Market Review Into the Supply of Card-Acquiring Services Responses to Draft Terms of Reference
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Market review into the supply of card-acquiring services Responses to draft Terms of Reference January 2019 Market review into the supply of card-acquiring services: MR18/1.2 Responses Responses to draft Terms of Reference Contents American Express 4 Association of British Travel Agents 12 Association of Convenience Stores 16 Association of Independent Risk & Fraud Advisors 22 British Airways 29 British Retail Consortium 32 Cardswitcher 40 Ciceroni 44 CMSPI 46 Ecommpay 67 Edgar, Dunn & Company 70 Elavon 79 Electronic Money Association 86 Emerging Payments Association 91 EuroCommerce 96 Federation of Small Businesses 102 First Data 106 Global Payments 113 Gradeon 117 HSBC 119 iZettle 125 Lloyds Banking Group 128 Mastercard 135 North East Interiors 149 Onestopmoneymanager Ltd 152 Paysafe 160 PSI-Pay 164 Secure Trust Bank 166 Stripe 169 Transport For London 177 UK Finance 181 Payment Systems Regulator January 2019 Market review into the supply of card-acquiring services: MR18/1.2 Responses Responses to draft Terms of Reference Vanquis Bank 188 Visa Europe 192 Which? 205 Worldpay 212 Names of individuals and information that may indirectly identify individuals have been redacted. Payment Systems Regulator January 2019 Market review into the supply of card-acquiring services: MR18/1.2 Responses Responses to draft Terms of Reference American Express Payment Systems Regulator January 2019 4 NON-CONFIDENTIAL American Express’s response to the PSR’s consultation on comments on the PSR’s draft terms of reference for a review of card acquiring services 14 September 2018 Non-confidential version 1 5 NON-CONFIDENTIAL American Express welcomes the opportunity to provide feedback on the PSR’s draft terms of reference for a review of card acquiring services. A. American Express in the UK American Express issues cards and acquires American Express transactions in the UK. American Express currently has a very small share of the cards sector contrasting sharply with the dominant duopoly of Mastercard and Visa (as the PSR concludes in its draft terms of reference, Mastercard-branded and Visa-branded cards accounted for over 98% of UK debit and credit card payments in terms of value and volume in 2017). Since its entry in the UK in 1963, American Express brought effective competition and increased consumer choice. American Express operates probably the best-known proprietary card system worldwide. The system is proprietary because American Express itself operates the network and typically acts as both issuer and acquirer, in contrast with the association-based, inter-bank network models used by Visa and Mastercard. In particular, the vast majority of American Express-branded cards worldwide, and the vast majority of transactions on these cards, are issued and acquired by American Express itself. By contrast, neither Visa nor Mastercard issues cards or acquires transactions; rather, they perform a network function linking and co-ordinating among thousands of independent issuing and acquiring institutions. As the issuer and acquirer of card transactions on the American Express network, American Express contracts directly with cardholders and merchants. With respect to card issuing, it bears responsibility for providing the payer with a payment instrument and for processing and authorising transactions made using the card; it bears the cost of funds, operating expenses and all other expenses relating to the card; it bears all the credit and other risks associated with issuing; and it remains responsible for compliance with all applicable laws and regulations. With respect to merchant acquiring American Express pays the sums due to the merchant for the transaction in which it has accepted payment by card; it agrees the price that the merchant will pay; it bears the risk associated with credit and fraud losses; it bears the cost of processing the transaction; and it remains responsible for ensuring compliance with all applicable laws and regulations. American Express does not compete - and could not compete - on the basis of ubiquity. It has to prove its value to both consumers and merchants every day and must rely on a highly differentiated, niche business model in order to compete with Visa and Mastercard. American Express cards are not a "must carry" commodity. Nearly every American Express cardholder carries and uses at least one (often more than one) Visa or Mastercard product. The reverse is not true: most Visa and Mastercard cardholders do not have an American Express Card. Since consumers and merchants do not have to carry or accept American Express cards, American Express can compete only if its customers see a benefit from using or accepting American Express cards. American Express focuses on providing superior customer service, as well as differentiated value to both cardholders and merchants. It is notable that merchants will not accept the payment products of a discretionary network like American Express unless they find value in doing so. For merchants, a