Today the use of plastic money is rife. Retailers across the board accept payment cards from consumers instead of cash. The easy aspect of a card transaction coupled with the comfort of effortless access to money makes this the most preferred mode of payment nowadays.
Although payment cards are simple to obtain and are apparently free, charges do exist in the form of hidden interchange fees.
These fees are paid indirectly between banks for the acceptance of card-based transactions. Each time a consumer makes a card purchase, the cardholder’s bank receives a fee paid out by the retailer’s bank. Normally, the customer’s bank or the card-issuing bank in a payment transaction receives a fee by deducting the interchange fee from the amount it pays the merchant’s bank.
The cost of the interchange fee is charged to the business in the more general context of the costs it is charged for the use of payment cards by the financial institution handling their transactions. Unaware of these payments, consumers ultimately bear the brunt of the levied fees. In fact, these fees are included in the prices charged by merchants, who pass on to their consumers the cost inflation they face as a result.
In a recent judgment, the Court of Justice of the European Union ruled on interchange fees on cross-border transactions charged by MasterCard. The proceedings were initiated at the instance of MasterCard that appealed a decision of the General Court taken in 2012. The latter court had upheld the decision of the European Commission whereby the interchange fee arrangements set by MasterCard were considered to restrict competition.
Both the Commission and the General Court concurred with the view that the arrangements entered into by MasterCard with participating banks restricted competition as it had the effect of fixing the price of charges to merchants, which could not be set at a level below the fixed fee. This had the effect of artificially increasing prices for consumers. Both the Commission and the General Court considered that the interchange fees were not shown to generate efficiencies benefitting consumers that are capable of justifying their restrictive effect on competition.
The decision of the General Court was appealed. MasterCard claimed that abandoning or capping interchange fees would harm businesses and consumers who could end up paying higher prices.
The fees are included in the prices charged by merchants who pass on to their consumers the cost of inflation
The Court of Justice, in its competence as an appellate court, confirmed the decision of the General Court and held that MasterCard’s network of cross-border interchange fees levied on retailers’ credit and debit card transactions, breached EU antitrust rules. The court considered that MasterCard’s fee system did not allow traders to negotiate the costs charged by the cardholder’s bank.
The court further held that the fee charged was not objectively necessary for the payment system to work effectively, as it was not impossible to carry out the operation without the levying restriction.
The judgment of the Luxembourg Court was positively welcomed by the European Commission and consumer organisations as a win for European consumers and for its impact on competition in the EU card market.
This judgment serves as a prelude to the EU’s preparation for regulatory changes in the card-payment sector. The EU is moving towards the imposition of a cap on all interchange fees of 0.3 per cent of the value of a credit-card transaction, and 0.2 per cent or €0.07, whichever is lower, for a debit-card transaction. The capping would apply to cross-border transactions as well as domestic transactions across the EU in a phased approach. The approval of the regulation that will establish the capping is to be approved by the EU member states and represents the EU’s bid to break down barriers to e-commerce.
Dr Josette Grech is adviser on EU law at Guido de Marco & Associates.