The soaring cost of accepting card payments is punishing retailers and adding to the cost of doing business, as consumers ditch the cash with a general movement towards paying by plastic.
Cards now account for four out of every five payments made, according to figures from the British Retail Consortium (BRC), prompting the business group and others to call on Parliament to intervene to tackle anti-competitive practices to protect British businesses and consumers from spiralling costs.
Hannah Regan, Financial Policy Adviser at the British Retail Consortium, said the soaring cost of accepting card payments was an extra concern for retailers already battling huge cost pressures from the weak pound, rising energy bills and global commodity prices, high transport costs, a tight labour market, and the cumulative burden of government-imposed costs.
In October last year, both Visa and Mastercard raised their cross-border interchange fees on purchases made by UK consumers to European businesses from 0.2% to 1.15% for debit cards, and 0.3% to 1.5% for credit card transactions. Meanwhile, transaction fees on digital wallets are also on the up: PayPal increased its fees for payments between businesses in the UK and Europe from 0.5% to 1.29% in November 2021.
Charlie Mercer is Head of Economic Policy at Coadec, part of the Axe the Card Tax campaign, which is calling on the Payment Systems Regulator (PSR) to intervene in the card payments market so that businesses have more choice of payment provider. “Payment fees are increasing because of a broken market where two giants control 99% of the payments market in the UK,” Mercer says.
“In the last eight years, the scheme [essentially membership fees] and processing fees charged by the major card schemes have exploded by 600%. The Payments System Regulator is looking into this spike, and ultimately there is a probable need for tighter regulation that curbs rising fees and creates a more competitive marketplace that enables alternative providers to thrive,” he adds.
Following a review by the PSR, new rules announced in October will, the regulator says, improve card services and choice for businesses and help them switch to more cost-effective services.
From January next year, 14 of the most significant providers of card-acquiring services will be required to provide trigger messages to businesses reminding them at the end of their contract term that they could get a better deal if they shopped around. Providers will also have to provide summary information boxes of the card fees businesses are charged and provide an initial online quotation tool of key charges to help them make informed choices.
The regulator is also limiting point of sale (POS) terminal contracts to 18 months, following concerns that businesses were being locked into lengthy contracts for card readers.
Kate Fitzgerald, Interim Head of Policy at the PSR, said: “Card-acquiring services play a crucial role in the payments sector – from the businesses that use them to accept payments, to the consumers using them to pay – so it’s important they work well for everyone. We believe that businesses could be saving up to thousands of pounds a year if it was simpler for them to compare prices and switch providers.” The National Federation of Retail Newsagents estimates that where its members switched acquirers, they saved between £100 and £450 per month on the cost of card acceptance services.
Meanwhile, it’s not just card costs that are on the rise. And, with recession increasingly likely, retailers who are already squeezed between higher costs and weaker demand are under pressure to absorb as much of these rising costs as possible. Experts believe that a burgeoning market for account-to-account systems facilitated by open banking could pave the way for cheaper payment overheads by allowing businesses to bypass the card networks entirely.
Making payments directly from one account to another is not new: direct debit, for example, has been widely used for many years and works well for regular payments. But even though the UK is recognised as a leader in open banking, very few payments in the UK are made using open banking-enabled account-to-account systems. This is especially true in the retail sector, where a significant proportion of payments are ‘spontaneous transactions’ such as a supermarket shop.
However, Peter Harmston, partner and UK Head of Payments at KPMG UK, believes this is set to change. He points to the Netherlands as a country where adoption of account-to-account payment options has exploded: “If you go into a restaurant for example, you are often presented with a QR code and can pay the restaurant directly from your bank account. Although there are still fees behind account-to-account payments, they’re often much lower than card payment schemes as there are far fewer parties involved.”
He urges businesses worried about the rising cost of payments to explore the open banking options available to them: “In the UK, although we aren’t as far along as the Netherlands, there are a number of companies that already offer these services, especially for online transactions.”
Mercer believes that as the market for account-to-account payments grows, more choice will drive down costs for businesses and retailers. Already alternative providers are emerging, he says. “Open banking providers such as Crezco offer B2B payments that are quicker and cost less. Fintech acquirers like SaltPay are offering more transparency to retailers too. Tomatopay and GoCardless are other UK companies emerging in this market.”
However, the immaturity of the account-to-account market in the UK means it isn’t without its risks, Harmston warns. “Businesses should be aware that there isn’t yet the same level of fraud protection for account-to-account transactions compared to traditional credit card schemes. There isn’t the chargeback regime for example, which credit cards offer.”
The PSR has identified several barriers to adoption for the account-to-account payment market, including the need for standards to meet the functional requirements for retail transactions, the need for dispute services for when things go wrong, and access and reliability issues. But despite some complex and significant challenges, the PSR expects account-to-account payments to continue to develop over the next few years.
“I’d urge businesses to spend time looking into the innovative alternative providers that operate in the UK,” Mercer says. “There’s a multitude of UK entrepreneurs waiting in the wings to offer better value in accepting payments, creating a world where British fintechs can grow alongside British retailers.”
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