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Questions raised over PSR decision regarding card schemes

The UK Payment Systems Regulator (PSR) has “after careful consideration” decided not to apply any new access or governance requirements on card payment system operators such as Visa or MasterCard (link).

The news comes just weeks after both Visa and MasterCard posted impressive revenue and profit figures for 2015. MasterCard announced operating income of $5.078 billion on revenues of $9.667 billion, an operating margin of 52.5%. Meanwhile, Visa announced operating income of $9.064 billion on revenues $13.880 billion, an operating margin of 65.3%*. 

The key to the card schemes’ ever-increasing profitability is their ability to charge merchants high and increasing scheme fees. 

The card schemes are likely to view European interchange fee regulation, which entered into force on 9th December 2015, as an opportunity to increase their own fees by replacing interchange costs. Indeed, in the immediate aftermath of European interchange regulation caps, we have already seen evidence of scheme fee increases in Europe from both Visa and MasterCard.

Furthermore, Visa Inc.’s impending acquisition of Visa Europe has provided a further catalyst for fee increases for merchants. Visa Inc. CEO Charles W. Scharf told investors that there was an “opportunity to genuinely evaluate pricing from the perspective of a commercial enterprise rather than a member-owned association.”

Fundamental doubts over the market

CMS Payments Intelligence has long been concerned about the duopolistic structure of the card scheme market in the UK and beyond, and we believe this is reflected in the astonishing profitability of both major global card schemes. Visa and MasterCard are able to charge high network fees because merchants simply have no choice but to pay them; it is not a realistic option for most merchants to refuse to accept either card brand. Therefore, card scheme pricing bears little resemblance to underlying costs and profitability is very high. 

However, the PSR’s announcement suggests that we are unlikely to see either of these outcomes any time soon in the UK and, in our view, this casts serious doubts about the PSR’s willingness to act as a strong and effective regulator.

The PSR revealed in October 2015 that it has charged issuers and acquirers regulatory fees of £4,014,300 to cover each of the Visa/MasterCard networks in 2015-16. The fees charged to acquirers are directly passed on to merchants and, therefore, indirectly passed on to consumers. We feel that the position the PSR has taken over the card schemes ignores fundamental issues with an anti-competitive market and does not do enough to justify the fees that it is charging. 

*Please note that Visa profitability figures are for Visa Inc, which does not include income from Europe. However, these figures are indicative of the commercial model that we expect Visa Inc to apply after it has completed its acquisition of Visa Europe.

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