Dealing a heavy blow to MasterCard, the
European Commission (EC), the executive branch of the European
Union (EU), has ruled that its multilateral interchange fees (MIF)
for cross-border payment card transactions with MasterCard and
Maestro-branded debit and consumer credit cards in the European
Economic Area (EEA) violate rules on restrictive business
practices. MasterCard must comply with the order to withdraw its
MIF by June 2008 or face the possibility that the EC may impose
daily penalty payments of 3.5 percent of its daily global turnover
in the preceding business year.
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The EC’s ruling came after a four-year investigation by the EC
which first sent MasterCard a statement in October 2003 detailing
its concerns that its MIF were too high and lacked transparency.
According to the EC MasterCard’s MIF applies to virtually all
cross-border card payments in the EEA and to domestic card payments
in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxemburg,
Malta and Greece. About 45 percent of all payment cards in the EEA
either bear a MasterCard or a Maestro logo.
MIF not illegal
According to the EC, MasterCard’s MIF charged on each MasterCard
debit card payment at a merchant outlet ranges between 0.4 percent
of the transaction value increased by €0.05 ($0.075), 1.05 percent
increased by €0.05 for payments with Maestro debit cards, and
between 0.80 percent and 1.20 percent for transactions with
MasterCard consumer credit cards. Fees are retained by the issuing
(customer’s) bank and charged to the acquiring (merchant’s) bank
which then takes this cost element into account when setting its
prices to merchants.
The EC stressed that while MIF are not illegal an open payment card
scheme such as MasterCard’s MIF is only compatible with EU
competition rules if it contributes to “technical and economic
progress and benefits consumers”. However, the EC concluded that
MasterCard submissions that included an oral hearing in November
2006 had failed to submit the required empirical evidence to
demonstrate any positive effects on innovation and efficiency which
would allow passing on a fair share of the MIF benefits to
consumers.
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By GlobalData Commenting, the EU’s Competition Commissioner Neelie
Kroes said: “Multi
lateral interchange fee agreements such as MasterCard’s inflate the
cost of card acceptance by retailers. Consumers foot the bill, as
they risk paying twice for payment cards: once through annual fees
to their bank and a second time through inflated retail prices paid
not only by card users but also by customers paying cash. The
Commission will accept these fees only where they are clearly
fostering innovation to the benefit of all users.”
In its conclusion the EC stressed that the MasterCard decision will
support the creation of the Single Euro Payments Area (SEPA) by
fostering greater competition in the cards market and preventing an
artificial increase of merchant fees due to an “illegal pricing
mechanism” such as MasterCard’s MIF.
A warning from MasterCard
MasterCard is not taking the situation lying down and has announced
that while it will comply with the EC’s decision it will appeal
against the ruling. Its appeal looks set to be founded on the
benefits of allowing market forces to dictate the setting of
interchange fees and the damage to consumer choice and innovation
in the payments industry regulatory intervention may cause.
“We are disappointed that after years of review of MasterCard
Europe’s transparent, default cross-border interchange fees, the
Commission failed to appreciate that without a mechanism to fairly
share costs among all the participants in a payment system that
functions across Europe and around the globe, consumers will be
hurt,” said MasterCard Europe’s president Javier Perez.
He continued that forcing drastic reductions in interchange fees
across Europe could delay implementation of SEPA, reduce incentives
for payment institutions to expand into new domestic European
payments markets and lead to cutbacks on necessary investments in
new services and technology.
MasterCard also stressed the example set by Australia, the only
other jurisdiction in the world that regulates interchange fees.
“The Commission has also ignored the experience in Australia where
regulators forced down interchange fees, resulting in higher
cardholder charges, reduced card features and benefits, less
competition, and diminished investment and innovation,” said Perez.
“Not surprisingly, the Australian payment card business has seen
slower growth since regulation was introduced.”
Visa’s position vague
MasterCard’s stance received the full backing of the
American Bankers Association, the industry body’s president and CEO
Edward Yingling terming the EC’s decision disappointing and failing
to take adequate account of the benefits that retailers receive
from the worldwide card payment system. Yingling also pointed to
the negative impact of arbitrary limits on interchange fees in
Australia.
MasterCard noted that the EC’s order appears to call for an even
greater reduction in interchange fees than occurred in
Australia.
Visa’s position following the EC’s ruling on MasterCard’s MIF is
unclear. In 2002 the EC approved Visa’s MIF system for a limited
period following Visa’s offer of substantial reforms including a
progressive reduction in fees from an average of 1.1 percent to 0.7
percent. However, on 1 January 2008 Visa became, as the EC termed
it, “responsible to ensure that its system is in full compliance
with EU competition rules.”
What the rules are, are however unclear as far from the EC’s ruling
against MasterCard providing clarity its decision has left the
entire payments industry in doubt as to what interchange fees the
Commission will allow, said Perez.
Addressing a media briefing Kroes said Visa’s fee structure would
be re-assessed.
