What you need to know about the Card Acquiring Market Review

Merchants use card acquiring services to accept card payments made by consumers or, indeed, another business, typically a supplier. These services are vital to the UK economy - they enable consumers and businesses to use credit, business or purchasing cards to pay for goods and services. There are circa 157 million cards issued in the UK, and consumers made £15.5bn worth of debit card payments in 2020.

The PSR launched a market review over concerns that card acquiring services don’t necessarily offer merchants value for money. As a regulator with a specific focus on competition and the interest of service users, the PSR believes merchants should shop around, consider alternative providers, or renegotiate with their incumbent provider, bearing in mind that the typical acquiring contract lasts for around three years.

Two merchant segments

To present the findings, the PSR used two broad merchant segments within the supply of card acquiring services:

• The first segment encompasses SME-sized merchants, with an annual card turnover of up to £10m. These merchants make the vast majority of card transactions, yet they are only responsible for 17% of the overall value of card transactions. The smallest merchants within this segment, with an annual card turnover of up to £380k, account for 90% of the overall merchant population.
• The PSR defines the large merchants as those with an annual turnover in excess of £10m. This segment is dominated by a small number of the largest merchants that most consumers use, with an annual card turnover of over £50m. These alone accounts for around 76% of the overall value of card transactions.

The report found that although the supply of card acquiring services may work for the bigger merchants, it is not the case for merchants with annual card turnover up to £50m. In other words, these merchants are not getting particularly good value for money.

Acquiring pricing models

All merchants can negotiate their fees with an acquirer. However, the reality is that smaller merchants have less bargaining power. Indeed, larger merchants have better means to look specifically at their acquirers, interest rates etc. In contrast, SME merchants do not necessarily have such resources and/or knowledge.

Furthermore, there are two pricing models within acquiring:

• The interchange ++ (IC ++) pricing model provides the merchant with full transparency and a complete breakdown of the costs, making it easy to scrutinise how competitive the offer is. Merchants can negotiate better fees by going with an IC ++ model, but should the interchange increase, the risk falls on the merchants’ part because they do not have fixed costs. Larger merchants can typically absorb these increased costs whereas smaller businesses may not.
• On the other hand, the blended pricing model does not entail complete transparency. There is no fixed pricing and typically, in case of an increase in the interchange, the risk sits with the acquirer. It is reflected into the rate.

Some SMEs, particularly with cash reserves, are happy to go with IC ++ and take the associated risk, because they calculate that the benefit outweighs the risk.

What to expect

Through the publication of the review, the PSR intends to give merchants transparency and information  on how to negotiate their way through acquiring services. The regulator did the groundwork to ensure UK merchants get a fairer deal. The review provides SMEs with the necessary information, enabling them to get a fairer deal, thereby saving a significant amount of money – should they  decide to make good use of it.