The European Commission (EC) has
published the final report of its competition inquiry into the
European retail banking sector, finding that there are “major
competition barriers” in retail banking and payment cards. However,
the EC has stopped short of proposing to scrap interchange fees.
The EC said that the outcome of the inquiry, which covered the
payment card industry, payment systems and retail banking products,
should boost retail banking competition in the run-up to the
creation of the Single Euro Payments Area (SEPA).

The report on the Sector Inquiry into Retail Banking stated that
the European payment card industry had total sales volume (with
card transactions) in 2005 of more than €1.35 trillion ($1.75
billion). The inquiry found several “significant competition
issues” in the market, which the EC said confirmed the need for
strong competition law enforcement in close co-operation with
national competition authorities. Discrepancies in merchant,
cardholder and interchange fees across member states highlighted
market fragmentation, the report stated.

Competition concerns

The report said that multilateral interchange fees raise
competition concerns, and that evidence shows that most domestic
debit card networks set significantly lower interchange fees than
international networks on debit card transactions, resulting in
generally lower interchange fees. The card networks claim that card
issuers typically bear the main costs of the payment system, as
most of the revenues are collected on the acquiring side as
merchant fees, which the card networks say results in cost
imbalances that need to be redressed by the interchange fee

Neelie Kroes, European Commissioner for Competition, said: “The
inquiry has found widespread competition barriers which
unnecessarily raise the cost of retail banking services for
European firms and consumers. The competition will make full use of
its powers under competition law to tackle these barriers in the
market for payment cards and elsewhere when they result from
anti-competitive behaviour.”

On the subject of interchange fees, Kroes said: “We are not arguing
for their abolition. But it is clear that the present level of
interchange fees in many of the schemes we have examined does not
seem justified… where the commission concludes that the level of
interchange fees is unjustified, then we will not hesitate to take
appropriate enforcement action on the basis of the EC Treaty’s
anti-trust rules.”

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Visa and MasterCard respond

In response to the report, Javier Perez, president of MasterCard
Europe, said: “We are pleased to see that the final report on the
Retail Banking Sector Inquiry clearly acknowledges the positive
role of the industry in creating SEPA and that the commission has
abandoned the idea of abolishing the interchange fee.”

But Perez warned that Neelie Kroes’s comments “still leave the
interchange fee in a cloud of uncertainty that could deter further
investment in SEPA initiatives. Banks may hesitate to continue to
invest in SEPA while the European Commission debates what to do
with interchange fees. While the commission still seems to believe
that interchange fees should be reduced significantly, it is
overlooking that zero or low-interchange fee schemes are often
based on price regulation, cross-subsidisation or operating losses.
More importantly, these schemes do not deliver the competition
throughout the value chain that SEPA aims to achieve.”

Meanwhile, Peter Ayliffe, president and CEO of Visa Europe, said:
“We will analyse the report carefully but are initially pleased
that EU Competition Commissioner Neelie Kroes is taking a more
measured approach and recognises our argument that there is a need
to continue the constructive dialogue between the commission and
the financial sector.”

Commenting on the role of interchange in a four-party payment
system, he added: “Setting interchange at commercially viable rates
is a vital element in our system. It ensures the effective
operation of a four-party payment system, to the benefit of
consumers, retailers and banks. Without interchange, it would be
difficult to deliver SEPA and it could lead to the end of cards for
all, as costs for consumers would increase. To ensure the success
of SEPA it is critical that we end the legal uncertainty, once and
for all, and establish a framework for interchange. We will
continue to work with the European Commission to agree on a common
approach that works for the benefit of all in Europe – consumers,
retailers and banks.”