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The ECJ Judgment in MasterCard, and where it sits in the big picture

Credit card fees (“MIFs”) have been in the news because of a recent European Court of Justice decision about their unlawfulness, and related litigation brought by retailers against MasterCard and Visa. Here we explain:

  1. What are MIFs?
  2. Why might they be unlawful, and harmful to retailers?
  3. The European Court decision against MasterCard
  4. Visa’s commitments to the European Commission
  5. The ongoing litigation
  6. Possible future regulation of MIFs

1. What are MIFs?

Interchange fees are incurred in every credit or debit card transaction. They are charged by a cardholder’s bank (the “Issuing Bank”) to a merchant’s bank (the “Acquiring Bank”).

Interchange fees can be bilateral (BIFs) or multilateral (MIFs):

  1. BIFs are set by agreement between an Issuing and an Acquiring Bank;
  2. MIFs can be:

a) set by agreement between a number of Issuing and Acquiring Banks; or

b) in the absence of any agreement, imposed by the “Platform”; e.g. MasterCard or Visa themselves.

It is this last category (so-called “fallback MIFs”) which is provoking controversy.

Above is an illustration of the various transaction fees.

The MIF (and the merchant fee) is usually paid by way of withholding as the money flows from the cardholder to the merchant. When the cardholder makes a purchase:

  1. his bank (the Issuing Bank) pays the Acquiring Bank the sale price minus its fee for the transaction (the MIF); and
  2. the merchant receives from his bank (the Acquiring Bank) the sale price minus its fee for the transaction (the merchant fee).

So, if the cardholder buys something for £100, the Issuing Bank debits £100 from the card and pays, say, £98 to the Acquiring Bank; the other £2 being the MIF. The Acquiring Bank retains, say, a further £1 and deposits £97 with the merchant. The merchant fee is £3, not £1. The size of the merchant fee is largely determined by the Acquiring Bank’s need to cover the MIF.

2) Why are MIFs considered unlawful and how do they harm retailers?

Platform-imposed fallback MIFs are considered unlawful because of their anticompetitive effect.

It is the cardholder who chooses to use the service, but it is the Acquiring Bank and ultimately the merchant who pays for it. Therefore, if the MIF is imposed – as opposed to being negotiated by the Acquiring Bank – there is little downward pressure on MIF price. There is pressure on merchant fees, because merchants can shop around between Acquiring Banks. However, there is a glass floor to the merchant fee because the MIF must be paid out of it.

The lack of price pressure where someone chooses services and someone else pays for them has parallels in mobile telephony. Callers use the services of their own network and the recipient’s. The caller did not choose the recipient network so there is little constraint on “termination charges”, the telephony equivalent of MIFs. In the world of telephony, the charges are regulated, but calls outside the EU are expensive because the (unchosen) roaming network is free of competitive or regulatory constraint.

Back in the world of card payments, there are further concerns:

  • That Platforms increase their market share by offering high MIFs to Issuing Banks who then receive more income from promoting that Platform’s card. Issuing Banks therefore have little motivation to agree lower fees with Acquirers.
  • That, ultimately, some or all of the MIF is passed on to consumers; and not just card-paying ones. The MIF increases the merchant fee and, so the logic goes, the merchant increases the price of his goods.
  • That many small retailers do not accept card payments because of high merchant fees, putting them at a competitive disadvantage. The fees for AmEx are higher than MasterCard or Visa, in part to fund a generous cardholder rewards programme, and many small retailers will not take it.

A European Commission report published in 2006 demonstrated the large profits that Issuing Banks get from Visa and MasterCard MIFs. In 2004, the activity of issuing Visa and MasterCard gave a profit-to-cost ratio of 65%.

In 2007, Neelie Kroes, then European Competition Commissioner, said “95% of cross-border card payments in Europe are made by just two companies’” – i.e. the MasterCard and Visa Platforms. The operation of Platform-imposed MIFs across the European Economic Area (EEA) was therefore preventing the development of an internal market in card payments so limiting the possibility of merchants to benefit from better prices elsewhere. 

The card companies justify MIFs to cover three services:

  1. the interest free period for cardholders between making the purchase and paying their bill;
  2. the payment guarantee, which ensures that (subject to caveats) retailers are paid even if the card has been fraudulently used; and
  3. transaction costs; i.e. the Issuing Bank’s processing costs.

Despite these justifications, the central fixing of MIFs by Platforms has caused concern at the European Commission, and central fixing across the EEA has been investigated for its anticompetitive effect, culminating in the recent court Judgment against MasterCard.

3) MasterCard v the European Commission (C-382/12 P)

The recent court Judgment was to uphold a European Commission Decision of December 2007 which found MasterCard’s cross-border, intra-EEA MIFs infringed the European law against anticompetitive agreements, now embodied in Article 101 of the Treaty on the Functioning of the European Union.

The Commission found that MasterCard’s MIFs inflated the cost of card acceptance by retailers without any countervailing improvement in efficiency that could justify it, and therefore exempt it under (what is now) Article 101(3). As such, the setting of the MIFs constituted a decision by an association of undertaking that resulted in an appreciable restriction of competition.

In particular, MasterCard had not demonstrated that fallback MIFs were objectively necessary for the operation of its payment system, so they could not be accepted as a legitimate “ancillary restriction”.

The absence of fallback MIFs might make card payment impossible if a cardholder walked into a shop whose Acquiring Bank had no agreement with his Issuing Bank. However, the Commission found that interchange fees were not necessary at all. The scheme could function simply on the basis of the remuneration:

  • of Issuing Banks by cardholders, and
  • of Acquiring Bank by merchants.

