The world’s second-largest credit and debit card network, MasterCard, now seems to have no more avenues to explore but to desist from imposing multilateral interchange fees, commonly known as MIFs, on those traders who accept payment cards as a means of payment. The General Court recently confirmed a 2007 European Commission decision which had found MasterCard to be in breach of EU competition rules by imposing such fees.

Over 23 billion payments in the EU, exceeding a value of €1,350 billion, are made every year with payment cards- Mariosa Vella Cardona

Interchange fees are fees charged by a cardholder’s bank termed as the issuing bank to a trader’s bank called the acquiring bank each time that a customer effects a purchase using a payment card. Whenever this occurs, the trader receives from the acquiring bank the retail price less a service charge consisting mainly of the interchange fee. This fee is the price a trader pays to his bank for accepting cards as means of payment. The issuing bank, in turn, pays the acquiring bank the retail price which is deducted from the bank account of its customer less the MIF.

MasterCard’s business model includes a mechanism that determines a MIF traders must pay for accepting the MasterCard and Maestro payment cards. MasterCard’s MIF applies to virtually all cross-border card payments with MasterCard or Maestro in the EEA and to domestic card payments in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxembourg, Greece and even in Malta.

Following an investigation into the anti-competitiveness or otherwise of such MIF, the European Commission had concluded in 2007 that MasterCard’s MIF for cross-border payment card transactions was in breach of European competition law. The Commission asserted that such charges inflated the cost of card acceptance by retailers without leading to proven advantages for the consumer which could justify the restrictive effect on competition. The MIF had the effect of setting a floor under the costs charged by banks to traders and thus constituted a restriction of price competition between acquiring banks by artificially inflating the basis on which these banks set their charges to traders.

MasterCard filed an action before the General Court for annulment of the Commission’s decision. The court rebutted MasterCard’s arguments that MIFs are objectively necessary to the operation of the MasterCard payment system. MasterCard argued that if such fees were not imposed, financial institutions would find it necessary to offer their customers other types of payment cards or to reduce the benefits to cardholders. This would affect MasterCard system’s viability. However, the General Court considered it unlikely that, without a MIF, banks would cease or significantly reduce their MasterCard card issuing business or would change the terms of issue to such an extent as to lead customers to favour other forms of payment or payment cards.

In arriving at this conclusion, the court took note in particular of the importance of revenues and commercial benefits other than MIFs which financial institutions derive from their payment card issuing business. On the other hand, the court concluded that, without the MIF, retailers would be able to exert greater competitive pressure on the amount of the costs they are charged for the use of payment cards.

The court also maintained that MasterCard’s MIF system could not be granted an exemption from the applicability of EU competition rules by the Commission. This essentially because, the court concluded, there was no significant contribution of the MasterCard system to technical and economic progress as required by law for such an exemption to be granted. Indeed, the court observed that the methods of setting the MIF tended to overestimate the costs borne by banks for the issue of payment cards and to inadequately assess the advantages which traders derive from such form of payment.

Over 23 billion payments in the EU, exceeding a value of €1,350 billion, are made every year with payment cards. Statistics prove that card transactions cost EU retailers €25 billion per year. It comes, therefore, as no surprise that the General Court’s decision was applauded by both consumer and retailer organisations. Though MasterCard has appealed from the decision to the Court of Justice of the European Union, the message sent so far by the EU’s competition watchdog and the General Court is loud and clear. If MasterCard operated without a MIF, merchants would pay lower prices for accepting cards and this should translate in lower prices paid by consumers for the products that they purchase.

Any charges incurred by a trader are as a rule reflected in the final price of the product bought by each and every consumer and not solely by those using payment cards. This means that in the long run it is consumers who are footing the bill twice for the use of 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 in cash.

mariosa@vellacardona.com

Dr Vella Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.

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