European Commissioner for Competition Policy
Competition and regulation in retail banking and payment markets
ECB-DNB Retail Payments Conference
Frankfurt , 25 th May 2009
Ladies and Gentlemen,
I am very glad to be able to address you today at a moment when far reaching developments are taking place in the financial services sector and in European payments markets.
The crisis reveals new questions about the interaction between competition policy and regulation, and it will need the input of all of us to answer them.
When one looks across the various economic sectors it is apparent that competition enforcers are often left to deal with problems which regulators cannot solve or which bad regulation has helped to create. It seems likely that this pattern applies to financial services as well.
So if you will allow me to put my comments in the context of the wider crisis first, I will then move onto the detail of the payments markets.
Financial crisis context
It is too early to fully understand the implications the financial turmoil will have for competition on European retail banking and payment markets.
But we do know that many banks will need to redefine their business models – sometimes because of a restructuring plan agreed with the Commission. For many that will mean a greater focus on retail banking. At the same time, however, they may move to cut back their cross-border activities and to concentrate on their domestic markets. They may even be under pressure from their national governments to do so.
Let me be very clear. The Commission will not undermine the Single Market for banking in any of its guidelines or decisions.
We can't micro-manage lending decisions by banks, but state aid will only be available on a non-discriminatory basis.
This is the only way to deliver stability and a level playing field. And it is with a stable system that we can best hope to attain the basic goal of EU financial integration.
The complexities of the current situation highlight the need to further harmonise regulations within the EU and to create a real level playing field amongst banks.
European regulation has not achieved the desired degree of harmonisation, and at times national administrations have been bullied away from imposing regulation because of alleged competitive disadvantages such regulation might create for certain banks.
We see now that this fragmented, sometimes self-regulatory, approach was not beneficial for our long-term economic health.
And bearing this in mind, in one respect we should see the current state aid decisions as not only a part of the solution to the crisis, but also as a crucial opportunity to create a more level playing field in banking.
In doing that, the Commission is able to avoid a subsidy race between Member States, and a wider battle over protectionism.
What is more, we must also make sure that cross-border acquisitions are not stopped for non-competition reasons during the phase of consolidation that the financial sector will likely enter in the coming years.
So, overall, I am optimistic, therefore, that financial integration will proceed – despite, and maybe even because of the crisis. It has to, for the benefit of European consumers, retailers and corporate clients.
In moving forward though it is clear that some old practices need to go.
This includes the field of payments and it brings me directly to your areas of interest.
As I mentioned already, many banks will increase their focus on retail banking in coming months and years. Due to their pervasive role in our modern societies, integrated payment markets will therefore play a key role in the future of these banks.
In the past period through our competition enforcement policy we have contributed to the creation of effective, transparent payment markets and we will continue to do so.
It should be obvious that the need to obey the law does not change with GDP going up or down; competition law also applies when it rains.
Of particular relevance for the creation of integrated payment markets is the Single European Payment Area (SEPA) project.
SEPA is a self-regulatory project with laudable efficiency aims. We have always expected it to enhance competition, so the project of the European Payment Council has enjoyed the support of both the Commission and the ECB in regards to SEPA.
Our belief in the bigger picture of SEPA is one reason why the Commission, along with the ECB, has tried to address its concerns through informal dialogue rather than formal cases.
Given that SEPA is based on co-operation between competitors and potential competitors, this is an exceptional form of treatment that I am not sure the industry fully appreciates. I hope the industry does indeed understand the value of co-operating with us – because it would be a pity to lose this unique dialogue as wider regulatory reform takes place.
There are notable SEPA achievements we can point to. For example the EPC clarification that card schemes not covering the 31 states of the SEPA territory can be compliant with the SEPA Card framework  is a victory for the level playing field. This means that cheap and efficient national systems do not have to be abandoned for the more expensive existing international schemes i.e. Maestro/V-Pay (for debit cards) and MasterCard/Visa (for credit cards). It also means new schemes stand a real chance of entering the market - I will come back to this.
Although we have had good outcomes on key issues to ensure competition and a level playing field, including standardisation, access and other stakeholders' involvement, these issues remain on our radar screen.
In the meantime we have tackled the issue of MIFs for SEPA Direct Debit transactions.
The SEPA Direct Debit story has been a clear case of interaction between competition and regulation.
