MasterCard to drop ‘illegal’ fees

MasterCard Inc., the giant credit card company based in Purchase, said this week it will drop 40-year-old transaction fees that European regulators have declared illegal.

The European Commission said last December the company had to devise an alternative to its interchange fees that doesn’t harm consumers. The commission said MasterCard would face a daily penalty of up to 3.5 percent of sales if it did not revise the interchange fees.

The interchange fees are paid from bank to bank on each cross-border payment transaction. The fees cost consumers as much as 13.5 billion euros (about $21 billion) a year, according to the European Retail Round Table, a lobby group for 14 retailers.

MasterCard said it would drop the fees as of June 21, but will continue discussions with the commission about a better way to structure the fees.

The company is also appealing the commission’s decision to the European Court of First Instance.

“Retailers Say U.S. Should Follow European Ruling Ordering MasterCard to Withdraw Hidden Credit Card Fee ” (via NRF Businesswire release)

[Businesswire, Dec 19] The National Retail Federation today welcomed a ruling by the European Commission that hidden fees currently charged by MasterCard to process credit card transactions in Europe – similar to those that cost U.S. shoppers $40 billion annually – drive up costs for consumers in violation of EC rules and must be withdrawn within six months.

“European authorities say MasterCard is double dipping in Europe, and that’s exactly what we think both MasterCard and Visa are doing here in the U.S.,” NRF Senior Vice President and General Counsel Mallory Duncan said. “Visa and MasterCard are charging billions of dollars directly to consumers for all the fees that show up on their monthly statements, then they turn around and charge billions more from the hidden credit card fees they force merchants to include in the price of merchandise.”

“These fees drive up the cost of merchandise for shoppers while delivering little if any benefit commensurate with the billions charged,” Duncan said. “It’s time for this to stop, and authorities here in the United States should take the European ruling as a signal that it’s time to bring the same relief to U.S. consumers.”

The European Commission ruled today that so-called “interchange” fees charged by MasterCard and its banks violate EC Treaty rules on restrictive business practices and “inflated the cost of card acceptance by retailers without leading to proven efficiencies.” The commission ordered MasterCard to withdraw the fees within six months or face fines equivalent to 3.5 percent of global revenues.

The commission said the fees are “not illegal as such” and stopped short of saying MasterCard could not charge any interchange fee at all. But any replacement system of fees, even if lower, would be allowed under EC rules only if MasterCard could show that it “contributes to technical and economic progress and benefits consumers.”

EC Competition Commissioner Neelie Kroes said the fees drive up costs for consumers as well as retailers.

“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,” Kroes said in releasing the ruling. “The commission will accept these fees only where they are clearly fostering innovation to the benefit of all users.”

Averaging close to 2 percent in the United States, interchange is a fee Visa and MasterCard banks charge merchants every time a credit card or signature debit card is used to pay for a transaction. Visa and MasterCard collected more than $36 billion in interchange fees last year, up 17 percent from 2005 and 117 percent since 2001. This year, the amount is expected to top $40 billion, or about $350 per household. Interchange is largely unknown to most consumers because Visa and MasterCard don’t disclose the fee on monthly statements and prohibit merchants from disclosing it on receipts.

MasterCard interchange rates for cross-border transactions in Europe currently range from 0.8 percent to 1.2 percent of each transaction. Visa was not addressed in today’s ruling but reached an agreement with the EC in 2002 that restricts its fees – previously averaging 1.1 percent – to a maximum of 0.7 percent. That agreement ends at the end of 2007, and the EC said today that beginning in 2008 Visa will be “responsible to ensure that its system is in full compliance with EU competition rules.”

NRF is leading retailers’ fight against soaring interchange costs in the United States, and Duncan testified before the House Judiciary Committee’s Antitrust Task Force in July that collusion between banks when setting the fees has violated U.S. antitrust law. The hearing was the second time Congress has looked at interchange practices in the past two years following a Senate Judiciary hearing on possible antitrust violations in July 2006. In addition, approximately 50 federal antitrust lawsuits against Visa, MasterCard and their member banks have been consolidated in U.S. District Court in New York and are awaiting action.

The National Retail Federation is the world’s largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry’s key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees – about one in five American workers – and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. http://www.nrf.com

A Priceless Holiday Gift For Retailers and Consumers

WayTooHigh.com commentary on today’s European Commission ruling that MasterCard’s interchange fees imposed on retailers are illegal.   Visa has an exemption that runs through the end of the year.