It is a fairly revolutionary idea. If there was no MIF, and the Issuing Bank was instead paid by the cardholder, the cardholder’s payment would have to be more than the merchant’s price, which would be anathema to many consumers. However, it would address the problem, as the cardholder would both choose the service and pay for it, thereby subjecting it to competitive pricing. The absence of a MIF would supposedly make prices lower in the first place. Cash payers would not have to share the cost of card transactions.

MasterCard lodged an appeal and, in 2012, the European General Court dismissed it. MasterCard then appealed to the European Court of Justice, and that appeal was dismissed in a judgment handed down on 11 September 2014 on the following points:

  • Association of undertakings: MasterCard had argued that, following its flotation in May 2006, it was not an association of undertakings. It was a commercial entity distinct from its customer banks, pursuing its own commercial interests. Therefore, Article 101 – which concerns anticompetitive agreements between undertakings – was not applicable to its imposition of MIFs.

Held: MasterCard continued to be an association of undertakings. It did not cease to be one simply because the setting of MIFs was no longer a decision within the banks’ control.

  • Objective necessity: MasterCard argued that the fallback MIFs it imposed in the absence of an agreement were necessary to the operation of the scheme, and that the General Court’s test for objective necessity set the bar too high.

Held: the General Court had applied the correct legal test. It was right to conclude that, just because the absence of MIFs might have adverse consequences for the functioning of MasterCard’s system, that did not mean the MIF was necessary.

Scope and impact of the September 2014 judgment

  • There can be no further appeal of the Commission’s 2007 decision. The judgment therefore makes the decision final.
  • In the UK, such decisions are binding on the courts, so they can form the basis of follow-on actions by retailers for historic overcharging.
  • However, the judgment only concerns MasterCard’s fallback MIFs for cross-border transactions. It does not concern MIFs set at national level.
  • The judgment is unlikely to have an immediate impact on the levels of MIFs. MasterCard had already given undertakings to the Commission to set MIFs at levels consistent with both the commitments given by Visa (below) and the proposed EU MIF regulation (also below).
  • Following the judgment, the UK’s Competition and Markets Authority announced it was considering the implications, and it expects to make a decision on how to proceed with both MasterCard and Visa in the next few weeks. 
  • The judgment may be of assistance to parties bringing damages claims against MasterCard in the UK courts. Not only does it give rise to the possibility of follow-on actions for cross-border MIFs, it will assist actions based on national MIFs – some of which are ongoing – on the basis that the decision can be “read across”. Conversely, if the Commission’s 2007 decision had been set aside, it would have made those claims much more difficult.

4) Timeline of Visa’s Commitments to the European Commission

In March 2008, the Commission decided to initiate a formal investigation against Visa Europe Limited, Visa Inc and Visa International Services Association (“VISA”) in relation to a suspected breach of what is now Article 101 in the setting of its intra-EEA cross-border MIFs. This followed the expiry at the end of 2007 of an exemption previously granted to VISA – under what is now Article 101(3) – for its cross-border payments system.

In 3 April 2009, the Commission sent a Statement of Objections to VISA alleging that its fallback MIFs restricted competition between banks contrary to Article 101 and did not meet the conditions for exemption under Article 101(3).

In 2010 VISA offered, and the Commission accepted a commitment that VISA would reduce the maximum weighted average MIF applicable to debit card payments to 0.2% of the transaction value. The commitment did not cover credit cards.

In July 2012, the Commission sent VISA supplementary objections setting out an additional concern, that under VISA’s cross-border acquiring rules, the MIF in the merchant’s country was applied even if the MIF in the Issuer’s country was lower. As a result, cross-border competition remained limited; and segmentation of the market and wide divergence of fees across the EEA was preserved.

On 26 February 2014,the Commission accepted further commitments. The fine details are in §2(10) of the Decision but, essentially, the weighted average credit card MIF was capped at 0.2% for debit cards and 0.3% for credit cards.

5) Existing claims against MasterCard and Visa

There is over £1 billion of damages claims against MasterCard and Visa in the English courts including:

  • an action by Sainsbury’s against MasterCard;
  • an action by the Deutsche Bahn, the German rail company against MasterCard; and
  • “parallel actions” by Arcadia, BHS, Topshop, Asda, B&Q, Comet, Debenhams, Homebase, Argos, House of Fraser, Iceland, Next, New Look, HMV and Morrisons against, separately, MasterCard and Visa.

Last February, the Court ruled against MasterCard’s request in the Sainsbury’s claim to first have a mini-trial (a “preliminary issue” hearing) on the question of whether Sainsbury’s was debarred from suing because Sainsbury’s Bank applied the MIF itself. This argument may nonetheless be problematic for Sainsbury’s.

A preliminary issue hearing in the “parallel actions” against MasterCard is scheduled for January 2015 on the question of whether the six-year limitation rule permits the Claimants only to recover damages dating back to 2006. (The action was begun in 2012). Damages are claimed back to 1992.

A class action was brought in the US against Visa and MasterCard on behalf of merchants. The parties reached a $7.25 billion settlement.

6) Future EU Regulation of MIFs

As noted above, telephone call termination charges face a similar lack of competitive constraint, and this is overcome by regulation. An EU regulation to determine an appropriate level for domestic and cross-border MIFs has been approved by the European Parliament. It is currently being reviewed by the Council of the EU, and may be adopted in 2015. The proposal currently being discussed is:

  • That MIFs are capped at 0.3% of the transaction value for credit cards and 7¢ or 0.2% of the transaction value (whichever is lower) for debit cards.
  • This would apply to both cross-border and domestic transactions in the EU and would take effect one year after the rules come into force.

In time, lower fees should translate into lower prices for consumers.