03 March 2008

MLex: MasterCard files card fee appeal, EC publishes decision

MasterCard has lodged an appeal against the European Commission's decision in December last year forcing it to redraw its 'interchange fee' on payment card transactions by the end of June. Meanwhile, the commission has fast-tracked publication of a 242-page non-confidential version to provide much-needed guidance to the market.

Opting not to ask for interim relief, MasterCard lodged its appeal by today's deadline, stating that its concerns rest on the commission's "failure to recognize that four-party payment systems cannot operate without default settlement terms [...] which [require] the setting of an interchange fee," and the commission’s "refusal to recognize the efficiencies that four-party payment systems create and the fairness of MasterCard’s interchange fees".

The card network also criticises the commission’s "inaccurate conclusion that, despite MasterCard’s May 2006 IPO, MasterCard and its customers continue to be “an association of undertakings”."

It adds that it believes the commission has 'mischaracterised' MasterCard’s interchange fees as decisions of an association that restrict competition under EC Treaty rules.

The commission issued its long-awaited decision against the company on 19 December last year against the so-called interchange fee - a payment made between the banks of a consumer and a retailer to cover the costs of a card processing.

The crucial decision did not rule the card fees illegal but stated that MasterCard's own version of the fee did not comply with competition law, giving the firm six months to draw up new charges proving they provide a tangible benefit to the consumer. 

While the courts will now start their judicial review, attention turns to Europe's other payments network, Visa, which is in negotiations with the commission to redraw its own fees without facing an antitrust enquiry. 

Its special agreement, finalised in 2002 - which safeguarded the association's fees and committed to gradual cuts - expired at the end of last year and the commission has clearly hurried through publication of a 'provisional non-confidential' version of the MasterCard decision to provide more specifics on what kinds of fees the commission deems possible. 

On announcing the decision last December, the commission was aware that Europe's payments market was desperate for more detail on viable interchange fees since current and new players - such as the potential European rival EAPS - needed the guidance to invest in new systems to realise the project to construct a Single Euro Payments Area - in essence a single network to match Europe's single currency. 

The commission took just two months to publish the decision - albeit in a slightly rough and ready form - fast-tracking it while other prior decisions, such as on the other payments case between Visa and Morgan Stanley, remain unpublished. 

Furthermore, the decision has also not been subject to extensive deletions. Of the 242 pages, around 13 have been removed wholesale but they refer mainly to business secrets around MasterCard's IPO.

But, crucially since MasterCard insisted on defending its case under Article 81(1) of the EU treaty, those market players such as the association Visa, seeking to argue under 81(3), are given less guidance in the decision. 

A total of 85 pages are dedicated to MasterCard's case under 81(1) while 21 pages are directly applicable to Visa's case.

That said, in its decision the commission takes into account what it says were MasterCard's evolving arguments under Article 81(3), namely the two positions that an interchange fee is a "price or fee paid to services" or "a tool to balance cardholder and merchant demand". 

In its decision the commission highlights that any argument that an interchange fee creates efficiencies must be founded on robust, empirical data.

"MasterCard in particular failed to provide empirical evidence for its central claim that the [interchange fee] maximises the scheme's 'output' and for the causal link to the other objective efficiencies claimed," states the commission. 

The commission also takes issue with the model used by MasterCard to calculate its fees, saying that it is "severely limited by the fact that it takes consumer and merchant demand as a given in that neither strategically reacts to possible actions by the other."

The model is the target of further commission criticism as it is based on claims that merchants are homogeneous and the "unrealistic assumption of a perfectly competitive banking industry". 

The commission goes on to say that MasterCard's fee costs include items which are "neither intrinsic in the payment functionality of a card nor related to services that clearly benefit the customers that bear the expense".

Earlier this year, the Hungarian competition authority opened a case against issuing banks and the card networks over their interchange fees, hinting at the scenario whereby other national regulators will seek to follow the path the commission has beaten with its December decision.

By Lewis Crofts

© Graham Bishop