Following one of the leading UK supermarkets being awarded £68.5 million (plus interest) in compensation for excessive and anti-competitive interchange fees levied by MasterCard, “merchants” accepting payment by MasterCard or Visa (or other similar entities) for goods or services purchased by cardholders may have potential claims against these companies.. Do you?
Since this decision, a number of other large retailers have now successfully obtained compensation from MasterCard. MasterCard has disclosed that it settled a similar claim by another supermarket for £39 million.
The original legal challenge brought by the leading supermarket involved “Multilateral Interchange Fees” (MIFs) levied by MasterCard and resulted in the financial services giant being ordered to pay compensation in July 2016. The Competition Appeal Tribunal (CAT) determined that MIFs charged by MasterCard to retailers contravened competition laws. In November 2016, MasterCard was refused permission to appeal the decision and the precedent for the recovery of these excessive fees was therefore set.
By way of background, MasterCard operates a world-wide payment scheme in which banks are able to participate providing they are licensees of MasterCard. Licensed banks participate as “issuing banks” or “acquiring banks”. Issuing banks are those that have a contractual relationship with the MasterCard holder and provide a non-cash payment process (which may include credit) to that individual, i.e. a retail customer. Acquiring banks are those that have the contractual relationship with the merchant and provide the merchant with the ability to accept and process card payments.
A fee, the interchange fee, is charged for and retained by the issuing bank by agreement with the acquiring bank. This fee is then passed onto the acquiring bank, who passes the cost on to the merchant, pursuant to the merchant service charge. The interchange fee may be agreed between the banks, or as was the case with the supermarket, the default fee is set by the MasterCard scheme rules. It is the application and reasonableness of the default fee that the supermarket challenged.
CAT determined that had acquiring banks been able to compete between themselves on an open basis, they would have agreed lower rates, to the benefit of retailers. CAT held that in such circumstances, the supermarket would likely have obtained a deal with an interchange fee of:
- 0.5% rather than 0.9% for credit cards; and
- 0.27% rather than 0.36% for debit cards.
CAT therefore awarded the supermarket the difference between these, subject to a complicating factor that the Supermarket also operates a retail bank which would have received some of the interchange fees. This therefore is a complication that will not normally apply to other retailers.
For any company paying interchange fees above the 0.5% (for credit card transactions) and 0.27% (for debit transactions) threshold considered as reasonable by CAT, the excess fee may be recoverable provided the excess fee has not been passed on to the customer, but has been absorbed by the retailer.