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Brussels, 26 February 2014
Antitrust: Commission makes Visa Europe's commitments binding – frequently asked questions
What are inter-bank or interchange fees?
Interchange fees (which are also referred to as inter-bank fees) are charged by a cardholder's bank (the 'issuing bank') to a merchant's bank (the 'acquiring bank') for each sales transaction made at a merchant outlet with a payment card.
Interchange fees are either agreed bilaterally, between one issuing and one acquiring bank, or multilaterally, by a number of issuing/acquiring banks or by means of a decision binding all banks participating in a payment card scheme. The industry refers to these multilateral interchange fees as "MIFs". A MIF can be a percentage, a flat fee or a combined fee (percentage and flat fee).
When a customer uses a payment card to buy from a merchant, the merchant receives from his bank (the acquiring bank) the sales price less a 'merchant service charge', the fee a merchant must pay to his bank for accepting the card as means of payment for that transaction. A large part of the merchant service charge is determined by the interchange fee. The customer's bank (the issuing bank), in turn, pays the acquiring bank the sales price minus the MIF and the sales price is deducted from the customer's bank account. The MIF is therefore a cost that is finally charged to the merchant (through the reduction of the purchase price) who passes the costs on to consumers in the price level of the good or service.
What are the Commission's competition concerns?
In July 2012, the Commission formally informed Visa by sending a supplementary statement of objections that the interchange fees set by Visa for consumer credit cards and related practices may violate EU antitrust rules (Article 101 of the Treaty on the Functioning of the European Union – TFEU) (see IP/12/871). The concerns related in particular to:
(i) All interchange fees set Visa for transactions with consumer credit cards in the EEA. These MIFs currently apply to international and cross-border transactions in the EEA, as well as to domestic transactions in ten EU Member States or EEA countries (currently in Belgium, Hungary, Iceland, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands and Sweden). These interchange fees are paid by merchants' banks (acquirers) to cardholders' banks (issuers) for transactions with Visa's consumer credit cards. The Commission, fully upheld by the General Court and the Advocate General in the MasterCard case, has found that MIFs are a restriction of competition. However, they may be considered compatible with EU antitrust rules if they have positive effects on efficiency and allow a fair share of these benefits to be passed on to consumers in accordance with Article 101(3) of the Treaty on the Functioning of the EU.
(ii) Rules on 'cross-border acquiring' in the Visa system that limit the possibility for a merchant to benefit from better conditions offered by banks established elsewhere in the internal market. These rules today oblige banks to apply the interchange fees of the country where the merchant is located even if the fees in their home country are lower. As a result cross-border competition remains limited and the segmentation of the internal market and the wide divergence of fees across the European Economic Area (EEA) are preserved.
Which commitments has Visa Europe offered as regards interchange fees?
Visa Europe has offered to cap the weighted average MIF for consumer credit card transactions at 30 basis points (bps), i.e. 0.30% per transaction for all transactions where it sets the fee. For instance, if the average transaction value were €50 an average MIF of maximum 15 cents would be applied. The cap would at first be applicable to cross-border transactions within the European Economic Area (EEA). After a two year delay, the cap would also be applicable to domestic transactions in each EEA country where MIFs are either set directly by Visa Europe or the Visa Europe cross-border rates would apply by default (see list of countries above).
As regards international fees the commitments also cover cross-border card payments for cards issued in countries that are in the Visa Europe territory, which is broader than the EEA1.
Other international fees (from outside the Visa Europe territory) – such as fees that apply when a tourist from the US uses his Visa credit card to make a purchase at a merchant in the EEA – are not covered by the commitments. These fees are primarily set by Visa Inc. and not by Visa Europe. In this respect proceedings will continue against Visa Inc. and Visa International and the case will remain open.
The reductions mean a decrease of 40-60% in Visa Europe's MIF from their current levels affected by the commitments.
Which commitments has Visa Europe offered as regards cross-border acquiring?
Visa's MIF levels show wide divergence between Member States. The weighted average MIF level ranges between 0.20% - 1.40% for consumer debit cards, and between 0.30% - 1.50% for consumer credit cards depending on the Member State. For example whereas a payment of 50 EUR with a Visa debit card costs 10 eurocents in Finland, it cost as much as 75 eurocents in Cyprus. For a middle sized merchant with a turnover of € 100.000 per day, a third of whose payments are made by a Visa debit card, this corresponds to a difference of around € 400 per day and over € 130,000 per year –for the same service. Similarly, a € 50 payment with a Visa credit card costs 20 eurocents in Bulgaria, while 75 cents in Portugal or Cyprus. That represents a difference of € 11,000 on every € 1 million payments with a Visa credit card.
