On 9 July, the European Commission sent MasterCard a Statement of Objections in relation to (i) cross-border acquiring restrictions impeding cross-border payment acquisition, and (ii) inter-regional fees charged when cards from outside the EU are used within the EU.
The case fits into a wider pattern of EU competition law enforcement, and indeed competition enforcement in several jurisdictions around the world (notably the American Express judgment in the U.S.) aiming to address possible market power issues in payment networks. Payment networks have long posed issues for competition law enforcers, and for that matter competition law doctrine, to the extent that they enhance competition by creating a payments service, but rely on certain restrictions arguably inherent in making the platform work. In recent years, arguments have arisen that these restrictions go further than is necessary to enable platforms to function.
The SO represents the latest salvo in this lengthy history, recent landmarks of which include the EU Court of Justice judgment in MasterCard v. Commission, and direct regulation of interchange fees the EU.
The first practice, relating to cross-border acquiring, strikes at the heart of the EU market integration aims of the European Commission. Restrictions on cross-border acquiring are likely to play a part in preventing an integrated banking market, which the Commission has long sought through both regulation and enforcement, such as in the European Payments Council investigation. The Commission’s decision to take a firm stance against such restrictions is perhaps therefore relatively unsurprising.
Action on inter-regional fees is remarkable. It had long been thought that the EU would focus primarily on intra-EU fees, as part of a wider plan to encourage intra-EU banking integration. This was thought by some to imply that fees paid by those with cards from outside of the EU would not be a priority for regulation. Indeed, that position was preserved in the recent Interchange Fees Regulation (IFR), whose definition of a relevant cross-border transaction required a nexus to payment services providers established in the EU. By contrast, the SO suggests that the often relatively high interchange fees charged when extra-EU cards are used in the EU are now also in the firing line, despite the cards not having been issued in the EU.
The European Commission has long been tipped to be concerned about the distributional impact of interchange fees, notably the potential inflation of consumer prices perceived to result from interchange fees. Of course, it is an open question whether such inflation in fact exists and, if it does, whether it is problematic. Good points can be made either way: some will point to seemingly large aggregate fees that pose a large and real cost to merchants, while others will point to limited passing on of savings from fees regulation in other jurisdictions (notably Australia), and note that cash handling savings might outweigh interchange fee costs. These savings might be particularly large for inter-regional transactions where they save significant costs such as carrying foreign currency.
On one argument the fees might be efficient, even if they were to inflate prices. Others might think the current fees level unnecessary to realise the same potential savings.
The debate on interchange taps into a highly nuanced (and by no means decided) competition law question, requiring weighing of arguments about whether restrictions on competition ancillary to a useful service are, in fact necessary, and the extent to which they are justified. It remains to be seen which arguments will win the day, but the decision to address inter-regional fees suggests a heightened concern that could well result in a finding of excessive pricing: a rarely seen competition law enforcement tool that, given reluctance to regulate pricing, is generally only used where the Commission has serious concerns.
The MasterCard SO therefore sends a strong signal to payments watchers and specialist advisors that competition law enforcement will continue to be a significant factor for the industry, marking another step in the trend towards increasing regulation of interchange fees in the EU. Those affected by interchange fees, from banks to merchants to card networks to innovative payments providers, will be watching closely and some may yet decide to reconsider their positioning in relation to interchange fees.
Stephen Dnes is a Senior Consultant on Competition Law at Preiskel & Co LLP