The payment card industry is under attack from the European Commission, writes Michael Imeson.
What is it?
The European Commission (EC) is threatening to slash the income and reduce the power of payment card companies as part of its sector inquiry into competition in retail banking. Card issuers, card acquirers and card schemes will learn their fate by the end of the year when the final report is published.
Who dreamed it up?
The EC’s Competition Directorate General. It launched its inquiry into retail banking in June 2005, and is tackling the issue in two phases: payment cards and other retail banking services. It published its Interim Report I – Payment Cards this Apriland Interim Report II – Current Accounts and Related Services in July. In the area of cards, the EC says it found “significant market barriers which pushed up prices for firms and consumers”. In other retail financial services it says it uncovered “clear evidence of fragmented markets and of areas where markets are not working as well as they should”.
The EC has heard the views of all interested parties on the payment cards report, and is open to consultation on the second report until October 9. It will reach its final conclusions within the next few weeks.
What are its main provisions?
For payment cards, the EC alleges that:
- Card acquirers are charging retailers (merchants) and card issuers are charging consumers (cardholders) different fees in different EU states, meaning the single market is not working.
- Card issuers are charging card acquirers fees (“interchange” fees set by the card schemes) that are unjustifiably high or unnecessary.
- Card companies have erected technical barriers and other obstacles to raise costs for new entrants.
- Card companies are making “abnormally high” profits.
Unless card companies can persuade the EC otherwise its final report is likely to conclude that:
- Prices for merchants and cardholders should be “significantly reduced” in some states.
- Interchange fees should be lowered or even abolished.
- Under EC Treaty anti-trust rules, competition should be opened up to card acquisition and other services.
- The regulatory framework for payment cards should be amended.
What’s in the small print?
Joint ventures between merchant acquirers that it deems anti-competitive could be prohibited through anti-trust action and new regulation.
What does the industry say?
“In short, we believe that the Interim Report is based on incomplete, inaccurate and inconsistent evidence,” complains Javier Perez, president of MasterCard Worldwide’s European region. “For example, the commission’s perception that the payments card industry is excessively profitable is not supported by reliable data.”
He adds that the report’s statement that interchange fees are unnecessary “is not supported by any reliable evidence”. The European Banking Federation adds that eliminating interchange fees “may lead to a cost transfer from merchants to cardholders which could adversely affect the overall goal of the Single Euro Payment Area”.
How much will it cost?
The EC estimates that merchants in the EU paid more than €25bn in fees in 2005, so if merchant fees alone were cut by half, card acquirers would lose €12.5bn a year.
What do the regulators say?
Competition commissioner Neelie Kroes says: “The current system – where banks collectively set fees – amounts to a ‘tax’ on businesses and consumers.”
The law of unintended consequences
Reducing or abolishing interchange fees and shifting more or all of the costs from merchants to consumers “will simply lead to more cash and cheque transactions and to greater reliance on store cards”, says MasterCard.
Could we live without it?
Yes. And for Ms Kroes to call commercial fees a ‘tax’ is to truly mangle the language, especially as the fees are minuscule compared with the high levels of government VAT – typically 15%-20% – levied on consumer purchases throughout the EU. Let’s reduce VAT instead.
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