Up to now scheme rules were in place preventing retailers in 'high MIF' countries from benefiting from lower fees. Under these rules, even if a merchant chooses an acquirer in a different Member State, the acquirer is obliged to apply the fees of the merchant's country. This hinders retailers from benefiting from cross-border competition in payments in the same way as they do with respect to, for instance, transport services or goods.
Visa Europe has committed to reform its system in such a way that banks will be able to apply either the domestic rate or a reduced cross-border interchange fee of 0.2% and 0.3% respectively for both debit and credit transactions when they compete for clients cross-border. This is expected to lead to considerably lower rates for merchants in the EEA, also benefiting final consumers.
Visa Europe's commitments are likely to create positive dynamics in the internal market by allowing cross-border payment providers to apply lower rates in countries with high inter-bank fees. This is expected to put significant pressure on domestic inter-bank fees and is finally expected to lead to their reduction and harmonisation.
This can be illustrated by mentioning a fictitious example of the potential effect of the commitments: a large retailer with a turnover of 1 billion EUR in each of 5 member states (Poland, Germany, Italy, Spain and the UK), 5% of whose payments are made by Visa credit cards in each of those countries, could save around 2 million EUR annually due to the reduced credit card fees.
Taken together these cost reductions by European retailers could add up to a significant amount. For instance, according to ECB data credit card transaction value amounted to over 190 billion EUR equivalent in the UK in 2012. If only third of that credit card turnover would benefit from the reduced MIFs through cross-border acquiring, merchants could save 380 million EUR annually in the UK only.
How will Visa Europe increase transparency?
Visa Europe has offered commitments to further improve the transparency measures introduced by the Visa Europe debit commitments in 2010. In particular, Visa Europe commits:
(i) to introduce a rule to make the prices paid by merchants more transparent. Accordingly acquirers will be required to offer merchants merchant service charge ("MSC") pricing on a “MIF plus plus” basis. In other words, acquirers must, if requested, clearly break down in their contracts and invoices the MSC into three components, namely the MIF, the acquirer fee and all the other applicable payment system fees.
(ii) to introduce a simplified MIF structure for MIFs set by Visa Europe to provide for a reduction of at least 25% in the number of fee categories to aid transparency and comparison between rates.
How long will the commitments be in force?
The commitment capping the MIFs for consumer credit card transactions at a weighted average of 0.30% per transaction applies from now.
The commitments on the domestic MIFs set by Visa Europe (in 10 countries) will enter into force with a two year delay.
Visa Europe's commitments on cross-border acquiring and international MIFs within the Visa Europe territory will enter into force from the 1st of January 2015.
The entire package of commitments will remain in force during four years. In other words it will cease to be in force four years after the decision.
Why is there a two year delay for the introduction of MIF caps for domestic transactions?
In the responses to the market test of the draft commitments, concerns were expressed by a consumer organization that the commitments might distort competition in domestic markets between Visa and other card schemes such as MasterCard. Previous events in Hungary illustrated that if only one of the two major players (Visa and MasterCard) is subject to regulatory obligations, issuing banks are likely to migrate to cards of the competitor who can offer higher MIFs. If this occurred again with credit cards, there is even a risk that the total amount of inter-bank fees would increase as more expensive cards are issued.
After Visa Europe proposed commitments in May 2013, on 24 July 2013, the Commission adopted a legislative package in the field of the EU payments framework including a draft Regulation on Multilateral Interchange Fees (MIFs). When it is in place the proposed Regulation will address the concern about a level playing field. But the draft Regulation envisages imposing a cap on domestic MIFs two years after its publication. The legislative process is underway. Although in light of the Commission's assessment in the MasterCard Decision (under appeal before the ECJ) fees that are established in a similar way as MasterCard's fees prohibited in the Decision risk being unlawful, issuing banks may be tempted to switch to issuing cards with such higher interchange fees in order to still extract maximum revenues of card issuing before the entry into force of possible legislation. The two year delay aims to minimize the incentives for issuers to move to cards with higher MIFs.
What is the expected impact on merchants, consumers and banks of Visa Europe's proposed commitments?
The reduction of the interchange fees should lead to lower costs for merchants when receiving payments by card. The transparency measures proposed by Visa Europe should help to ensure that this works in practice.
The reduction will also benefit consumers. Indeed merchants normally pass on the merchant service charges, including MIFs, to their customers through higher prices for the goods and services they sell. Therefore, consumers ultimately pay the fees that banks charge merchants. This means that cardholders pay twice for card use: once to their bank and once through increased retail prices.
