namely the hidden costs associated with each card transaction, have increased significantly in recent years. Coupled with the lack of substantial competition from Mastercard and Visa, this raises the question: do these fees reflect actual operational costs, or are they simply taking advantage of the lack of alternatives?

The investigation by the Payment Systems Regulator (PSR) has generated a significant amount of concerning data: the opacity of card scheme billing information makes it difficult for acquirers (the banks handling card transactions for merchants) to understand the rationale behind these fees. Additionally, attempts to assess profitability within the UK market have been hindered by Mastercard and Visa's reluctance to disclose detailed financial data. While this lack of transparency doesn't conclusively prove overcharging, it certainly raises suspicions.

The proposed reforms by the PSR address some key issues:

• Pricing methods: The PSR acknowledges proposals regarding pricing methods considering costs, service quality, and serving users. This is an area for further discussion during the consultation period. Stakeholder feedback will play a crucial role in shaping any final pricing methodology.
• Compulsory negotiation with merchants: The PSR recognizes the potential benefits of mandatory negotiations with merchants when proposing fee adjustments. However, they also acknowledge the challenges this measure may bring. They are currently committed to improving negotiation with acquirers but are also open to exploring other avenues for involving merchants in new service development.
• Defining "service improvement": The PSR acknowledges the need to define and measure "service improvement" to address fee increases. They highlight this as a complex issue, indicating that further development may be required if the final report concludes that the market is not operating effectively.
• Alternative oversight methods: The PSR is willing to explore alternative oversight methods beyond increasing reporting requirements for monitoring Mastercard and Visa operations, considering stakeholder feedback on potential remedial measures in the final report.
• Competition and fee increases: The PSR finds that the lack of competition is the primary driver of fee increases, rather than factors like increased security threats. While security and reliability have improved, they haven't kept pace with fee growth. It is also noted that current fee levels suggest a lack of competitiveness in the market.
• Timeline for fee reduction: The PSR explicitly states that their interim report is a starting point for discussion and no final decisions have been made. They anticipate releasing the final report in the fourth quarter of 2024. If the report concludes that the market is not operating effectively, they will negotiate specific remedial measures that could lead to lower costs for UK businesses.

Tools for PSR resolution

One potential remedy is the implementation of Regulatory Financial Reporting (RFR), which would compel Mastercard and Visa to provide ongoing, UK-specific financial information to the PSR. This data would serve as a key to unlock the inner workings of card scheme giants and allow the PSR to assess the correlation between fees and actual costs. With this knowledge, they can determine whether the current pricing structure is genuinely fair or if adjustments are needed.

The PSR is also exploring methods to make the structure of scheme and processing fees clearer. One potential solution involves billing behavioral fees more transparently. Currently, these fees are levied based on merchants' behavior within their networks (such as delayed settlement, refunds). Clearer billing would ensure that acquirers accurately pass these costs onto merchants who trigger them, establishing accountability within the system and potentially incentivizing merchants to adopt practices that reduce these fees.

Another potential area for reform is the way pricing decisions are made. The PSR is considering a more structured approach, possibly involving a UK-led committee within card schemes. This committee would ensure that fee decisions are not made behind closed doors but based on clear principles. Ideally, core scheme and processing services would be priced based on cost-recovery models, while optional services would need to transparently demonstrate the reasonableness of their associated fees.

Response from Visa and Mastercard

Mastercard did not respond, while a Visa spokesperson stated, "Visa's fees reflect the significant value we provide to financial institutions, merchants, and consumers, including high levels of security, near-perfect operational resilience, and a range of high-quality products and services that meet the needs of consumers and merchants."

The PSR's market review is not just about tweaking the system. It will fundamentally reshape the relationships between card scheme giants, acquirers, merchants, and ultimately consumers.

By promoting transparency, establishing accountability in fee setting, and empowering merchants with knowledge, the PSR aims to create a fairer, more efficient system that benefits all participants in the card transaction process, potentially paving the way for a more competitive landscape and ultimately lower costs for everyone.

If implemented, the proposed reforms could have a significant impact on the pricing and conduct of card transactions in the UK. The PSR is seeking feedback from all stakeholders, including Mastercard, Visa, acquirers, merchants, and consumer groups, as it aims to cultivate trust and fairness in the hidden costs of every card transaction, rather than a system of opacity and suspicion. This, in turn, could pave the way for a more dynamic and competitive payment landscape, ultimately benefiting consumers and businesses.