24 October 2007

Pressure on MasterCard rises as wait for card fee ruling drags on

Europe's retailers have turned up the heat on MasterCard ahead of an upcoming decision by the European Commission on whether the payments card company should be forced to cut its interchange fees, while the commission's departments overseeing antitrust rules and the internal market wrangle over the functioning of Europe's payments systems.

Major retailers such as Ikea and Carrefour want the European Commission and national competition authorities to take a hard line against the way MasterCard calculates and imposes the fees. But concerns over how the decision will impact an emerging European single payments area (Single Euro Payments Area or SEPA) - which will restrict cross-border fees levied by banks and card companies - have led to delays in its adoption.

Initially, the decision was expected this summer, but continuous delays have brought harsh words from the European Central Bank, which believes that the development of SEPA is in the balance as long as uncertainty reigns over the fate of the card charges.

The commission has conducted a crusade against abuses in the payments sector over the past months, initially with the results of a sectoral enquiry in January this year, but also with a recent 10.2 million euro fine against Visa for denying Morgan Stanley membership of its association. Furthermore, last week it ruled that French payment card group Cartes Bancaires indulged in restrictive business practices.

Now, retailers are turning up the volume ahead of the MasterCard decision - expected for the end of this year or the beginning of next - saying customer-service businesses such as retailers, hotels, airlines and restaurants pay a collective average of 13.5 billion euros in interchange fees to card-issuing banks in Europe every year - which they say is an unacceptable and excessive level. Carrefour's worldwide interchange fee payments amount to 150 million euros; Ikea's add up to about 64 million euros. 

MasterCard and Visa argue that interchange fees are a crucial charge to offset the cost of interest free credit and the operation and development of the payments infrastructure.

Retailers hope that the commission will force MasterCard into an immediate reduction in interchange fees and into greater transparency in how it calculates such fees. This will be welcome news to the commission which is also steeling itself for one of the most hotly awaited decisions in years. For its part, MasterCard is understood to be prepared to fight the case in the courts.

The commission's decision matters: MasterCard is one of the world's two largest credit payment schemes. A decision on MasterCard interchange fees will set a prececent for Visa's charges which are also up for renegotiation at the end of the year. And a ceiling on interchange fees may affect the development of a European equivalent of Visa and MasterCard.

It is this last point which has created friction between those in the commission seeking to penalise MasterCard's alleged anticompetitive behaviour and others looking to the broader picture of how Europe's payments industry will function in the future.

The commission would love to see the emergence of a European rival to Visa and MasterCard and it seems it will have its way as the Euro Alliance of Payments Schemes is set to establish itself formally in Brussels on 7 November, bringing together eight national schemes from Germany, UK, Spain and elsewhere.

But without clarity on interchange fees - viewed by many as the key element in balancing the payments market - uncertainty will still afflict the emergence of a viable alternative.

Yet opposition to dismantling interchange fees to the extent that retailers would prefer is hardening within the commission, creating delays in a decision and, retailers fear, increasing the likelihood of at best gradual cuts in interchange fees. Though technically an issue to be decided by the commission's competition department, the internal market division also has some say in the decision making-process.

The commission's department in charge of financial services and the internal market is widely believed to see a benefit in interchange fees. It is also said to be nervous that a combination of Europe's launch next January of SEPA and a harsh reduction in interchange fees will destabilize Europe's banking sector.

By Juliane von Reppert-Bismarck 

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