On 6th October 2022 the PSR published its Final Decisions on its major and multi-year ‘work’ on the costs of accepting card payments for merchants. Costs, in this case, focuses on the service fees paid by a merchant to its appointed merchant acquirer. The all-in costs include the deductions-from-face-value, which the PSR has elected to overlook and which outweigh the service fees by some distance.
The PSR’s document should gain fame for the wrong reasons: it is a testament to the frustration of the Interchange Fee Regulation (EU) 2015/751 – the IFR – for the compliance with which the PSR itself is the ‘competent authority’. A main aim of the IFR was to radically reduce the all-in costs for merchants by setting a very low cap on the deductions-from-face-value.
The IFR was a ‘maximum harmonization’ measure and it stands out from much other EU law-giving, in the author’s opinion: it was well-founded and should have eliminated several detriments in the UK payments market. Being a Regulation, it had direct legal applicability in the UK from its live date of December 2015; it did not require transposition as an EU Directive did.
The IFR had two main objectives: (i) to cap deductions-from-face-value at 0.2% for debit cards and 0.3% for credit cards so the merchant would receive 99.8%/99.7% of the sticker price of their goods and services in settlement, and at the normal settlement date, 2-3 business days after the sale was made; and (ii) to ensure that merchants received comprehensive and consistent service information in proposals, in contracts and once in production, so they could verify what the costs were under their existing acquirer, check these costs against the existing service contract, compare offerings of different acquirers, make a business case to switch, and check afterwards that the winner was charging exactly what they said they would.
The deductions-from-face-value would thenceforth be a minor part of the all-in costs, and could not be expected to differ greatly between acquirers. That would not be an issue because they were small and fulfilled the ‘Merchant Indifference Test’: the costs for card payments would be on a level with those for cash, cheque and bank transfer, being generally low, comprehensible to the merchant, and negotiable by the merchant with their direct service provider.
As regards service information, Articles 9 and 12 of the IFR are specific and comprehensive about what that means.
The PSR’s ‘remedies’ are confined to this area, are set out in para 1.4 on p. 4 of PS22/2, and are composed for the most part of reiterating the IFR. There will also be a limit on the term of an acquiring contract to 18 months. Big deal.
Contrary to the PSR’s argumentation in para 2.42 on p. 15, this information is not supplementary to what the IFR specifies. The PSR attempts to throw a smokescreen over this by inventing a ‘So what?’ qualification that the IFR’s requirements were meant only to address the issue of ‘Unblending’, as they appeared in a section with that title. This is a bogus argument: what does it matter which section the requirements were given in? All that matters is that they were given. The PSR now re-states this information as its own ‘remedies’. All this will remedy is a small part of the industry’s non-compliance with the IFR, and the PSR’s failure as ‘competent authority’ to police compliance over this subset of the IFR’s scope.
This is not the worst of it, though, not by some distance.
The PSR document, in para 1.116 on p. 52, makes admissions that are shocking. The PSR ought to be shocked itself, and not pass these matters off, as it does, in a manner that implies they are known and business-as-usual facts. The PSR admits to the possibility that the benefit of the IFR caps on deductions may not be being passed on to many merchants, and the PSR’s rendition of how the IFR caps have been implemented operationally testifies to flagrant breaches of the IFR.
The wording ‘cost savings from the IFR caps that were not passed through to merchants’ confirms that the benefits exist, namely that there are deductions greater than 0.2%/0.3% occurring. IFR states that this should not be happening.
Secondly the benefits are arising but being kept by a market actor other than the merchant. The IFR is explicit that only the merchant and no other market actor can benefit from the IFR caps.
Thirdly the PSR’s formulation indicates an operational treatment by the industry different from that laid down by the IFR. The IFR stipulates that the deduction-at-source can be no higher than 0.2%/0.3%. The merchant must receive the 99.8%/99.7% of the sticker price of the goods and services 2-3 days after the sale was made.
Instead, if cost savings had to be ‘passed through’ to some merchants, it infers that a higher deduction-from-face was made at the outset, and that the industry had then decided to rebate some of that – or to keep it. The IFR deprives the industry of the power to make that decision: the IFR caps the deductions-at-source. There cannot be a higher deduction that is then subjected to a rebate process, or not.
Fouthly, the PSR puts an annual figure for 2018 on the amount of savings that was passed through to merchants at £600 million. The PSR then states: ‘These are typically the largest merchants’. This indicates that a differentiation is being made by the industry between large and small merchants, as regards to whom to extend the benefits of the IFR caps. No such freedom is granted to the industry by the IFR.
The conclusions to be drawn from this are damning for the industry and still more for the PSR. The industry is operating flagrantly in breach of the IFR. The PSR’s PS22/2 is a PR exercise, an absolute de minimis action to make out that the IFR was more limited than it actually was, so as, via smoke and mirrors, to make out that the PSR itself has not been asleep at the switch since the IFR came into force.
That is not the worst of it. For smaller merchants the deductions-from-face are way higher than the IFR caps, and they form the majority of the all-in cost of accepting card payments. PS22/2 takes a very oblique action on that, surrendering to vested interests rather than doing what the PSR exists for: to enforce applicable law to the benefit of end users.