• The EU decision is yet another rejection of the justifications offered by MasterCard and Visa for fixing of interchange fees paid by merchants.  

• The Australian RBA, the UK OFT, and the earlier EU decision on Visa all have rejected the networks’ excuses.

• This decision, and the others, will certainly get the attention of U.S. courts, regulators, and Congress. It has piqued interest by U.S. merchants and today marks the highest number of visits to WayTooHigh.com – The Credit Card Interchange Report.

• It is long past time for the networks to reduce or eliminate interchange fees in the U.S. rather than face crippling liability in U.S. courts.

• Remember, nearly 100 separate merchant interchange fees in the U.S. are more than double the rates in Europe.

[commentary: WayTooHigh.com]

Antitrust: Commission prohibits MasterCard’s intra-EEA Multilateral Interchange Fees

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 (Article 81). The Commission concluded that MasterCard’s MIF, a charge levied on each payment at a retail outlet when the payment is processed, inflated the cost of card acceptance by retailers without leading to proven efficiencies. MasterCard has six months to comply with the Commission’s order to withdraw the fees. If MasterCard fails to comply, the Commission may impose daily penalty payments of 3.5% of its daily global turnover in the preceding business year. MIF are not illegal as such. However, 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. In the EU, over 23 billion payments, exceeding a value of €1350 billion, are made every year with payment cards.

Competition Commissioner Neelie Kroes said: “Multilateral interchange fee agreements such as MasterCard’s inflate the cost of card acceptance by retailers. 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 paid not only by card users but also by customers paying cash. The Commission will accept these fees only where they are clearly fostering innovation to the benefit of all users.” The MIFMasterCard’s business model includes a mechanism that determines a minimum price merchants must pay for accepting the organisation’s payment cards. This mechanism is based on a complex network of multilaterally agreed inter-bank fees which industry refers to as “interchange fees”. At stake in today’s decision are MasterCard’s intra-EEA fallback interchange fees (“MasterCard’s MIF”). MasterCard’s MIF is a charge on each payment at a merchant outlet. This charge ranges between 0.4% of the transaction value increased by €0.05 and 1.05% increased by €0.05 for payments with Maestro debit cards, and between 0.80% and 1.20% for transactions with MasterCard consumer credit cards. The fee is retained by the customer’s bank (the “issuing bank”) and charged to the merchant’s bank (the “acquiring bank”), which then takes this cost element on board in setting its prices to merchants. MasterCard’s MIF applies to virtually all cross-border card payments in the EEA and to domestic card payments in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxemburg, Malta and Greece. Approximately 45% of all payment cards in the EEA either bear a MasterCard or a Maestro logo and MasterCard cards are accepted at some 85% of businesses accepting debit cards in the EEA.The Commission prohibited MasterCard’s MIF because it inflates the base on which acquiring banks charge prices to merchants for accepting payment cards, as the MIF accounts for a large part of the final price businesses pay for accepting MasterCard’s payment cards. This restriction of price competition harms businesses and their customers.MasterCard presented its MIF as an instrument to “maximise system output”. However, during four years of investigation MasterCard failed to submit the required empirical evidence to demonstrate any positive effects on innovation and efficiency which would allow passing on a fair share of the MIF benefits to consumers. The Commission therefore concluded that MasterCard’s MIF does not lead to objective efficiencies that could balance the negative effects on price competition between its member banks.The investigationThe Commission’s investigation was initially based on a series of notifications that MasterCard’s legal predecessor, Europay International S.A., submitted between May 1992 and July 1995, as well as on a complaint by EuroCommerce of May 1997. After two Statements of Objections (see MEMO/06/260) and an oral Hearing in November 2006, the Commission further verified MasterCard’s arguments through additional fact-finding.Past case practiceIn 2002, the Commission exempted a similar system proposed by Visa (see IP/02/1138) after Visa offered substantial reforms to its MIF. In particular, Visa offered to reduce progressively the level of its fees from an average of 1.1% to 0.7% until the end of 2007 and to cap fees at the level of costs for specific services. Visa also enhanced the transparency of fees and allowed banks to reveal information about the MIF to businesses. The exemption, however, expires on 31 December 2007 and Visa will from that moment on be responsible to ensure that its system is in full compliance with EU competition rules.SEPA The MasterCard MIF decision follows the Commission’s sector inquiry into retail banking in 2005 and 2006 (see IP/07/114 and MEMO/07/40), which found that interchange fee agreements might stand in the way of a more cost-efficient payment cards industry and of the creation of a Single Euro Payments Area (SEPA). The inquiry found that in five EEA countries (Denmark, Netherlands, Norway, Finland, Luxembourg) the payment card system functions without any MIF. The MasterCard decision will support the creation of a SEPA by fostering greater competition in the cards market and preventing an artificial increase of merchant fees due to an illegal pricing mechanism such as MasterCard’s MIF. 