Even consumers who do not use a card but pay in cash are bearing these costs, as they are typically exposed to the same retail prices as cardholders. Very few merchants surcharge or rebate their prices to reflect the different costs of the means of payment and consumers are normally unaware of the true costs. This allows payment card schemes to raise their fees to levels where card payment is typically more expensive than non-card payments. In that case, a payment made with a card imposes a hidden cost on all consumers compared to a payment without a card.
Some concerns have arisen, that lower MIFs may encourage banks to raise card holder fees. However, consumers already now pay for the use of cards, even if some of those costs are hidden in retail prices. Ultimately, retail prices have to cover all of a merchant's costs, including those for accepting card payments; and a large part of the merchant's cost for card payment is made up by the MIF. In practice, we see that banks have not raised card holder fees in the past when MIFs were reduced. For example, the decision adopted in 2011 by the French competition authority accepting commitments offered by the domestic card scheme Groupement Cartes Bancaires (2011), which substantially reduced interchange fees for domestic debit and credit card transactions does not appear to have resulted in increased card holder fees.
Experience (for example in Australia and Spain) shows that reducing excessive inter-bank fees to merchants encourages card acceptance by merchants and can lead to an increase in card transactions and higher income for banks. It also leads to fewer cash transactions, which impose significant costs on banks, and greater card use has many other benefits for banks even without the MIF income.
What is the relevance of the proposed commitments for other payment schemes?
The proposed commitments are in line with the undertakings offered by MasterCard in April 2009 (see MEMO/09/143) as regards the MIF level.
Therefore, Visa Europe's commitments represent an important step towards the creation of a level playing field in the payments card market and in ensuring the success of the Single Euro Payments Area (SEPA) since, like the MasterCard undertakings, they provide a benchmark for setting MIFs that appears to allow consumers and retailers to enjoy a fair share of the benefits they generate. All payment schemes must comply with EU antitrust rules.
In 2007, the Commission prohibited MasterCard's cross-border inter-bank fees within the EEA (see IP/07/1959 and MEMO/07/590) and in May 2012, the General Court rejected MasterCard's appeal against that decision (see MEMO/12/377 and case T-111/08) MasterCard's appeal of that judgment is pending before the Court of Justice of the EU. In 2013, the Commission opened new proceedings against MasterCard to investigate its inter-regional inter-bank fees and cross-border acquiring (see IP/13/314). The investigation is ongoing.
The Commission also welcomes recent developments in Member States such as France, Poland and Hungary where MIFs of both Visa and MasterCard were capped and intends to further support investigations that are on-going in a number of other Member States. Private damages actions such as those launched in the UK are also a way for retailers to prevent that they will have 'over paid' fees that in the end will turn out to be unlawful.
What is the relationship between the commitments and the Commission's cost of cash study?
On Wednesday 19 February DG Competition presented the preliminary results of the data collection carried out by Deloitte Consulting regarding merchants' costs of accepting cash and card payments (see the Commission's press release).
Since the results are preliminary and only concern a specific number of large retailers DG Competition is not drawing conclusions yet; further work is required. A final, more comprehensive report is expected to be published before the summer.
However, the preliminary results of the cost of cash study are consistent with Visa Europe's debit and credit commitments. The Commission therefore sees no reason to require any change at this stage.
What is the relationship between the commitments and the planned Regulation?
In complement to the enforcement of antitrust rules, the Commission has proposed a regulation on interchange fees for card-based payment transactions (IP/13/730). The legislative process is ongoing.
The precise content and timing of adoption of the legislation are not yet known, but when it enters into force Visa Europe will have to comply both with the terms of the legislation and with its commitments. In practical terms this means that in case the legislation would contain stricter rules than Visa Europe's commitments, Visa Europe would have to follow such rules. If on the other hand the Regulation contained more lenient conditions than the commitments, Visa Europe would still have to abide by the terms of its commitments.
What are the next steps?
The Commission continues the proceedings in respect of Visa Inc. in relation to international fees - such as fees that apply when a tourist from the US uses his Visa credit card to make a purchase at a merchant in the EEA. These fees are set by Visa Inc. and not by Visa Europe.
Pursuant to the terms of Visa Europe commitments a Trustee will be appointed to monitor Visa Europe's compliance with the commitments.
The full version of the commitments is available on the Commission's website at: http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_39398
The Visa Europe territory means the EEA, Andorra, Faroe Islands, Greenland, Israel, Monaco, San Marino, Svalbard and Jan Mayen Islands, Switzerland, Turkey and Vatican City.