Behind the Mastercard and Visa Crackdown: How the PSR Scrutinizes Card Scheme Fees
The financial world thrives on constant evolution, yet the dominance of Mastercard and Visa in processing card transactions in the UK has felt stubbornly entrenched. Now, a shift is underway. The Payment Systems Regulator (PSR) has stepped in, wielding a magnifying glass, to scrutinize the fees these giants charge and explore the possibility of a fairer system.
The PSR's concern centers on the potential imbalance embedded within the current fee structure.
The evidence suggests a concerning trend: scheme and processing fees, the invisible costs attached to every card swipe, have ballooned in recent years. This, coupled with a lack of meaningful competition for Mastercard and Visa, raises the question of whether these fees reflect actual operational costs or simply exploit a lack of alternatives.
The PSR isn't making accusations lightly.
Their investigation has yielded a treasure trove of data painting a concerning picture. The opaque nature of billing information from the card schemes makes it difficult for acquirers (the banks that handle card transactions for merchants) to understand the justification for these fees. Furthermore, attempts to assess profitability specifically within the UK market were hampered by Mastercard and Visa's reluctance to disclose granular financial data. This lack of transparency, while not a definitive proof of excessive profits, certainly ignites suspicion.
The Payment Systems Regulator answers key questions on proposed reforms
We reached out to the Payment Systems Regulator and a PSR spokesperson clarified their approach to some key areas:
Pricing Methodology: The PSR acknowledges the suggestion for a pricing methodology that considers cost, service quality, and service users. They emphasize that this is an area for further discussion during the consultation period. Feedback from stakeholders will be crucial in shaping the final form of any pricing methodology.
Mandatory Consultation with Merchants: The UK regulator recognizes the potential benefits of mandatory consultation with merchants when fee changes are proposed. However, they also acknowledge the potential challenges associated with such a move. They are currently focused on ways to improve consultation with acquirers, but are open to exploring further ways to involve merchants in the development of new services.
Defining "Improvement in Service": The regulator acknowledges the need to define and measure "improvement in service" in response to fee increases. They note that this is a complex issue that would require further development if their final report concludes that the market is not functioning well.
Alternative Methods for Oversight: The PSR is open to exploring alternative methods to enhance their oversight of Mastercard and Visa's operations, beyond increased reporting requirements. They will be considering feedback from stakeholders on potential remedies in their final report.
Competition and Rising Fees: The regulator has found clear evidence that a lack of competition is a primary driver of rising fees, rather than factors like increased security threats. While security and reliability have improved, they haven't kept pace with the rise in fees. Regulators believe the current level of fees suggests a market that is not competitive.
Timeline for Fee Reduction: The UK regulator is clear that their interim report is a starting point for discussion and no final decisions have been made. They expect to publish their final report in Q4 2024. If the report concludes the market is not working well, they will then consult on specific remedies that could lead to fee reductions for UK businesses.
So, what tools are in the PSR's arsenal to potentially rectify this situation?
One potential remedy is the implementation of Regulatory Financial Reporting (RFR). This would compel Mastercard and Visa to provide the regulator with ongoing, UK-specific financial information. This data would act as a key, unlocking the inner workings of the card scheme giants and allowing PSR to assess how fees correlate with actual costs. Armed with this knowledge, they could then determine if the current pricing structure is truly justified or if a readjustment is necessary.
The PSR is also exploring ways to demystify the often-labyrinthine structure of scheme and processing fees. One potential solution involves clearer billing for behavioral fees. These fees are currently levied on acquirers based on the behavior of merchants within their network (e.g., late settlements, chargebacks). Clearer billing would ensure that acquirers can accurately pass on these costs to the merchants who trigger them, fostering accountability within the system and potentially incentivizing merchants to adopt practices that minimize these fees.
Another potential area of reform lies in the way pricing decisions are made. The UK regulator is contemplating a more structured approach, potentially involving a UK-led committee within the card schemes. This committee would ensure that fee decisions are not made behind closed doors, but rather based on clear principles. Ideally, core scheme and processing services would be priced based on a cost-recovery model, while optional services would require a transparent justification for their associated fees.
Visa and Mastercard's Response
We reached out for both Visa and Mastercard on the matter and while Mastercard didn't reply, a Visa spokesperson opted to comment the following:
"Visa’s fees reflect the immense value that we provide to financial institutions, merchants and consumers including extremely high levels of security, near-perfect operational resilience, and a wide range of consumer protections and high-quality products and services that serve consumer and merchant needs.”
The PSR's market review isn't just a tweak in the system. It will fundamentally reshape the relationship between card scheme giants, acquirers, merchants, and ultimately, consumers.
By promoting transparency, fostering accountability in fee setting, and empowering merchants with knowledge, regulators are aiming to create a system that is fairer, more efficient, and ultimately benefits everyone involved in process of swiping a card. This, in turn, could pave the way for a more competitive landscape, potentially leading to the emergence of innovative new players and ultimately, lower fees for everyone.
The proposed reforms, if implemented, could have a significant impact on the way card transactions are priced and conducted in the UK. The regulator is seeking feedback from all stakeholders, including Mastercard, Visa, acquirers, merchants, and consumer groups as it aspires to create a system where the invisible cost of every swipe fosters a sense of trust and fairness, rather than obscurity and suspicion. This, in turn, could pave the way for a more dynamic and competitive payments landscape, ultimately benefiting consumers and businesses alike.