MasterCard Interchange Fees Are Illegal: EU Ruling Expected to Announce Next Week

According to Thompson Financial News (Dec 14) [click here to read article], next week the European Commission will rule that MasterCard’s charges are illegal and violated the law. According to the report, “[t]he commission has longed feared that interchange fees, set at around 1 per cent per purchase, paid by retailers’ banks to card-issuing banks, are being abused to collect the highest rate of return.”  Interchange rates for the identical services in the U.S. are nearly double the charges in Europe.

[Source, via Thompson Financial]

“EU’s Kroes Warns Banks on Payments” (via AP)

EU Antitrust Chief Warns That New Bank Payment System Should Not Cost Customers More.  The EU’s antitrust chief Neelie Kroes warned banks on Monday that a new payment system should not be allowed to cut down choice or increase costs for customers.

Regulators have criticized the high level of these fees, saying card networks like Visa, MasterCard and American Express have failed to explain why they need to charge so much for handling payments.

Click here to read article.

[via AP]

“Retail Bosses Call on EU to Crack Down on Card Fee Fixing”

The bosses of 14 major retail companies have signed a letter to the European Commission (EC) calling for a crackdown on the excessive charges which make Europe’s payment card companies 13 billion euro a year in revenue.

The retailers, who together have 250 million customers a week and include Asda/Walmart, IKEA, Kingfisher, M&S and Tesco say the Commission must order cuts in the fees card companies charge retailers for each transaction when it makes its, long awaited, ruling on the legality of the so called interchange fees.

The retail chiefs say the success of the Single Euro Payments Area (SEPA), to be launched in January 2008 and intended to create a Europe-wide system for efficient, low cost money transfers between EU countries, depends on the EC taking action to end MasterCard and Visa’s price-fixing.

Their letter argues if SEPA is launched with card companies allowed to continue the existing secretive and excessive charging regime; it could fail because the potential benefits to customers and businesses will be lost.

The British Retail Consortium (BRC), has led the fight against the charges, and long argued they are an unjustifiable tax on customers.

BRC Director General Kevin Hawkins said: “The Commission’s decision on these cross-border card charges has huge implications for individual and businesses throughout Europe. MasterCard has clearly been abusing its position to boost profits at massive cost to customers and retailers.

“The Commission claims its Single Euro Payments Area will do for card payments what the euro has done for cash but it will only deliver the cheap, easy system promised if MasterCard and Visa’s price fixing is ended.

“Retailers big and small are simply looking for a fair deal. With the new Area starting in less than two months the Commission must recognise now is the time.”

Notes to Editors
An interchange fee is the fee a retailer is forced to pay on each credit card transaction it accepts. Typically around 1 per cent of the value of a transaction, the fees cost retailers hundreds of millions of pounds each year. Some individual retailers pay tens of millions of pounds annually to credit card companies as a result of the fees.

The EC decision on the charges currently levied by MasterCard on cross border transactions within the EU is expected in mid to late November.

The joint letter to the EU Commission from 14 major European retailers was co-ordinated by the European Retail Round Table (which brings together senior figures in European retailing) and EuroCommerce (which represents European retailing and wholesaling businesses). 

[Source: British Retail Consortium, press release] 

“Retailers Call on EC to Stop Card Price-Fixing” (ePayNews.com)

Excerpt:

Top executives at 14 major European retailers are asking the European Commission (EC) to lower what they call excessive interchange fees charged by payment card companies. Card companies earn €13 billion euro (US$19.08 billion) in annual revenues from card transaction fees, which the retailers say is excessive.

 The letter appears to be timed to coincide with the final stages of the EC’s enquiry into the charges currently levied by MasterCard on cross-border transactions within the European Union. A decision by the EC is expected in mid- to late November 2007

Click here to read more.

(Source: ePayNews.com)