The European Commission has ordered MasterCard to withdraw its 'interchange fees' within six months or face possible daily penalty payments of 3.5 percent of its daily global turnover.
The decision brings to an end – at least for now – nearly a decade of investigation by the commission of MasterCard's so-called 'interchange fees' - charges used by financial institutions and payments networks to balance transactions between customers' and consumers' banks. The commission has traditionally seen them as a “tax on consumption” but the industry has opposed this rhetoric, stating that they are a vital cog in the payments system.
Crucially, the commission has stated that the fees are “not illegal as such” however they are only compatible with EU competition laws if they contribute to “technical and economic progress and benefit consumers”.
The commission found, however, that “MasterCard 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 [interchange fee] benefits to consumers.”
In short, MasterCard failed to gain an exemption under Article 81(3) because the model underlying MasterCard's fees is based on “unrealistic assumptions” and benchmarks which are “largely arbitrary and inflated”.
It will now be up to MasterCard to come up with a fresh calculation of interchange, measuring the specific costs and proving that these are key to the functioning of an efficient and innovative payments system. As yet, the commission has given scant guidance on what this may mean in practice.
The decision also gives other emerging schemes – such as the newly founded EAPS – some breathing space to apply an interchange fee if they can convince the commission of its consumer benefit.
Usually, antitrust decisions apply immediately but in this instance the commission is allowing a transition period of six months to allow the industry to adjust and ease the path for some businesses previously covered by a revenue stream which is now facing uncertainty. The commission calls this an “exceptional measure”.
Likely appeals to the European Courts
But today's decision will not spell the end for the fees as the case is likely to go to the courts and the precedent will be scrutinised as the industry seeks to construct Europe's single payments area (SEPA) – a project to design a legal and technical network to complement Europe's single currency.
While Visa opted for a consensual approach a few years ago, negotiating an exemption from theantitrust investigation with the European Commission, MasterCard has held firm, believing that US antitrust case-law establishes that a “four-party payments system” – such as Visa or MasterCard – does not constitute price-fixing 'per se'.
The card network argues that cases in the US federal courts such as Nabanco v Visa and BMI v CBS have established that the collective setting of fees among competitors – required to bring a product to market – does not constitute price-fixing.
Visa's exemption expires at the end of the year but the provision will roll over into 2008 pending negotiations. While the MasterCard decision is not addressed directly to Visa, it will likely set the framework for future talks, establishing the commission's position on what kind of fees are allowed and how they can be calculated.
MasterCard has stated that an appeal is highly likely as well as a request to the courts for interim suspension of the decision. While it may feel confident about its legal challenge, some think that the quest for interim relief from implementing the decision may be over-optimistic.
Not only is it traditionally difficult to convince the courts of such a case, but when the commission's decision concerns exclusively cross-border interchange fees – about 3 percent of MasterCard's business – it may be hard for the company to convince the courts that implementing the decision will cause irreparable harm.
That said, MasterCard's default interchange fee for domestic credit card transactions is actually the same in eight EU countries as its cross-border fee. So, the impact of the commission's decision will likely be broader than just 3 percent of the company's business.
National cases and the effects
The fear amongst payments schemes, however, is that the commission's decision will become the template for national competition authorities, many of which have brought domestic interchange fees under the regulatory microscope.
For example, the UK's Office of Fair Trading has its own investigation which is almost a carbon-copy of the commission's case, and Germany's 'Bundeskartellamt' has a pending complaint from the hospitality industry which is currently under preliminary investigation. Other countries such as Austria and Hungary are known to be looking at the fees.
Many believe that such authorities will translate the commission's decision to domestic markets meaning that, while tomorrow's MasterCard decision may only affect 3 percent of the payments industry, within a few years it could become the standard.
Meanwhile, countries like Denmark – which already regulates interchange – and Ireland and Norway are unlikely to witness vast changes off the back of the decision. Furthermore, Sweden, which concluded an investigation into interchange a year ago without finding an infringement, will also have no immediate concerns.
Belgium also looked at the fees as part of an Article 82 investigation into Banksys which concluded in August 2006, and a hard-hitting case brought by the Polish regulators is pending in the appeal courts.
Poland faces a slightly more complicated situation where the fees have already resulted in a 40 million euro fine against 20 banks and are currently being appealed in court. The Polish ruling is considered to be one of the more hardline approaches to interchange and the regulator will be watching closely to see which course the commission plots.
Meanwhile, some regulators, such as those in Finland and the Netherlands, seem more concerned about the bigger picture with national card schemes being swallowed up by the international schemes – Visa and MasterCard – as SEPA takes shape.
As a parting shot, the commission also states that its investigation is not over yet since it has not reached a final conclusion on MasterCard's interchange fees applying to commercial cards.
By Lewis Crofts
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