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30 October 2009
Recently, the European Commission and the Italian Competition Authority have both examined the retail banking sector. In particular, four-party systems - also termed open card payment systems - have been analyzed and a debate is underway about whether the system of interchange fees should be rethought.
Open payment systems provide benefits for both consumers and retailers. Customers benefit from easy access to money, in a more convenient form than cash, and their losses are limited if a card is stolen or lost. Moreover, they are normally granted an interest-free period before payment is due. Retailers can operate more effectively by reducing the costs of managing cash and the risk of theft, accounting errors and fraud.
However, the commission and the authority have focused on anti-competitive concerns relating to multilateral interchange fees - that is, the transfer payments between two banks when a cardholder who is a customer of a bank makes a purchase from a retailer that is a customer of another bank.
In 2007 the European Commission expressed concern at the results of a two-year inquiry into the retail banking sector, observing that competition between payment methods may be distorted where banks have an incentive to promote the use of payment methods that carry high interchange fees. In March 2009 the commission and the European Central Bank published a joint statement clarifying certain principles underlying direct debit in the future Single Euro Payments Area, and commenting that "there appears to be no clear and convincing reason for 'per transaction' multilateral interchange fees to exist after December 31 2012".
Following a landmark case in 2002 regarding Visa's cross-border multilateral interchange fees, in December 2007 the commission ruled that MasterCard's practice of charging interchange fees breached antitrust laws. The commission held that MasterCard's fees restricted price competition between acquiring banks, since they prevented retailers from contracting with the acquiring bank that offered the best price for its services. Furthermore, the high fees could not be justified on economic grounds under Article 81(3) of the EC Treaty. The commission ruled that the system of fees constituted a decision by an association, notwithstanding the fact that from May 2006 the role of determining cross-border fees was transferred from member banks to a separate organization. However, multilateral interchange fees were not declared illegal and the commission did not set a level above which they become so. MasterCard has appealed, but it also agreed to a temporary reduction in charges on card payments across Europe from July 2009. Its new fee mechanism results in fees that are substantially lower than those found to be in breach of EU antitrust rules.
In the past few years the Italian Competition Authority has followed the commission's lead. Since 2005, when responsibility for the application of competition law to banks was transferred from the Bank of Italy to the authority, various competition issues in relation to the retail banking sector have been investigated.
In 2006 the authority launched a sector inquiry into the fees charged for funding services. The authority has also started proceedings in the retail banking sector. Two cases were closed after the authority accepted commitments. The first, in April 2007, involved interbank fees on payment services and bank operations. The second, in April 2009, related to interbank cheque-processing charges and maximum cheque-clearing periods.
In the first case the Italian Banking Association (ABI) and the card issuer organization CO.GE.BAN proposed a substantial reduction in interbank commissions by applying a new calculation method based only on direct costs, thus excluding indirect costs and mark-ups. Moreover, the parties agreed to carry out assessments every two years to determine whether cost savings allowed for a further reduction in commission charges.
In the second case the ABI and PattiChiari, a banking consortium, proposed commitments that mainly involved cutting interbank costs for cheques and reducing clearing times for client funds. The association agreed to eliminate commissions on truncated personal cheques and to reduce the commission on cheques returned unpaid by clearing houses. The authority held that the commissions in question were the most lucrative for the banks and thus most affected the cost to customers of using cheques. However, three forms of commission continued to be applied, as they were deemed to be justified on the grounds of economic efficiency. PattiChiari offered undertakings to reduce maximum clearing periods and agreed to provide customers with information regarding collection periods for the banks in its network.
In both proceedings the commitments allayed the authority's concerns by establishing fairer means of determining costs and providing an incentive for greater efficiency.
In September 2008 the authority decided to open formal proceedings against MasterCard in respect of its multilateral interchange fees. The authority's approach in the proceedings, which are still ongoing, is similar to that previously adopted by the commission. It shares the commission's view that multilateral interchange fees should be regarded as the result of a decision by an association of undertakings. Moreover, the authority agrees that multilateral interchange fee agreements may appreciably restrict competition, since they artificially inflate the base on which acquiring banks set their charges to retailers, which in turn lose the countervailing power that they would otherwise exert over banks if no fee were charged. It considers that MasterCard and its licensee banks profit from high interchange fees. MasterCard can offer issuing banks incentives to issue cards, which increases the number of potential transactions on which the banks dealing directly with retailers can levy a merchant fee.
However, in some respects the Italian proceedings diverge from the commission's position. Most significantly, they deal only with Italian transactions, not cross-border transactions. In addition to MasterCard, nine other banks are involved in the investigation. The authority is looking at multilateral interchange fees from two perspectives: like the commission, it is investigating the horizontal fixing of a fee applied by all banks whereby the MasterCard consortium determines fees in Italy, but it has also extended its analysis to the vertical aspects. In particular, the authority is considering the effects of the agreements in the relation between MasterCard and the acquiring banks, as interchange fees are made effective through banks consent. Furthermore, the authority seems to be interested in examining the relation between interchange fees and merchant fees.
The authority's formal proceedings are in line with the commission's approach. However, its proceedings against MasterCard and others differ from the commission's investigation in scrutinizing vertical elements of the banks' conduct. This approach may anticipate an argument on which MasterCard is likely to rely in its appeal against the commission's decision. The definition of MasterCard's multilateral interchange fee system as a decision by an association of undertakings may be contested before the European Court of First Instance. Extending the scope of the proceedings to the vertical agreements between MasterCard and the individual acquirer banks could provide flexibility for the authority if the court accepts MasterCard's argument.
A final decision in the authority's proceedings is expected by July 2010, unless the period is extended. As in the previous cases concerning payment services, the authority could still close proceedings by accepting commitments, although the present case shows some peculiar features. A possible remedy would be a proposal by MasterCard to reduce multilateral interchange fees. Such commitment would in principle overcome the authority's antitrust concerns, although MasterCard would need to be careful not to jeopardize its position both in its appeal against the commission's decision and in the other member states' proceedings.
As the MasterCard decision is under scrutiny before the European Court of First Instance; therefore, a proposal of commitments to the authority would have to coordinate with this proceeding. Furthermore, various member states have also started investigations concerning the domestic interchange fees of MasterCard, Visa and domestic card schemes. Consequently, the authority's decision may constitute a benchmark for other authorities in deciding their cases.
For further information on this topic please contact Alberto Pera or Giulia Codacci Pisanelli at Gianni Origoni Grippo by telephone (+39 06 478 751), fax (+39 06 487 1101) or email (email@example.com or firstname.lastname@example.org).
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Giulia Codacci Pisanelli