Mobile payments and competition law ©Wigley & Company 2015 page 1 September 2015 Speed read Mobile payment platforms, and the various innovative ways that they will be able to enable payments in the coming years, have the ability to be procompetitive and pro-consumer. This can reduce the need to have competition law and regulatory intervention to remedy market failure. But they can lead to market failure too. This article assumes familiarity with the competition law aspects of interchange fees and Merchant Service Fees (MSF), as outlined by us in our article, Retailers pay banks more over payWave/PayPass than over EFTPOS. Using a buzz word, disruptive technologies might radically change the payments landscape and the role of current players, such as banks and/or card schemes. That can be pro-competitive. But competition law challenges can remain. For example, commentators are concerned that banks and/or the card schemes may have the market power to migrate consumers away from the EFTPOS platform, even to the extent of eliminating its use altogether, in due course (such as down to the level that cheques are now used). Some point not only to the increased MSFs that this entails, but also to the migration from a fast and simple system for NZ based payments – EFTPOS – to a less efficient and more complex platform (for payments that can be serviced by EFTPOS, or a mobile variant of EFTPOS). Whether this and other aspects raise competition law and regulatory concerns is a complex issue requiring thorough analysis. We are sitting on the fence for good reason: it would be folly to try and conclude in a short article that any player here has competition law problems or should be regulated. This article therefore provides a framework. In particular, all players - incumbents and new entrants - can, by careful strategy, optimise their competition law and regulatory positions. While we outline some potential competition law problems, there are counter-arguments, such as this, in relation to interchange fees, which are a core issue for mobile payments:1 “The justification generally used for interchange fees is that they are used to stimulate card issuing and use; banks would use part of the fees to incentivise card use through bonuses (air miles, etc.).” The Detail The story so far This article follows on from our earlier ones: • How does Apple make money from Apple Pay? • Introduction to NZ mobile payments regulation and law • Cybersecurity risk and mobile payments • Mobile payments and the slippery slope of privacy loss... • Retailers pay banks more over payWave/ PayPass than over EFTPOS Introduction: mobile payment continues the migration from EFTPOS The major mobile payment initiatives so far2 - even Apple’s - build upon the existing and long established payment networks and card schemes, even to the extent of moving payments from EFTPOS (no charge per transaction) to card scheme-based payments, involving interchange fees between banks and also involving merchants (who pay MSFs to the banks). In turn, MSFs may be passed through to consumers, directly or indirectly. We overviewed those fees in our previous article, Retailers pay banks more over payWave/PayPass than over EFTPOS. The same principles apply to mobile payments. What is happening to contactless cards is happening to mobile payments page 2 Mobile payments and competition law via platforms involving the banks. For example, we understand that, like contactless payment by debit card, mobile payments by debit card won’t go through the EFTPOS network: they will therefore attract interchange fees and, in turn, there will be MSFs payable by merchants. Some commentators are concerned that banks and/or the card schemes may have the market power to migrate consumers away from the EFTPOS platform, even to the extent of eliminating its use altogether, in due course, or at least to reduce the role of the EFTPOS platform to more like the use of cheques (rarely used by some). Some point not only to the increased MSFs that this entails, but also to the migration from a fast and simple system for NZ based payments – EFTPOS – to a less efficient and more complex platform (for payments that can be serviced by EFTPOS, or a mobile variant of EFTPOS). They say that it adds unnecessary complexity for merchants (which is an additional real cost for merchants on top of the MSF). Competition law and regulatory concerns? It is possible that this raises issues around market dominance and market failure, the more so if new entrant payment players cannot get frictionless access to existing payment systems. Of course, some parties have strong incentives to create barriers and retain market strength. Some will push hard to maximise their commercial position, and this may raise questions as to Commerce Act compliance, the prospect of regulation under Part 4 Commerce Act, and/ or introduction of regulation. Other participants such as new entrants and those with new technologies have the flip side incentives and concerns as to competition law and regulatory intervention. By careful strategies, each of those sets of players can optimise their positions. The key is careful legal, economic and policy preparation. Time and again we’ve seen careful planning and well researched strategies win against more “off-the-cuff” approaches. The Commerce Commission has noted in an internal report that, as to contactless card use (which would extend to mobile payments too):3 “Already we are seeing signs that NFC transaction systems are replacing the current EFTPOS payment system with its lower fee structure. This could result in a transaction fee structure monopoly and increased charges to consumers as traders pass on their increased transaction costs through surcharges or increased prices.” Coming back to the point above around complexity and careful