The OFT's view
The OFT ruled that a collective agreement between members of
MasterCard UK Members Forum, including most major banks, setting a
multi-lateral interchange fee paid on virtually all purchases in
the UK made using UK-issued MasterCard credit and charge cards
between 1st March 2000 and 18th November 2004
restricted competition and infringed Article 81 of the EC Treaty
and the Chapter I prohibition of the Competition Act.
The EC Treaty and the Competition Act 1998 both prohibit
anti-competitive agreements. Article 81 of the EC Treaty and the
Chapter I prohibition of the Competition Act apply to agreements
which prevent, restrict or distort competition.
When a credit card is used, a small percentage of the purchase
price is paid by the merchant to its bank. The merchant’s bank then
pays a fee – the interchange fee – to the cardholder’s bank. In
2004, over 700 million purchase transactions were made in the UK
using MasterCard cards with a total value of £42.7 billion. An
interchange fee was charged on each of these transactions as a
percentage of total transaction value.
MasterCard says this interchange fee is necessary, that it is
the mechanism by which operators of the MasterCard system are able
to balance the costs and revenues between the cardholder’s bank and
the merchant’s bank. In particular, MasterCard argues that it
allows the cardholder’s bank to recover a portion of its costs from
the merchant, who is one of the principal beneficiaries of credit
cards.
But the OFT says that the interchange fee agreement had adverse
effects on competition within the MasterCard scheme and also in
relation to other payment systems. It considers that the collective
agreement deterred issuers of MasterCard cards and merchant
acquirers of MasterCard transactions from competing by negotiating
their own interchange fees, different from the MasterCard UK
Members Forum's multi-lateral interchange fee – what it called the
MMF MIF.
In turn, the OFT says this reduced competition between merchant
acquirers because the MMF MIF – as a standard cost for merchant
acquirers – directly affected the merchant service charges paid to
merchant acquirers by retailers accepting MasterCard cards.
The OFT also found that the MMF MIF was used to recover
'extraneous costs' for services which were not necessary for the
operation of the MasterCard scheme as a mechanism for transmitting
payments, such as the costs of the interest-free periods provided
by card issuers.
Recovering extraneous costs through the MMF MIF resulted in
merchant acquirers paying a higher interchange fee to card issuers
than if the MMF MIF had been used just to recover the costs of the
payment transmission mechanism. This fee was passed on to retailers
by the merchant acquirers through higher merchant service charges.
Consumers, including those who do not use MasterCard cards,
ultimately picked up the cost for the higher interchange fee
through higher retail prices, it said.
It ruled that, as an increase in the standard costs faced by all
merchant acquirers, the higher MMF MIF reduced the ability of
merchant acquirers to compete on the amount of merchant service
charges charged to retailers.
The inclusion of extraneous costs in the MMF MIF provided a
large flow of revenue to card issuers and the incentive to induce
customers to hold and use MasterCard cards, for example, through
loyalty schemes, advertising and funding the provision of an
interest-free period, according to the OFT. This distorted
competition between the MasterCard scheme and alternative methods
of payment such as debit cards, cheques or cash, it says. The
recovery of extraneous costs through the MMF MIF also led to a
distortion of competition between card issuers within the
MasterCard scheme.
Sir John Vickers, OFT Chairman, said:
"The parties to this collective agreement
set the interchange fee to derive revenues from retailers and their
customers over and above the costs of providing the payment
services. This unduly high interchange fee was like a tax on UK
consumers."
MasterCard introduced new arrangements for setting the
interchange fee on 18th November 2004. They currently apply to all
UK MasterCard transactions. The OFT has concerns that under the new
arrangements the interchange fee applying to UK transactions may
still be set with reference to extraneous costs and used to recover
these costs. The OFT expects to start an investigation into the new
arrangements for setting the fallback interchange fee applying to
UK MasterCard transactions unless this concern is addressed by
MasterCard.
MasterCard's view
MasterCard expressed its "strong disagrement" with today's
conclusions from the OFT. It denied infringing the Competition Act
and the EC Treaty.
