Introduction
Interchange fees
Competition law concerns
MasterCard and Visa cases
Proposal for regulating interchange fees
On July 24 2013 the European Commission adopted a package with new rules on payment services. The package includes a proposal for a new Payment Services Directive and a regulation on interchange fees for card-based payment transactions.
For many years the commission has been in a fierce battle with MasterCard and Visa over what it believes to be excessively high interchange fees.(1) With the present proposal the commission appears to have opted for regulatory intervention.
It is exceptional for the commission to resort to regulation to address issues that fall squarely within the scope of its competition law regime and tools. In this case, the commission found that despite the various competition proceedings, the European payment card sector remains fragmented and interchange fees vary widely between member states. Commissioner Almunia explains that the:
"ad hoc commitments achieved through our antitrust enforcement cover only certain types of card payments and deal only with specific market players. Interchange fees on most domestic transactions still vary widely across member states, fragmenting the internal market. Ex ante regulation is therefore required in order to cap multilateral interchange fees for everybody and everywhere in the EU."
This is hardly an explanation or justification for the use of such an interventionist measure. A regulation which applies equally in all member states does not recognise characteristics of national payment card markets that may vary significantly and may not be constant over time.(2) Neither does the regulatory measure allow room for an economics-based approach, which would be in line with what the commission generally advocates with regard to its competition law policy. Price regulation goes against the principle of free competition protected by competition law and it is therefore justifiable only in exceptional circumstances.
The commission's proposal on interchange fess concerns only must-take consumer debit(3) and credit(4) cards. These cards are the most widely used and it is generally difficult for merchants to refuse payment with these cards.
Interchange fees or multilateral interchange fees are (multilaterally) agreed fees payable between the consumer's bank (the bank having issued the card (issuing bank)) and the merchant's bank (the bank acquiring or accepting the card payment (acquiring bank)), designed to share the cost of processing payment card transactions. For each transaction paid by card, the acquiring bank pays a fee to the issuing bank – the interchange fee. For handling the payment transaction, the merchant pays the acquiring bank merchant service charges, which are largely made up of the interchange fee. As a result, it is the merchant which pays the interchange fee agreed between the acquiring and issuing bank. The merchant typically passes the cost of the interchange fee onto the consumer, leading to higher prices for consumers.
This set-up is known as a four-party payment card scheme, and applies equally to debit and credit cards.
The alternative three-party card scheme involves only one bank (or payment service provider),(5) acting at the same time as issuer and acquirer. Consequently, there is no interchange fee paid between banks.
Three-party schemes are often more expensive for merchants, as merchant service charges tend to be higher. These schemes have not agreed to regulated interchange fees and merchants can refuse to accept them or add a surcharge.(6) Three-party schemes are excluded from the scope of the proposed regulation.(7)
The commission and national competition authorities believe that banks and card schemes have a vested interest in increasing, or at least maintaining, the revenues from card payments – including from interchange fees – which results in upward rather than downward pressure on prices charged to merchants and consumers (reverse competition).
For the same reason, interchange fees restrict market entry, as they function as a minimum threshold to convince issuing banks to issue new cards or other payment instruments. It is particularly difficult for lower-priced market entrants, as banks are not inclined to support cards that generate less income from lower interchange fees.
Also, the widely diverging levels of interchange fees applicable in different member states result in a fragmented European market, with merchants disincentivised from looking beyond their own member state for the provision of payment services.
The commission's proposed regulation is based largely on its cases against MasterCard and Visa.
MasterCard
On December 19 2007 the commission issued a prohibition decision against MasterCard and concluded that its multilateral interchange fees applied to cross-border transactions infringed EU competition law. The commission held that MasterCard's multilateral interchange fees restricted price competition, as the fees (charged between banks belonging to the MasterCard network) were ultimately passed on to merchants and consumers, and therefore did not result in competition between banks.
MasterCard appealed the decision and in April 2009 offered undertakings to address the commission's concerns, including:
- reducing multilateral interchange fees for cross-border transactions to a cap of 0.2% for debit cards and 0.3% for credit cards;
- undoing price increases that MasterCard had introduced to compensate for the effects of the commission's 2007 decision; and
- making its fee structure more transparent, un-blending card fees (according to card type used – consumer credit, commercial or debit card), and discontinuing tying of certain consumer credit and debit cards (allowing merchants to choose debit cards independently from credit cards).
In May 2012 the General Court upheld the commission's decision and rejected the "objective necessity" of multilateral interchange fees to the payment system. MasterCard appealed to the European Court of Justice. The advocate general's opinion is due in November 2013 and the judgment is expected early 2014.(8)
Visa
In March 2008, for reasons similar to those which triggered the MasterCard investigation, the commission opened formal proceedings against Visa in relation to the multilateral interchange fees applied to cross-border transactions within the European Economic Area.
In December 2010 Visa offered commitments to cap its multilateral interchange fees for debit card transactions at 0.2% and make its fee structure more transparent. In July 2012 the commission sent a supplementary statement of objections to Visa relating to credit card multilateral interchange fees and cross-border acquiring rules (obliging acquirers to pay multilateral interchange fees in the country where the transaction is made, thereby discouraging cross-border trade). In May 2013 Visa offered commitments including a 0.3% cap on credit card multilateral interchange fees and a reform of its system on cross-border acquiring, allowing banks to apply a reduced cross-border interbank fee when competing for cross-border clients. These commitments are currently being market tested by the commission.
