On 6th October 2022 the PSR published its Final Decisions under reference PS22/2 on its ‘work’ on Card-acquiring market remedies, a major and multi-year programme on the costs for UK merchants of accepting payments by card, which primarily means cards branded to Visa and Mastercard.

The PSR’s ‘remedies’ fall below the lowest expectations of what could make a difference to the all-in costs, because the PSR has resolutely stuck to its stance that costs means the service fees paid by the merchant to their contracted merchant acquirer, steadfastly overlooking the main component in the costs: the deductions-from-face-value that are shared around the other market actors in the extensive card eco-systems.

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'.

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 should have had two outcomes: (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 (ii) to ensure that merchants received comprehensive service information in proposals, in contracts and once in production, so they could check what the current fees were, confirm that these fees were in line with their contract with their acquirer, compare offerings of different acquirers, make a business case to switch acquirers, 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. With very low deductions, the 'Merchant Indifference Test' would be fulfilled, as is specifically laid out in the IFR: the costs for card payments would be on a level with those for cash, cheque and bank transfer.

The PSR's 'remedies', set out in para 1.4 on p. 4 of PS22/2, steer round the deductions issue, do not even discuss the specifics of the fee scales of acquirers, and limit themselves to the service information aspect. The PSR could have saved itself the trouble. Articles 9 and 12 of the IFR are specific and comprehensive in that area. The only thing the PSR adds is a limit on the term of an acquiring contract to 18 months. Big deal.

Knowing it is on weak ground regarding its ‘remedies’ being duplicative of the IFR, the PSR makes a bogus argument in para 2.42 on p. 15, arguing that, because the requirements listed in the IFR were given under a section with the title ‘Unblending’, they only served the objective of ‘Unblending’. This is palpable nonsense. It matters not a jot what heading the requirements were given under. All that matters is that the requirements were stated in the IFR, and they demanded merchants be given the exact same level of transparency that the PSR now says that its ‘remedies’ are required to deliver.

All this proves is that this information is not being supplied by the industry now. The industry is non-compliant with the IFR. The PSR as the 'competent authority' has failed to enforce compliance over a 6-year period. The PSR throws up a smokescreen to obscure its own failure.

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 ought to be shocking. The PSR ought to be shocked itself, and not pass these matters off 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 by the industry testifies to flagrant breaches of the IFR.

The wording ‘cost savings from the IFR caps that were not passed through to merchants’ infers that the cost savings exist but are being kept by one or more market actors other than the merchant. The IFR is explicit that only the merchant and no other market actor can benefit from the IFR caps.

Secondly the PSR's formulation indicates an operational treatment by the industry different from that laid down by the IFR. The IFR stipulates no higher deduction-at-source than 0.2%/0.3%. The merchant must receive the 99.8%/99.7% of the sticker price of the goods and services and within the normal settlement cycle, which, non-compliantly with Payment Services Directive II, occurs 2-3 days after the sale was made, even for a payment in £pounds from a UK-issued card.[1]

Instead, the phrasing that cost savings had to be ‘passed through’ to some merchants infers that a higher deduction-from-face was made at the outset, and that the industry applied a process of its own formulation to rebate some or all of that deduction, and to keep the balance. The IFR deprives the industry of the power to install such a process: the IFR caps the deductions-at-source. It cannot be subjected to a rebate process.

Thirdly, 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 to make out that the IFR was more limited in scope and substance than it is, so as to spare the PSR’s own blushes.

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 oblique action on all-in costs, by duplicating what the IFR already says and with regard only to the smaller portion of the all-in costs: the service fees paid to and kept by the acquirer. In the process the PSR puts a dense smokescreen around what the IFR says, its status as a directly-applicable EU Regulation, what non-compliance means for the wider economy, and what the PSR’s role is as ‘competent authority’ for a piece of applicable law.

How the market actors in the extended cards eco-systems must be laughing.

[1] This counts as a national payment in a member state currency and should be settled same-day