big component of that value is the incremental spend that American Express is able to deliver as a result of its investments and efforts in targeted marketing, business building initiatives, rewards and other cardholder and merchant benefits and services. In an effort to improve geographic coverage and market relevance, American Express has established licensing relationships with approximately 150 partner payment providers around 2 6 7 NON-CONFIDENTIAL B. American Express’s comments on the draft terms of reference As a general comment, we note the proposed study is referred to as a “market” review. Market definition has a specific meaning for the purposes of competition law. American Express kindly asks the PSR to treat its review as a sector review in order to avoid unintended consequences from a market definition perspective. 1. Do you agree with our description of card-acquiring services? If not, please explain: a. how our description should be altered b. why you think the description should be altered in this way Please include any evidence you think is relevant to your response. American Express partially agrees with the PSR’s description of card-acquiring services in paragraph 1.7. As defined in PSD2 (Article 4(44)), card acquiring services are services to accept and process card payments for the merchants, resulting in a transfer of funds to the merchant. American Express agrees it is fundamental to draw a distinction between acquirers and payment facilitators. In the UK, only American Express acquires transactions on American Express cards. [CONFIDENTIAL] In addition, payment facilitators do not have the same regulatory and commercial obligations and responsibilities as an acquirer. Where a payment facilitator interacts with merchants, the acquirer continues to carry the relevant acquiring-related risks and responsibilities from a regulatory perspective for acquiring those merchants. [CONFIDENTIAL] 2. Do you agree with the proposed scope of the market review? If not, please explain: a. how the proposed scope should be altered b. why you think the proposed scope should be altered in this way Please include any evidence you think is relevant to your response. American Express broadly agrees with the proposed scope of the PSR’s review, including the focus on the supply of card acquiring services for Visa and Mastercard on which we will comment in more detail in response to question 3. American Express agrees that the focus should not be limited to particular categories of merchants. 1 [CONFIDENTIAL] 2 [CONFIDENTIAL] 4 8 NON-CONFIDENTIAL 3. Do you agree with our proposal to focus on card-acquiring services for Mastercard and Visa? If not, please explain: a. how the focus should be altered b. why you think the focus should be altered in this way Please include any evidence you think is relevant to your response. American Express agrees that the focus of the analysis should be on the supply of card- acquiring services for Mastercard and Visa for the reasons set out in this section. [CONFIDENTIAL] First, as the PSR concludes in its draft terms of reference, Mastercard-branded and Visa-branded cards accounted for over 98% of UK debit and credit card payments in terms of value and volume in 2017. Second, the concerns the PSR intends to analyse relate to Visa and Mastercard. Further to the explanations provided under point A, American Express’s business model operates differently from the association-based, inter-bank network models used by Visa and Mastercard. Therefore, the concerns identified by the PSR notably in point 1.11 relating to merchant pricing and transparency do not apply to American Express for the following reasons: - American Express does not have interchange fees. Therefore, the concern that smaller merchants have not benefitted from cost savings expected to arise due to regulated interchange fees is not a concern that applies to American Express. [CONFIDENTIAL] - American Express has dedicated initiatives that benefit small merchants. Another reason why the concern with regards to smaller merchants does not apply to American Express is the following: [CONFIDENTIAL] We have also been running a so-called “shop-small” campaign once a year for the last 6 years. This marketing campaign incentivises American Express cardholders to spend at participating small merchants through dedicated marketing and with the offer of statement credits3. [CONFIDENTIAL] - [CONFIDENTIAL] The concern regarding a lack of transparency around the fees merchants pay to accept card payments does therefore not apply to American Express. - [CONFIDENTIAL] The PSR’s concerns with regards to scheme fees do therefore not apply to American Express. 3 Statement credit means that an amount is credited to a cardholders statement, reducing the overall sum due to American Express by that amount. 5 9 NON-CONFIDENTIAL Third, as set out in further detail under point A, three party schemes such as American Express (with less than 2% of card share in the UK) are a choice, not a must-have. Nearly every American Express cardholder carries and uses at least one (often more than one) Visa or Mastercard product.