2024 Market Review Of UK Card Schemes And Payment Processing Fees

The Payment Systems Regulator (PSR) has published an interim report on the market review of scheme and processing fees associated with Mastercard and Visa, the two largest card payment system operators in the UK.

The report sets out the provisional findings and potential regulatory actions to address concerns about the competitive constraints and transparency of these fees.

Executive Summary

The report highlights several key points:

1. Fee Increases: Mastercard and Visa have significantly increased scheme and processing fees charged to acquirers over the past five years, with overall fee levels rising by more than 30% in real terms. These increases have led to UK businesses paying over £250 million extra annually.
2. Lack of Competitive Constraints: Mastercard and Visa do not face effective competitive constraints in the UK market. For core scheme and processing services, there are no direct competitors, and while new entrants are considered, they do not pose a credible threat currently. Optional services also show varying degrees of competitive constraint, but the one-stop-shop nature of Mastercard and Visa gives them a strong market position.
3. Market Outcomes: The fee increases have occurred with little or no link to changes in service quality, pointing to a lack of competitive pressures. The profitability of Mastercard and Visa is high, suggesting prices are set significantly above competitive levels.

Competitive Constraints on the Acquiring Side

The report examines competitive constraints faced by Mastercard and Visa in supplying services to acquirers and merchants:

• Core Scheme Services: Acquirers must participate in these services as a condition of the card payment system, leaving no room for alternative providers.
• Core Processing Services: In principle, these could be offered by alternative processors, but no such providers currently operate in the UK, and significant barriers to entry exist.
• Optional Services: Alternative providers exist but are often limited, and Mastercard and Visa’s comprehensive service packages give them a competitive edge.

Market Outcomes

The PSR’s provisional findings indicate:

• Fee Increases and Profitability: There have been significant increases in the revenues earned from scheme and processing fees, with total revenues more than doubling since 2017. Most of these increases are passed through to merchants and, ultimately, to consumers in the form of higher retail prices.
• Transparency Issues: The complexity and lack of transparency in billing and fee structures make it difficult for acquirers and merchants to understand and manage these costs. Many acquirers need additional services or consultancy to interpret their billing information, leading to accidental purchases of optional services and increased overall costs.

Potential Remedies

The PSR is considering several remedies to address these issues:

1. Transparency and Complexity: Enhancing the clarity and accessibility of billing information, clearly distinguishing between mandatory and optional services, and developing a taxonomy of scheme and processing fees to ensure consistent understanding across the sector.
2. Consultation and Notification: Requiring Mastercard and Visa to consult acquirers and merchants before implementing fee changes and providing sufficient notice periods. This aims to ensure that fee changes reflect cost increases and consider service users’ interests.
3. Pricing Methodology: Establishing a formal pricing methodology, including a UK-specific pricing committee, to ensure pricing decisions are made transparently and are based on cost considerations.
4. Information and Support: Providing better information and support to merchants, particularly SMEs, to help them understand and manage scheme and processing services. This includes creating bespoke materials and improving the quality and timeliness of information provided through the schemes’ portals.

Next Steps

The interim report is open for consultation, with stakeholders invited to provide feedback on the provisional findings and potential remedies by July 30, 2024. The PSR aims to publish a final report in Q4 2024, which will outline the final decisions and actions to be taken based on the consultation feedback​.