The UK Payment Systems Regulator Takes Action Against Visa and Mastercard: What It Means for Businesses and the Industry
The UK’s Payment Systems Regulator (PSR) has announced its intent to take action against Mastercard and Visa after discovering that the two dominant card schemes increased their core scheme and processing fees by more than 25% between 2017 and 2023. This move comes amid growing concerns that the duopoly’s fee structures lack transparency, making it harder for merchants and acquirers to negotiate better terms.
The Findings: A Lack of Competition and Transparency
The PSR’s investigation highlights three key issues:
- Significant Fee Hikes: Mastercard and Visa raised their core scheme and processing fees by over 25% in real terms, increasing costs for acquirers and merchants.
- Opaque Pricing Structures: Merchants and acquirers receive incomplete or overly complex information regarding the fees and services provided by these card schemes.
- Higher Profit Margins: The regulator found evidence suggesting that Mastercard and Visa’s UK profit margins exceed levels expected in a competitive market.
Although the PSR has stopped short of imposing direct financial penalties, it is recommending a series of remedies to enhance transparency. The proposed measures include mandatory explanations and consultations on price changes, as well as providing detailed financial information to the regulator.
Impact on the Payments Industry
This intervention by the PSR has far-reaching implications for various stakeholders in the payments ecosystem:
Impact on Merchants and Small Businesses
- Higher Costs and Reduced Growth: Increased fees have burdened small and medium-sized businesses (SMBs), reducing their ability to invest and expand.
- Potential Cost Controls: The Federation of Small Businesses (FSB) is advocating for fee caps, which could alleviate short-term financial pressure on merchants.
- Need for Alternative Payment Solutions: As card fees continue to rise, more merchants may explore alternative payment solutions such as Open Banking-powered payments, digital wallets, and BNPL (Buy Now, Pay Later) options.
Impact on Acquirers
- Increased Complexity in Pricing Models: Acquirers have struggled with a lack of clear pricing information from Visa and Mastercard, making it harder to offer competitive rates to merchants.
- Potential for More Competitive Market Dynamics: If transparency measures are enforced, acquirers could gain more leverage in negotiating fees, potentially leading to a more competitive acquiring market.
Impact on Visa and Mastercard
- Regulatory Scrutiny and Compliance Costs: Increased transparency obligations may require Visa and Mastercard to invest in clearer fee structures and reporting mechanisms.
- Possible Pressure to Reduce Fees: If public and regulatory pressure mounts, Mastercard and Visa may have to reconsider future fee hikes.
- Shift Towards Value-Driven Justifications: Visa’s response emphasizes that its fees support innovation, security, and reliability—an argument that may need to be reinforced through further industry collaboration and consumer education.
Broader Implications for the Payments Landscape
This regulatory intervention is part of a broader global trend toward increased scrutiny of dominant payment networks. Similar concerns have been raised in the EU and the US, where regulators are investigating interchange fees, cross-border transaction costs, and competitive dynamics in the payments sector.
Rise of Alternative Payment Methods
With regulators questioning the fee structures of traditional card schemes, businesses and consumers are turning to alternative payment methods:
- Open Banking Payments: Direct account-to-account payments are gaining traction, offering merchants lower-cost alternatives to card payments.
- Real-Time Payments: Domestic and cross-border real-time payment schemes (such as the UK’s Faster Payments and Europe’s SEPA Instant) are reducing reliance on card networks.
- Cryptocurrency and Decentralized Finance (DeFi): Although still in its early stages, blockchain-based payment solutions are being explored as potential disruptors to traditional card networks.
The Road Ahead
As the PSR moves forward with its consultation on potential remedies, stakeholders across the payments ecosystem will need to assess their strategic responses:
- Merchants should evaluate their payment acceptance strategies and consider alternative solutions to reduce dependency on Visa and Mastercard.
- Acquirers must push for greater transparency to ensure they can offer competitive pricing to businesses.
- Visa and Mastercard need to adapt to increased regulatory oversight by providing clearer justifications for their fees and exploring new value-added services.
Ultimately, this regulatory push could lead to a more competitive and transparent payments market, benefiting businesses and consumers alike. However, the success of these reforms will depend on how effectively the PSR enforces its recommendations and whether alternative payment solutions can gain enough market adoption to challenge the dominance of Visa and Mastercard.
