On 31 January 2007, the European Commission (“the Commission”) published the final report of its competition inquiry into the retail banking sector. The Commission has identified several significant competition concerns in the markets for payment cards, payment systems and retail banking products. The inquiry has confirmed that markets suffer from fragmentation along national lines, price rigidity and customer immobility.

Market structures vary widely across the EU and explain the different conduct and performance of the banking sector between Member States. The sector inquiry has shown that the retail banking industry displays a wide variety of profit margins, prices and selling patterns between the Member States. However, there is strong evidence of considerable price and policy convergence within the Member States themselves. The report notes that high profitability could result from increased efficiency in the banks’ operations and favourable economic conditions; however, the combination in some Member States of large profits, high concentration and significant barriers to entry suggests that the banks are able to exploit their market power to the detriment of consumers and small firms.

Payment card systems

The use of payment cards, such as Visa and MasterCard, facilitates a significant number of total sales transactions in Europe, with such payments annually generating an estimated €25 billion in fees for banks. The sector inquiry has highlighted several areas which will require intervention by the EU and national competition law authorities.

There are substantial differences in merchant, cardholder and inter-bank fees. In Portugal in 2004 such fees were more than twice those in Slovakia and more than three times those in Italy and Finland. The Commission found that competition barriers explained these differentials. For example, acquisition of card transactions is often carried out by a monopoly player acting in conjunction with banks which issue the payment cards onto the market, thus enabling the card issuers to exercise considerable market power. The existence of various network rules governing how the banks and card systems operate also impede competition; the prohibition in some Member States of “co-branding” a card between banks and card systems, which are deemed to be competitors, is expected to negatively affect competition. Furthermore, the existence of bilateral clearing arrangements between local banks makes market entry more difficult; new entrants must find a sponsoring bank for tansaction clearing, which is generally reluctant to assist a competitor. Other factors affecting competition include the level of joining fees to a card payment scheme, payment providers must adopt national technical specifications and most clearing systems admit only banks.

Credit registers

Good quality credit data is in short supply in several Member States, either because of regulation or limited development of credit data markets. The inquiry has identified two Member States in which credit registers owned and operated as joint ventures with banks, appear to offer discriminatory access to data.

Next steps
While some of the market participants have already offered voluntary reforms following publication of the Commission’s preliminary findings in 2006, the Commission will work closely with national competition authorities to tackle serious competition abuses.

The outcome of the inquiry should boost retail banking competition in the run-up to the creation of the Single Euro Payments Area (SEPA).