At a time when card issuer fees are coming under
increased inspection across the globe, MasterCard has recently
announced that financial regulators in Hungary have begun a formal
investigation into the matter of its interchange fees within
Europe. The company said this probe by the Hungarian Competition
Authority follows an informal investigation it had been conducting
of MasterCard’s interchange fees since the middle of 2007.
MasterCard is the card brand accepted by the largest number of
merchants in Hungary.

The probe by the Hungarian Competition Authority
is only the most recent regulatory query into the issue of
MasterCard’s interchange fees. In a recent regulatory filing with
the US Securities and Exchange Commission (SEC), MasterCard said
that regulatory authorities and central banks in numerous countries
including Brazil, Colombia, Mexico, South Africa, Portugal,
Singapore and Switzerland are currently reviewing MasterCard’s
interchange fees and may seek to regulate them.

The European Commission has already firmly
reprimanded MasterCard, telling the company late last year to cut
its interchange fees within six months or face heavy fines (see CI
393); European Commissioner for Competition Neelie Kroes ruled that
the fees paid by the retailer to a card issuer were illegal and a
“tax on consumption”.
As card payments have become more crucial to
the functioning of a local economy, the level of interchange fees
between issuing banks and the retailer has come under increased
scrutiny. There have been rulings against MasterCard in relation to
the level of these fees in Poland – where they were judged to be
unlawful under Polish competition law – as well as in New Zealand,
where its Competition Commission filed a lawsuit seeking penalties,
and was subsequently joined in this by several of the country’s
largest merchants. MasterCard are currently appealing the Polish
In the US, merchants are seeking to reduce the
level of interchange fees through litigation, having filed up to 50
class action or individual suits that allege MasterCard’s
interchange fees violate federal antitrust laws. There have been
recent Senate investigations into credit card practices that will
include a consideration of interchange fees, and several state
legislatures in the US have either considered or already proposed
interchange legislation.
“Although we establish certain interchange
rates and collect and remit interchange fees on behalf of our
customers entitled to receive them, we do not earn revenues for
interchange fees,” said MasterCard in its filing with the
The company then suggested that if interchange
fees were to be lowered or abolished entirely, there would be a
significant reduction in the number of financial institutions that
were prepared to actively participate in a four-party payment card
system such as MasterCard, as well as a drop in the number of cards
issued and overall lower transaction volumes.

Amex lawsuit repercussions drag on

It is not just regulatory action related to interchange fees that
are plaguing MasterCard at the moment. Late last year, Visa and the
remaining bank defendants from the American Express antitrust
lawsuit reached an agreement with the claimant. This leaves
MasterCard as the sole remaining defendant. Amex is willing to
proceed to trial against MasterCard in September this year, and
believes that it can win.

This would mean that MasterCard would then be
liable for all the damages for all the acts of all named
defendants, which includes the profits foregone from lost merchant
discount revenues on bank-issued Amex cards, as well as lost
profits from decreased merchant acceptance and related lower fees.
Moreover, because these actions have been brought under US federal
antitrust laws, any actual damages would be trebled.
In its filing with the SEC, MasterCard claims
that such liability could have a material adverse effect on its
financial position, and in certain circumstances could cause it to
become insolvent.
Two of MasterCard’s key competitors – Visa and
Discover – have both recently overhauled their ownership structure,
potentially making them more efficient companies. Visa is currently
planning an IPO (see Visa IPO is largest in US history), while
Discover began trading on the New York Stock Exchange in July 2007
after its spin-off from Morgan Stanley.
As publicly owned companies, Visa and Discover
would have better greater transparency and access to capital
markets, making them stronger rivals for MasterCard.

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