On 31 January 2007, the European Commission published its final report on the inquiry into the retail banking sector. The European retail banking sector is estimated to have generated gross income equivalent to about two per cent of total EU GDP in 2004. Retail banking provides vital services to EU consumers and fair competition in this sector is a priority for the Commission.

The purpose of the 18-month inquiry was for the Commission to examine a number of practices which appeared to be restricting competition in the European Union. The EU retail banking sector is characterised by high levels of profitability and concentration and significant divergence between Member States. There may be a number of benign explanations for these market traits, including a supportive business cycle, regulation and efficiency.

However, the Commission found grounds for competition concern in the convergence of prices within Member States, artificial barriers to entry and non-essential co-operation between banks. Its key findings included the following.

Card payment networks can raise barriers to entry and limit competition

Card issuers bear the main costs of setting up a card payment system whereas the acquiring (retailer’s) bank charges a merchant fee (to the retailer) for processing the transaction. Interchange fees provide a mechanism to address this cost imbalance.

However, the Commission has expressed doubts as to whether interchange fees are necessary at all given the profits made from card issuing. The Commission found that domestic card networks were charging lower interchange fees than international networks with some domestic networks charging no fee at all.

Many Member States reserve rights of issuing and acquiring to credit and financial institutions, creating a barrier to entry for non-banks. In others, there is a monopoly provider of acquiring services - often a joint venture between incumbent card issuers. Practices such as blending (acquiring banks charging businesses a global price for accepting cards of different types), co-branding and joining fees may raise barriers to entry and weaken price competition.

Bilateral interchange and clearing arrangements reinforce the mutual benefits of incumbents and also raise barriers to entry.

Discriminatory access to credit data

Banks need access to data in order to assess the credit worthiness of borrowers and allocate risk accordingly. Not all Member States have readily available widespread credit data. Moreover, some registers are operated as joint ventures between banks and make data available to third parties on unfavourable terms.

Co-operation can impede competition

Co-operation between banks (eg over payment systems) can bring economic and consumer benefits. However, co-operation between independent banks with strong market positions can also impede effective competition. The Commission indicated its willingness to analyse such co-operation in greater depth.

Banks take advantage of customer inertia

Customer mobility is limited by information asymmetry and high switching costs. This increases the market power of banks. Some banks create artificial barriers by, for example, imposing high closing charges or tying products such as mortgages and current accounts in order to deter customers from switching.

The Commission’s recommendations

  • Using antitrust enforcement to address the main competition concerns, such as access barriers, discrimination, high interchange fees, governance arrangements and tying practices. An expert group has been launched to examine customer mobility in relation to bank accounts.
  • Establishing a Single Euro Payment Area (SEPA) to remove the current restrictions and give retailers greater choice.
  • Ensuring cross-border access to credit registers on a non discriminatory basis by a variety of measures including the Proposed Directive on Consumer Credit.


In response to the Commission’s interim reports, market players have already started to take remedial action by reducing entry barriers. Enforcement action has also been taken under competition powers against MasterCard and others. The Commission’s final report into retail banking indicates that more is needed. The report is clear that the Commission will not hesitate to exercise its powers to ensure that the competition rules are respected in the EU retail banking sector