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European Commission blocks Mastercard fees 
Written by Adrie van der Luijt Wednesday, 19 December 2007 The European Commission has decided that MasterCard's 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 EC Treaty rules on restrictive business practices.
Neelie Kroes, European Commissioner for Competition Policy, said that the Commission has concluded that MasterCard's MIF, a charge levied on each payment at a retail outlet when a card payment is processed, inflated the cost of card acceptance by retailers without leading to any advantage for consumers or retailers.
Tax on consumption
She added that 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.
The latter is caused by retailers setting their prices taking account of all costs, including MasterCard's interchange fees. The European Commission, therefore, concluded that MasterCard's MIF acts as a "tax on consumption" paid not only by card users but also by customers using cash and cheques.
The decision requires MasterCard to withdraw its MIF within six months. If MasterCard fails to withdraw the fees or circumvents the Commission's decision, the Commission may impose daily penalty payments of 3.5 per cent of MasterCard's daily global turnover.
The Commission said its decision does not mean that all MIFs are illegal, but that MasterCard's particular MIF is illegal.
Technical and economic progress
A MIF in an open payment card scheme such as MasterCard's is only compatible with EU competition rules if it contributes to technical and economic progress and benefits consumers. Kroes said that MasterCard did not manage to convince the Commission that this is the case.
She added that it was not sufficient that a MIF simply increases the sales volumes of a scheme to the sole benefit of the member banks.
Rather, a MIF should contribute to objective efficiencies such as to promote more efficient payment means to the detriment of less efficient ones. The proceeds from a MIF should also not just increase bank's revenues; they should be clearly dedicated to the achievement of efficiencies.
Kroes said that if after the Commission’s decision MasterCard wanted to introduce a new MIF it would have to demonstrate clearly to the Commission that there would be advantages for both retailers and consumers, for example in terms of fostering innovation such as by improving the security of payments to combat card fraud.
Interchange fees
Banks have traditionally set MIFs without involving either merchants or consumers. The process of setting a MIF could benefit from more transparency. Both consumers and merchants should have a say.
Kroes added that the "interchange fees" concerned by this decision are fees which banks charge one another for transactions with a payment card.
For transactions in shops, the interchange fees are typically paid by the bank of the retailer to the bank of the cardholder. It is when interchange fees are decided multilaterally that they are referred to as a "MIF" or Multilateral Interchange Fee.
The MIF at stake in the present case is a charge levied on each cross-border payment with MasterCard and Maestro branded cards as well as on domestic payments in eight EU Member States (Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxembourg, Malta and Greece).
In some of these Member States, MasterCard's MIF constitutes up to 70 per cent of the price businesses pay for accepting credit cards.
Single European Payments Area
Kroes said that the economic importance of MasterCard's MIF - and of MIFs in general - cannot be underestimated.
In the EU, over 23 billion payments are made every year with payment cards, with a value exceeding 1350 billion euros. MasterCard's MIF is among the highest in Europe, set at more than 0.50 per cent for debit card payments and more than 1 per cent for credit card payments. This is twice as much as MasterCard charges in other continents such as Australia.
The first phase of the Single Euro Payments Area will start in a few weeks, at the beginning of 2008. Kroes said that the Commission’s decision will support the SEPA project in two ways.
She explained that the decision orders MasterCard to refrain from implementing its new "SEPA" interchange fees for the Eurozone. This prohibition will prevent that, in the area of payment cards, SEPA leads to permanent price increases to the detriment of consumers.
“In several member states, such as in the Nordic and the Benelux countries, efficient domestic payment schemes operate without a MIF at all. If banks replaced their existing debit cards with Maestro cards, MasterCard's MIF would inflate the cost of card acceptance in these countries,” Kroes said.
Confusion in the market
She added that the decision also provides more legal certainty.
“We know that some stakeholders are preparing the ground for new schemes. The question arises whether the Commission will once and for all prohibit all MIFs, including MIFs for new schemes in a start up phase. The answer is no. The decision cannot and does not prohibit MIFs as such. Every scheme and every MIF must be examined on its own merits,” Kroes concluded.
She said that there had been some confusion in the market, with many operators understanding that a SEPA compliant card scheme must cover all of the 31 SEPA countries. Only MasterCard and Visa could have met this requirement.
The European Payments Council decided on Tuesday to clarify that there is no such requirement. Kroes said that this means that domestic card schemes in Europe can develop into genuine competitors of the international schemes.
The Commission adopted an exemption decision concerning VISA's MIF in 2002. This exemption expires on 31 December 2007. Kroes said that from that moment on VISA will be responsible to ensure that its system is in full compliance with EU competition rules.
MasterCard Europe said that it will appeal to the European Court of First Instance against the Commission's decision. The company said that its decision to appeal is based on its firm conviction that market forces, not regulation, should drive key decisions such as the setting of interchange fees and retailers' choices over which forms of payment to accept.
The company also pointed to the experience in Australia, the only other jurisdiction in the world to regulate interchange fees, where it claimed consumers had ended up paying more for credit cards and were receiving fewer benefits and less choice.