analysis, it is essential to recognise that these are just initial internal views at the Commission and full analysis may produce a different picture. But it does at least tell incumbents that competition law as to mobile payments is an issue that must be on their radar, and they must determine a strategy to handle this. And for new entrants, this also tells them that there are issues to consider in this area, to see if there are opportunities and concerns to be pursued. For both, a strategic approach is needed, based on careful legal and economic analysis. For the banks and/or the card schemes, there is the commercial reality that some Uber or AirBNB-type disruptive technology will take hold and greatly erode their businesses. One of the hardest jobs in banks these days will around trying to predict the future in the payments world, where bad calls now may lead to bad outcomes. It would be folly in this short article to give concluded views; so we outline the issues at a high level. Walled gardens To a related issue; maintaining a walled garden approach (e.g. by not enabling inter-operability between payment systems and innovative mobile payment platforms) can sometimes be problematic under the Commerce Act. page 3 Mobile payments and competition law Payments NZ is the self-regulatory body that manages aspects and rules around NZ payments. Paymark NZ has recently added Mobile Device Rules and Standards that specifically deal with mobile payments. Payments NZ has said that the Rules are to provide a level playing field and to be responsive to new innovations (by way of change or addition to the rules). If that happens over time, then that removes one potential competition law issue. An example of a walled garden is Apple: it seems they won’t allow the banks to directly use Apple phones for mobile payments, forcing disintermediation via Apple Pay. This may raise some competition issues (although again, that calls for careful analysis, including as to learnings from competition law actions in the EU). Collaborations and JVs Payments are also marked by collaborations between competitors (of which the Spark, 2degrees and Vodafone involvement in Semble is a new example). Collaborations can be pro-competitive, and the Commerce Act recognises this (after all, payment networks won’t work without strong bank and scheme collaboration). But, if not handled carefully, they can lapse into breaches such as cartel activity, an area where new legislation is imminent, including prison sentences for so-called hard core cartelists. (We’d expect the three mobile network operators to have carefully structured their involvement in Semble to reduce Commerce Act risk, for they are well aware of the issues here from other Telco collaborations). Players, particularly incumbent providers and those wanting to collaborate with competitors, need to be extra careful. On the other hand, players such as new entrants that believe they are being shut out, may look to see if they have grounds for competition law and regulatory attack, to advance their businesses. But they will need to have this analysed very carefully before taking action: this is not the place for simply taking a single strand – e.g. whether the interchange fee is too high – out of multiple factors. What at first sight can appear to be anti-competitive, can be the opposite after careful analysis, and vice versa. Other parties The complexities are such that we have kept this analysis to interchange fees and Merchant Service Fees. One key element to be factored into the analysis is the potential role of the card schemes, Visa and Mastercard, in this complex and multi-party area. They have a big role. Interchange fees and Merchant Service Fees – more detail Here’s a diagram showing the central mobile payments flows. It morphs the payWave example in our last article in order to keep to the same approach: note in particular that the interchange fee and Merchant Service Fee (MSF) in this example are used for illustration purposes only. page 4 Mobile payments and competition law There’s actually a lot more going on beyond this, as the Apple Pay diagram at the end of this article shows (we describe this in our first article of this mobile series). Even that removes multiple elements, and omits for example how loyalty schemes and other players might fit. We’ve explained in our last article that: • Interchange fees are capped by regulation at far lower percentages in Australia and the EU, for example, than interchange rates in NZ. • Most of the Merchant Service Fee is made up of the interchange fee. • In 2013, the Commerce Commission observed that there may be problems. However it said that, on the facts then applicable (e.g. pre-payWave/PayPass and mobile payments), competition law remedies may not be applicable but there may be, for example, Reserve Bank Act and Part 4 Commerce Act alternatives. It may be that analysis shows market conditions have moved page 5 Mobile payments and competition law on since then, such that Commerce Act issues are re-engaged. We emphasise (again!) that we are not saying that this is in fact so: for all we know at present, for example, the disparity between interchange rates in NZ and in Australia/ EU can be explained away. • There may be issues around driving migration away from EFTPOS to scheme-based payments. • These issues engage the competition parts of the Commerce Act, Reserve Bank Act (maybe?), Part 4 Commerce Act as to regulated businesses, and law reform. As outlined in the introduction above, the post-interchange settlement move to contactless cards, mobile payments, and other developments, both in NZ and internationally, may be reason to revisit the competition law aspect, and/or look at the other options such as Part 4 Commerce Act (although it would have to be shown that the required