Proposal for regulating interchange fees
The commission proposes to introduce maximum interchange fee levels for transactions in the European Union with payment cards that are widely used by consumers, and where both the issuing and acquiring banks are established in the European Union. Commercial (or corporate) cards (payment cards issued to undertakings, public sector entities or self-employed individuals for business expenses), cash withdrawals at automated teller machines and transactions with cards issued by three-party payment card schemes are excluded from the proposal.
Article 3 of the proposed regulation provides that within two months of the regulation entering into force, payment services providers (including banks) shall not offer or request for cross-border debit card transactions a per-transaction interchange fee or other agreed remuneration with an equivalent object or effect of more than 0.2% of the value of the transaction.
For similar cross-border transactions with credit cards, the interchange fee may not exceed 0.3% of the value of the transaction.
Twenty-two months later (two years after the regulation has entered into force), these fee caps will apply to all card transactions, including domestic transactions (Article 4).
The proposed fee caps are the same as those proposed by Visa and MasterCard as part of their commitments. The fee caps are set in accordance with the merchant indifference test (ie, at a level at which a merchant would be indifferent between being paid by card or in cash).The regulation (Article 5) also provides that the interchange fee caps cannot be circumvented by any other compensation to allow the issuing bank to recoup any loss in revenue as a result of the lower interchange fees.
In addition to the interchange fee cap, the regulation includes new rules for payment card-related practices in general:
- Licensing – licences for issuing payment cards or acquiring payment card transactions cannot contain territorial restrictions in the European Union. Equally, a country-specific licence cannot be required to operate across borders within the European Union (Article 6).
- Separation of payment card schemes and processing entities – four-party card schemes must be separated from processing entities and may not discriminate between partners. Card schemes shall allow for single transactions to be processed by different processing entities. Any territorial discrimination shall be prohibited and systems of processing entities must be technically interoperable with other systems of EU processing entities (Article 7).
- Co-badging and choice of application – an issuer is allowed to have two or more different brands of payment instrument on a single card or device (co-badging). Any rules in relation to co-badging must be non-discriminatory and differences in treatment must be objectively justifiable. The consumer can freely choose the payment application at the point of sale and this cannot be dictated by the issuer, including through technical means (Article 8).
- Un-blending – acquiring banks shall not impose a single price, but rather offer and charge individually for different categories and brands of payment card, unless the merchant has requested blended charges. Agreements between acquiring banks and merchants shall include individually specified information on merchant services charges, interchange fees and scheme fees (Article 9).
- Honouring all cards – merchants will no longer be obliged to accept other cards and payments instrument issued by other issuing payment service providers within the framework of the same scheme, except if they are subject to the same regulated interchange fee (Article 10).
- Steering rules – merchants cannot be prevented from steering consumers to use specific payment instruments preferred by the merchant. Payment schemes and payment service providers cannot prevent merchants from informing consumers about interchange fees and merchant service charges (Article 11).
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Information for merchants on individual payment transactions – the proposed regulation states that the payment service provider must provide the following information to the merchant after each individual transaction:
- the reference to identify the transaction;
- the amount of the transaction in the merchant's currency; and
- the amount of any charges, indicating the interchange fee separately (Article 12).
The commission aims to have an agreement on the Payment Services Directive and the proposed regulation by Spring 2014. The ambitious timing reflects the commission's desire to have the payments legislative package adopted before the European Parliament elections in 2014.
For further information on this topic please contact Joost Haans or Charles Paillard at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email ([email protected] or [email protected]).
Endnotes
(1) Similar investigations and proceedings have been conducted and are ongoing in a number of other jurisdictions – including Australia, France, Germany, Hungary, Italy, Latvia, Poland, the United Kingdom and the United States.
(2) According to the proposal, four years after their entery into force, the European Commission will review the implementation and consider the appropriateness of the interchange fees (Article 16). A four-year period seems too long to consider relevant developments in a timely fashion.
(3) A debit card is a payment card that does not allow payment transactions which exceed the balance of the account.
(4) A credit card enables card holders to make purchases and withdraw cash up to a prearranged credit limit.
(5) A payment service provider is an entity, such as a bank or payment card company, that provides payment services as listed in Directive 2007/64/EC.
(6) According to the Payment Services Directive (Article 55), surcharges are not allowed for card payments covered by the proposed regulation.
(7) Three-party schemes that issue licences to payment service providers for the issuing of cards and acquiring of transactions are not pure three-party schemes and resemble a four-party system. Such schemes may be covered by the caps on interchange fees.
(8) In April 2013 the commission opened new formal proceedings against MasterCard in relation to its inter-regional fees (applicable to payments made from non-EEA countries), cross-border acquiring rules (prohibiting merchants from benefiting from better conditions offered in other member states) and other internal rules such as the "honour all [MasterCard] rule", forcing merchants to accept all types of MasterCard cards.