John Bushby, General Manager, MasterCard Northern Europe, said:
“We’re very disappointed by the OFT’s decision after five and a
half years of deliberations and all the detailed evidence we have
provided to explain the need for MasterCard’s default interchange
fees in the UK.”
Bushby added: “We have consistently shown not only that default
interchange fees have paved the way for a large number of new
entrants into the UK credit card business over the past decade, but
also that the UK payment system is one of the most competitive in
the world."
The OFT complained that the interchange includes funds to cover
the interest free period, funds described by the OFT as
“extraneous” costs. But Bushby argued that the interest free period
"is in fact integral to the credit card system and it is highly
valued both by retailers and cardholders”.
He continued:
“For the OFT to claim that the interchange
fee agreement either reduced competition or disadvantaged consumers
or retailers is simply wrong. Consumers benefit from greater choice
as more retailers accept credit cards, and retailers of all sizes
benefit as card usage expands. As such, today’s OFT ruling is bad
news for both healthy competition and the economy.”
“Today’s ruling also fails to recognise that
interchange fees have contributed to significant expansion in use
of new technology and a considerably more sophisticated and secure
means of payment, tightening up the way in which transactions are
recorded, preventing fraud, and helping to place the UK at the
forefront of the e-commerce drive. These vital benefits seem not to
have been properly taken into consideration by the OFT.”
Regarding the OFT's suggestion that default interchange fees
represent a "tax" on consumers, Bushby argues that every cost that
a retailer has could likewise be called a "tax". "It’s another
example of the hazards of trying to analyse the issue of
interchange fees in isolation," he says. "Cards are a more
efficient, more secure and more convenient means of payment than
cash for both consumers and retailers, something today’s ruling
fails to recognise."
MasterCard says it has always argued that reducing interchange
fees by regulatory intervention will not make the costs of running
the system disappear. It claims that the UK’s 30 million MasterCard
cardholders would, under the circumstances the OFT seeks to impose,
be compelled to pay a greater proportion of the costs of the
system, to the ultimate detriment of cardholders and retailers.
Bushby continued:
“Consider what happened when the Reserve
Bank of Australia forced MasterCard and other four-party payment
systems to reduce interchange fees by nearly 50%: cardholder fees
increased, card benefits (such as loyalty programs) were reduced,
and retailers, so far as anyone can tell, pocketed the savings
rather than passing them along to consumers in the form of lower
prices. Worst of all, less efficient and more expensive
three-party systems (such as American Express) have been able to
increase their share of the business, since the Reserve Bank chose
not to regulate them. MasterCard observes that the OFT’s decision
today would, likewise, give three-party systems an unfair
competitive advantage.”
MasterCard believes that the OFT decision, in addition to
jeopardising competition will, if allowed to stand, lead to reduced
services to cardholders and to an increase in cardholder fees and
charges, and may even make it difficult for many consumers to get
credit cards.
It suggests that, in the long run, even retailers will suffer
from today’s decision. "Retailers are the primary beneficiaries of
a healthy credit card industry, given the importance of credit
cards in facilitating millions of consumer purchases and in
increasing retailers’ sales," it said. "Anything that undermines
the credit card business will, eventually, harm retailers."
MasterCard plans to appeal the OFT’s decision and says it will
continue to work to defend the interests of its cardholders,
retailers and members. It says it is confident that the OFT’s
decision will ultimately be reversed.
As for the fact that MasterCard last year took over from its UK
members the responsibility for setting default interchange fees,
MasterCard said that, if the OFT challenges the current
arrangements, MasterCard is equally confident that those
arrangements would ultimately be vindicated.
Visa
The OFT is currently investigating an agreement between Visa
members on the UK domestic multi-lateral interchange fee applying
to Visa transactions. While the OFT stressed that today's decision
makes findings only in relation to the MasterCard agreement, it
commented: "where the OFT applies competition law to other
interchange fee arrangements, it expects to do so in a consistent
manner."
