Doing the Right Thing the Wrong European Way

Doing the Right Thing the (Wrong) European Way

The European Commission (EC) has had Visa’s and MasterCard’s cross-border inter-bank fees in its crosshairs for quite a while now. Back in 2007, the Commission banned MasterCard from charging cross-border fees on transactions within the European Economic Area (EEA) — the EU’s 27-member states as well as Norway, Liechtenstein and Iceland. Then five years later, in May of last year, the EC issued a “supplementary statement of objections” (SSO) related to Visa’s multilateral interchange fees (MIFs) whose linguistic and substantive qualities I reviewed at the time (I did confess to being an ardent admirer of Eurospeak). Back then I wondered why the EC had decided to deal separately with MasterCard’s and Visa’s cross-border fees, but it turns out that there was even more to come.

Earlier this week the EC informed us that it had launched yet another investigation to establish “whether MasterCard may be hindering competition in the European Economic Area (EEA) with regard to payment cards, in breach of EU antitrust rules”. The EC’s concerns had once again been raised by “MasterCard’s inter-bank fees and related practices”. So, one might ask, hadn’t the issue already been dealt with? Well, no, the EC’s latest investigation has to do with transactions made with cards issued outside the EEA. Still, I can’t help but wonder why the original investigation in 2007 would not have covered both card networks and all of their cross-border transactions. So, if this whole thing sounds to you like a huge waste of time and money, you’re not alone. But let’s take a look at the EC’s latest.

Investigating MasterCard Inter-Bank Fees Again

The investigation will focus on payments made by people from outside the EEA who use their MasterCard credit and debit cards when inside the area. Here is what the EC is investigating now:

(i) inter-bank fees in relation to payments made by cardholders from non EEA countries — as opposed to fees for cross border transactions within the EEA that were already prohibited in 2007 (see IP/07/1959 and MEMO/07/590). Such fees apply for example when a US tourist uses his MasterCard credit card to make a purchase at a merchant in the EEA;

(ii) all rules on ‘cross-border acquiring’ in the MasterCard system that limit the possibility for a merchant to benefit from better conditions offered by banks established elsewhere in the internal market and

(iii) related business rules or practices of MasterCard which amplify the Commission’s competition concerns (like the “honour all cards rule” which obliges a merchant to accept all types of MasterCard cards).

These fees and practices may restrict competition. The inter-bank fees are generally passed on to the merchants, leading to higher overall fees for them. Ultimately, such behaviour is liable to slow down cross-border business and harm EU consumers.

In addition to its anti-trust enforcement action, the EC will come up with a proposal for regulating the inter-bank fees.

What to Expect

The EC is characteristically vague in describing its objective in the case. The statement talks about things like “level[ing] the playing field between payment card providers” (that is mentioned twice) and providing “legal certainty”. But I confess to being hugely disappointed — surely the EC could have done better than that and come up with something like “supplementary statement of objections” to throw at MasterCard, just as they did to Visa, whose case is still being reviewed. But linguistics aside, the Commission was much more explicit in the Visa case when it spelled out its objective thus:

The Commission has reached the preliminary conclusion that MIFs [multilateral interchange fees] reduce price competition between banks by creating an important cost element common to all acquirers. The Commission considers that Visa’s MIFs harm competition between acquiring banks, inflate the cost of payment card acceptance for merchants and ultimately increase consumer prices.

And if Visa was found in breach of EU antitrust regulations, the company could face fines of up to 10 percent of its global turnover. Now the BBC reports that the EC is considering applying the same remedy in MasterCard’s case:

Mastercard, which said it would “fully co-operate” with regulators, could be fined up to $740m, or 10% of its 2012 revenue, if found guilty.

So the fine itself would be quite significant, but even more damaging to Visa and MasterCard would be the permanent loss of the cross-border fee revenue. Moreover, if the EU wins the case, it is very likely that the U.S. authorities will take similar actions; in fact they would probably end up doing it even if Visa and MasterCard won in Europe, unlikely as it is.

The Takeaway

So, in all probability, the end of the cross-border fees is nigh, however clumsily the objective might have been achieved. And that’s a good thing for consumers who have been paying up to three percent in such fees, in addition to any currency conversion fees that are also applied to cross-border transactions. It is true that the number of U.S. card issuers which have voluntarily discarded these fees has been increasing over the past few years (for a long time Capital One was the only major issuer who charged no cross-border fees on most of its cards), but it would be much better to know that we don’t have to worry about them at all. And yet, isn’t it incredible just how tortuous a way the EC has taken in its effort to do the right thing here?

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