test is met, as in our last article) or law reform. Or maybe not if the various developments, now and in the future, make the market more competitive. Some of the economic reasons for and against regulating interchange rates We’ve set some of these out in our last article. The EU debate helps inform this. The EU is in the process of introducing detailed regulations relating to payments in its Payment Services Directive (known as PSD2) and it has, as noted above, already capped the interchange fees. EU commentary in that process provides useful insights from the perspective of why interchange rates should be capped:4 “1.1 Why are the current levels of interchange fees problematic? …The justification generally used for interchange fees is that they are used to stimulate card issuing and use; banks would use part of the fees to incentivise card use through bonuses (air miles, etc.). However, they have many drawbacks. Cardholders are encouraged to use cards that generate higher fees, and card companies compete primarily to attract issuing banks by offering higher interchange fees. Hence competition between payment card schemes actually leads to cost increases for retailers, which they pass on to all consumers through relatively higher retail prices, given that merchants find it difficult to refuse and/or surcharge in particular the ‘must-take’ consumer debit and credit cards. Consumers paying with debit cards or in cash thus ‘subsidise’ the air miles of the users of expensive cards. New and innovative providers of mobile or online payment services cannot enter the market and (low fee) domestic operators cannot expand as banks expect at least the same (high) revenues from them as for normal card payments. As a result, consumers and merchants cannot benefit from seamless and efficient payment means and European companies are at a competitive disadvantage on the global stage.” European views on mobile payments and interchange fees When introducing the new interchange fee regime, the EU had this to say:5 “Payments via mobile phones are increasing, and in the future we may see many different means of payment ‘co-badged’ on our mobile phones (e.g. debit card, credit card, credit transfer). Undistorted competition will lead to innovation. However, the problems in the card markets today are already spilling over into the new markets of internet and mobile payments. This is why we need to act now.” page 6 Mobile payments and competition law It’s not just about interchange rates There are also many other facets, from a competition law and regulatory perspective. For example, payments are heavily reliant on payment networks. To be effective, new entrants should be able to access the networks in a way that is inter-operable with other elements and participants in the payments systems. Thus, incumbents have strong incentives to keep new entrants out. For this reason, interoperability is also potentially a competition law issue. On that, and as to new entrants, the EU has this to say (new entrants are called TPPs below):6 “Until now, entering the market of payments was complicated for TPPs, as many barriers were preventing them from offering their solutions on a large scale and in different Member States. With these barriers removed, many more new players are expected to enter new markets and offer cheaper solutions for payments to more and more consumers throughout Europe. The TPPs will have to follow the same rules as the traditional payment service providers: registration, licensing and supervision by the competent authorities. In addition, new security requirements included in the text of the PSD2 will oblige all payment service providers to step up the security around online payments.” This all means that walled garden strategies may come under the spotlight; in the introduction above, we’ve given two examples of potential walled gardens. Remedies If there are market failure problems, options to consider include Commerce Act complaints, regulation under Part 4 Commerce Act (which has challenges), and law reform (as is happening in the EU, for example). Essentially, the same as we set out in more detail in our previous article. Conclusion Incumbent providers should be looking at the risks and ways of managing the position optimally in the context of their commercial objectives. New entrants should be looking at the flip side. page 7 Mobile payments and competition law Wigley+Company PO Box 10842 Level6/23 Waring Taylor Street, Wellington T +64(4) 472 3023 E firstname.lastname@example.org and in Auckland T +64(9) 307 5957 www.wigleylaw.com We welcome your feedback on this article and any enquiries in relation to its contents. This article is intended to provide a summary of the material covered and does not constitute legal advice. We can provide specialist legal advice on the full range of matters contained in this article. 1. European Commission, Press release, “Payment Services Directive and Interchange fees Regulation: frequently asked questions” (2013) para 1.1 (http://europa.eu/ rapid/press-release_MEMO-13-719_en.htm) 2. That is, for four party models and not, for example, payment schemes for say a single retailer, or schemes such as Amex. 3. Commerce Commission, Consumer Issues 2014 Strategic Intelligence Assessment (2014) para 69 (www.comcom.govt.nz/ dmsdocument/13277). 4. European Commission, Press release, “Payment Services Directive and Interchange fees Regulation: frequently asked questions” (2013) para 1.1. (http://europa. eu/rapid/press-release_MEMO-13-719_ en.htm). 5. At http://ec.europa.eu/competition/ publications/factsheet_interchange_fees_ en.pdf 6. European Commission, Press release, “Payment Services Directive and Interchange fees Regulation: frequently asked questions” (2013) para 2.2A. (http://europa. eu/rapid/press-release_MEMO-13-719_ en.htm).