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Do payment processors wield too much power?

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Press reports covering the recent distressed sale of Flybe to the consortium Connect Airways (subject to the deal receiving shareholder approval on 4 March 2019) suggest that one of the reasons for the airline’s alarming decline (towards what would in all likelihood have been a complete collapse) was a problem with cash flow that was exacerbated by its credit card processing provider.

Payment processors, as the name suggests, facilitate payments by credit and debit cards for both online and point of sale transactions. The payment processor acts as an intermediary between the merchant (e.g. a retailer or airline) and the customer’s bank, facilitating the rapid authorisation (or otherwise) of the payment and initiating (and usually guaranteeing) settlement of the purchase monies via the credit card networks. The sector has evolved rapidly in recent years and has generated considerable interest from private equity houses that see the businesses as good sources of steady incomes.

Ordinarily merchants receive settlement of their purchase monies within 1-3 days of the transaction. However, this period can be significantly extended by the payment processor if it deems the merchant’s business to be in a high-risk sector. It is also common for payment processors to hold back a proportion of monies due to merchants on account by way of security for possible chargebacks (the process by which credit card companies claw-back payments following customer requests or fraud etc.). These practices are commonplace in some markets (such as air travel) and businesses can usually factor them into their business plans accordingly.

Problems arise when payment processors unilaterally, and often at short notice, delay (or even suspend) the transfer of the settlement monies to the merchant’s account. They may do this where, for example, they have concerns that the merchant’s business is in difficulty and wish to mitigate any potential chargeback claims made by customers with unfulfilled contracts. The complaint from merchants is that this action may in itself end up being the cause of a business’ problems. Whilst the payment processors cannot withhold the settlement monies indefinitely, any significant delay can cause serious liquidity problems for a merchant and can be enough undermine the business entirely – this certainly appears to have been an issue for Flybe in recent months, and is one that its new owners have sought to address.

There has been no suggestion to date that the actions of payment processors constitute breaches of the contractual terms between the parties, but the very fact that they are in a position to insist upon such terms suggests that the balance of power may have shifted a little too far in the payment processor’s favour. Of course, merchants are free to shop around to get the best deals, and the fintech sector has certainly produced a number of different participants, but consolidations in the market over the last year or so have limited merchants’ options somewhat and the big players continue to dominate the space.

Plainly, payment processors are entitled to protect themselves against the risk of significant exposure when a business fails. However, it could be said that at least of proportion of that risk should already be priced into the fees that they charge their merchant customers. There is also always the option for payment processors to decide not to take on clients if they deem the credit risk of a particular merchant to be too great.

The result of the practice by payment processors of delaying settlement payments in order to build up, often very significant, and unnecessary, financial buffers, is that merchants are finding themselves in serious difficulties with their cash flows in what may otherwise be perfectly viable businesses.

The issue is certainly not limited to the aviation sector. Retailers have been enduring a torrid time on the high street (and indeed online), with HMV only recently emerging from administration, hot on the heels of House of Fraser and Evans Cycles. Undoubtedly cash flow was a factor for all of these retailers at some point and payment processors will now have an important role to play in their restructuring plans, and potentially their long-term trading viability and with it the jobs of their employees.

Do payment processors now hold too much sway in the market? Potentially, and, if regulators agree, we may find that they consider this to be an area of interest in the not too distant future.