April 6th 2017 | CMS Payments Intelligence

Written by Elley Frost, Managing Director

The UK Payment Systems Regulator (PSR) has been in full operation for just under two years and has for the first time been brought in front of the Treasury Select Committee. In our view, the PSR has underperformed and has turned a blind eye to the real issues affecting the payments industry.

The PSR is failing to scrutinise the card schemes and is ultimately failing to protect end users adequately. Here, we identify four main areas where we are disappointed with the PSR’s performance.

The PSR is the world’s only specialised payments regulator. All other regulations of the payments industry are conducted by organisations with a far broader remit, such as competition authorities and central banks.

CMSpi, with the support of many of the UK’s leading retailers, campaigned for the introduction of a payments regulator in the UK and was, therefore, delighted when the PSR was announced. However, after nearly two years in full force, it’s time to look at the performance of the PSR from a merchant’s perspective and evaluate whether it has achieved its key objectives.

How has the PSR performed?

Overall, we are thoroughly disappointed with the effectiveness of the PSR. We feel it has provided little value for merchants and fails to sufficiently regulate the key areas it was set up to govern.

In this 'end of year report', we identify four areas of concern and score the PSR's performance from a merchant's perspective.

Interchange Fee Regulation (IFR)

The PSR has been designated as the competent body responsible for overseeing the implementation of the IFR in the UK. Although we accept that the UK government has made many of the key decisions regarding the UK’s approach to the IFR itself, the PSR has nonetheless been very passive.

Specifically, we are concerned that the PSR does not seem to have investigated whether Visa’s weighted-average debit card structure is compliant with the IFR. We have long suspected that the structure may not have been compliant with a 0.2% weighted average. Given that the structure was in place for nearly one year under the IFR caps (please note that UK Visa debit interchange was changed to a flat 0.2% from September 2016), this may have resulted in UK merchants being unfairly overcharged by millions of pounds.

CMSpi has previously argued that the move from a per item to ad valorem basis in 2015 was an increase in aggregate UK interchange fees, though this was disputed by Visa.

We are also disappointed that the PSR has not investigated the possibility of imposing lower caps than those dictated by the IFR, as has happened in countries such as Spain and the Republic of Ireland. The UK is Europe’s largest cash and card market and will, therefore, have substantial economies of scale over its European peer group that should logically result in lower card fees.


Sale of Visa Europe to Visa Inc.

The PSR’s draft guidance on monitoring the Interchange Fee Regulation (IFR) did notcontain any mention of Visa Inc.’s acquisition of Visa Europe. Visa Europe was sold at a substantial premium (70 times net earnings) and we are already seeing a portion of this outlay being recouped in the form of increased scheme fees for merchants. A collection of issuers and acquirers jointly owned Visa Europe before it was sold and were, therefore, the ultimate beneficiaries of the Visa Europe sale. We feel there is an argument that this takeover – particularly at this cost – constitutes a circumvention of the European IFR’s anti-circumvention clause and should therefore be monitored by the PSR.


Sale of Vocalink to MasterCard

We have concerns over the confirmed proposed sale of VocaLink to MasterCard for £700 million. We believe that this acquisition will heighten consolidation in the already consolidated payments infrastructure market. However, we have seen no indication that the PSR shares our concerns; it has stated that “if MasterCard were to purchase VocaLink, that would meet our criteria of divestment by the big banks1”.

In addition to our own views, other organisations have also voiced their disquiet over the PSR’s role in MasterCard’s takeover of VocaLink. Before the sale, the Cheque & Credit Clearing Company (C&CCC) expressed concern that the PSR’s overall objective “to promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems” might not be met if MasterCard were able to purchase VocaLink from the payment service providers (PSPs). Following the announcement, the PSR stated: “It will be for the relevant merger authority to consider the effects of this merger under merger control law.”

Additionally, the Treasury Select Committee (TSC) has expressed concerns surrounding the sale of VocaLink to MasterCard. The TSC is concerned the company is being sold to an organisation that has a history of anti-competitive behaviour, including multiple anti-trust lawsuits currently under way and the PSR’s remit is specifically to promote competition in the payments arena.


PSR Panel and Payments Strategy Forum

In recent years, the PSR has set up two different industry bodies to look at the development of the PSR’s strategy, and to identify initiatives, where necessary:

  • The PSR Panel was set up in December 2014 to “contribute towards the effective development of the PSR’s strategy and policy and offer advice and early input on the PSR’s work”2, as well as providing feedback, presenting issues and identifying areas for research.
  • The Payments Strategy Forum (PSF) was formed in March 2015 to provide initiatives for the payments industry to promote collaborative innovation3.

The composition of both bodies is heavily weighted towards financial institutions and the payments industry, with only one merchant member out of 19 on the panel and one merchant out of 22 on the PSF. Indeed, this has drawn comparisons with the failed UK Payments Council, and the TSC has noted that “it does look as if the membership and the remit both look remarkably similar for the Payments Council and the Payments Strategy Forum4”.

Moreover, we are concerned about the exclusion of cards entirely from the scope of the forum. This is despite the fact that in the UK cards make up 64% of total consumer spending5.


Overall performance

From our perspective, the PSR has been ineffective in addressing the very issues for which it was created. The returns for the end users of payment systems have been limited to: the unwillingness to impose any new directives on Visa and MasterCard; devising a vanilla policy towards monitoring the IFR; turning a blind eye to the Visa Europe sale, and; charging merchants a new PSR fee. Further, and worryingly so, there appears to be a complete lack of opposition to MasterCard’s proposed takeover of VocaLink.

It would be understandable for a merchant to question what value they have received from having a dedicated payments systems regulator in place.

Disclaimer: The views mentioned in this article are based upon CMSpi’s areas of expertise: that of the card payments system and the card schemes. We do not pass comment on areas of the PSR’s remit outside of our own expertise. 

If you would like to receive further informaiton about the PSR and its performance, please contact us at info-uk@cms-pi.com

Payments Intelligence

Read more blogs here

1 http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/work-of-the-payment-systems-regulator/oral/45939.html
2 https://www.psr.org.uk/about-psr/role-psr-panel
3 http://consultation.paymentsforum.uk/
4 http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/work-of-the-payment-systems-regulator/oral/45939.html
5 Euromonitor, 2016, Financial Cards and Payments in the UK

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