MIFs have long been a concern for the Commission, as our MasterCard decision demonstrates. We had similar concerns regarding MIFs proposed for SEPA Direct Debit (SDD).
In spite of our repeated requests, the EPC failed to provide us with a convincing justification or evidence as to why the arrangement would be justified for efficiency reasons. Backing our concerns is the clear trend to direct incentives for consumers to use direct debit. Besides, only six countries have a 'per transaction' direct debit MIF in place, and they too are moving towards a decreasing or zero MIF.
This initial deadlock over SEPA Direct Debit MIFs was a good example of the limits of self-regulation, and the resulting uncertainty could have led to the SDD not being launched.
So it was for good reason that Commissioner McCreevy and I supported the ECB's 2008 proposal for a transitional regime to help the industry move forward and agree to launch the SEPA Direct debit. Thankfully this transitional package was taken over in draft legislation which was adopted in first reading by the Council and European Parliament.
However, the banking industry still needed regulators and competition enforcers to work together to clarify long-term arrangements.
Recognising this need, the European Commission and the ECB jointly issued a statement stating that we see no convincing reason for per transaction MIFs to exist after 31 October 2012. That joint statement should, by the way, be recognised as an unprecedented form of interaction between financial regulation and competition enforcement. We do value the excellent co-operation with the European Central Bank in this area, which has made it possible to issue this 'mini-guidance'.
While the content of the statement may not reflect the industry's preferred way forward, it did allow the industry to make an informed assessment of which future SEPA Direct Debit business models would comply with competition rules. This smoothed the way for the scheme's launch.
This case study is of course far too specific to be a general template for interaction between regulation and competition policy – but it provides useful proof of how we can add value by working together. And it gives us the encouragement we need to provide full guidance for the long term on MIFs for SEPA Direct Debit by November this year – if the industry provides us with the input we need.
MasterCard, Visa and new payment card schemes
I will now turn to our current cases in the field of payment cards . These have an impact on SEPA and provide further lessons about the interface between competition and regulation.
If there's anywhere that can do with an overhaul of tired practices, it’s the area of payment cards.
In April I announced MasterCard's undertakings to comply with our 2007 decision. Essentially, MasterCard agreed to new cross-border MIFs of less than half the previous MIFs for both credit and debit cards – giving Europeans its lowest rates worldwide: a big win for consumers.
MasterCard is also adopting transparency-enhancing measures. Merchants will be offered and charged different rates according to the type of card used ('unblended' rates). This system enables merchants to make better choices for their business needs, to impose charges that reflect their real costs for accepting different cards, and to explain these charges more clearly to customers. Merchants will also be informed that they do not need to accept MasterCard and Maestro as a bundle, but can choose to accept one, both or neither.
One might argue that MIFs for payment cards are clear candidates for regulatory intervention, such as the regulation adopted by the Australian Federal Reserve Bank. However, in Europe such regulation simply was not there. In a world which is moving to 'plastic money' with a pace of 11% card usage growth a year we were faced with the increasingly harmful effect on consumers of a collectively agreed invisible fee at a level for which banks were not able to provide a convincing efficiency justification. When you consider that a series of opaque practices also make it impossible for merchants and consumers to detect what they pay to use each card, it is clear that competition law can and should bridge the regulatory void.
Other challenges and possible ways forward
Beyond those cross-border MIF issues, domestic MIFs will continue to present challenges.
High domestic MIFs not only raise prices; they are a barrier to new entrants, discouraging banks from issuing cards from new SEPA-compliant payment schemes. At a time when the existing international schemes are also taking over the domestic markets, new entrants are therefore fighting an unequal battle.
This is why it was important that the SEPA Cards Framework created the possibility for new entrants to start, even if they do not yet cover the whole SEPA territory. It is also why it is important that the SEPA Cards Framework enables co-branding and gives consumers and merchants the choice which of the brands on a card to apply for an individual payment.
To finish my remarks, let me say that self-regulation efforts have a role to play in creating an integrated market and shaping conditions for effective competition.
However, that is not enough – SEPA and other forms of self-regulation need critical monitoring and evaluation. Without this they won't reach their competition potential.
In essence: the crisis in the financial markets has shown asking questions and sticking to rules is important to make markets work.
 The EPC published an easy-to-read Questions and Answers clarifying key aspects of compliance with the SCF on the 26 th June 2008.