Written by Adrie van der Luijt Wednesday, 19 December 2007 The European Commission has decided that MasterCard's 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 EC Treaty rules on restrictive business practices.Neelie Kroes, European Commissioner for Competition Policy, said that the Commission has concluded that MasterCard's MIF, a charge levied on each payment at a retail outlet when a card payment is processed, inflated the cost of card acceptance by retailers without leading to any advantage for consumers or retailers.
Tax on consumption
She added that 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.
The latter is caused by retailers setting their prices taking account of all costs, including MasterCard's interchange fees. The European Commission, therefore, concluded that MasterCard's MIF acts as a "tax on consumption" paid not only by card users but also by customers using cash and cheques.
The decision requires MasterCard to withdraw its MIF within six months. If MasterCard fails to withdraw the fees or circumvents the Commission's decision, the Commission may impose daily penalty payments of 3.5 per cent of MasterCard's daily global turnover.
The Commission said its decision does not mean that all MIFs are illegal, but that MasterCard's particular MIF is illegal.
Technical and economic progress
A MIF in an open payment card scheme such as MasterCard's is only compatible with EU competition rules if it contributes to technical and economic progress and benefits consumers. Kroes said that MasterCard did not manage to convince the Commission that this is the case.
She added that it was not sufficient that a MIF simply increases the sales volumes of a scheme to the sole benefit of the member banks.
Rather, a MIF should contribute to objective efficiencies such as to promote more efficient payment means to the detriment of less efficient ones. The proceeds from a MIF should also not just increase bank's revenues; they should be clearly dedicated to the achievement of efficiencies.
Kroes said that if after the Commission’s decision MasterCard wanted to introduce a new MIF it would have to demonstrate clearly to the Commission that there would be advantages for both retailers and consumers, for example in terms of fostering innovation such as by improving the security of payments to combat card fraud.
Interchange fees
Banks have traditionally set MIFs without involving either merchants or consumers. The process of setting a MIF could benefit from more transparency. Both consumers and merchants should have a say.
Kroes added that the "interchange fees" concerned by this decision are fees which banks charge one another for transactions with a payment card.
For transactions in shops, the interchange fees are typically paid by the bank of the retailer to the bank of the cardholder. It is when interchange fees are decided multilaterally that they are referred to as a "MIF" or Multilateral Interchange Fee.
The MIF at stake in the present case is a charge levied on each cross-border payment with MasterCard and Maestro branded cards as well as on domestic payments in eight EU Member States (Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxembourg, Malta and Greece).
In some of these Member States, MasterCard's MIF constitutes up to 70 per cent of the price businesses pay for accepting credit cards.
Single European Payments Area
Kroes said that the economic importance of MasterCard's MIF - and of MIFs in general - cannot be underestimated.
In the EU, over 23 billion payments are made every year with payment cards, with a value exceeding 1350 billion euros. MasterCard's MIF is among the highest in Europe, set at more than 0.50 per cent for debit card payments and more than 1 per cent for credit card payments. This is twice as much as MasterCard charges in other continents such as Australia.
The first phase of the Single Euro Payments Area will start in a few weeks, at the beginning of 2008. Kroes said that the Commission’s decision will support the SEPA project in two ways.
She explained that the decision orders MasterCard to refrain from implementing its new "SEPA" interchange fees for the Eurozone. This prohibition will prevent that, in the area of payment cards, SEPA leads to permanent price increases to the detriment of consumers.
“In several member states, such as in the Nordic and the Benelux countries, efficient domestic payment schemes operate without a MIF at all. If banks replaced their existing debit cards with Maestro cards, MasterCard's MIF would inflate the cost of card acceptance in these countries,” Kroes said.
Confusion in the market
She added that the decision also provides more legal certainty.
“We know that some stakeholders are preparing the ground for new schemes. The question arises whether the Commission will once and for all prohibit all MIFs, including MIFs for new schemes in a start up phase. The answer is no. The decision cannot and does not prohibit MIFs as such. Every scheme and every MIF must be examined on its own merits,” Kroes concluded.
She said that there had been some confusion in the market, with many operators understanding that a SEPA compliant card scheme must cover all of the 31 SEPA countries. Only MasterCard and Visa could have met this requirement.
The European Payments Council decided on Tuesday to clarify that there is no such requirement. Kroes said that this means that domestic card schemes in Europe can develop into genuine competitors of the international schemes.
The Commission adopted an exemption decision concerning VISA's MIF in 2002. This exemption expires on 31 December 2007. Kroes said that from that moment on VISA will be responsible to ensure that its system is in full compliance with EU competition rules.
MasterCard Europe said that it will appeal to the European Court of First Instance against the Commission's decision. The company said that its decision to appeal is based on its firm conviction that market forces, not regulation, should drive key decisions such as the setting of interchange fees and retailers' choices over which forms of payment to accept.
The company also pointed to the experience in Australia, the only other jurisdiction in the world to regulate interchange fees, where it claimed consumers had ended up paying more for credit cards and were receiving fewer benefits and less choice.
