Bank cards face EU showdown on charges

Bank card firms claim that EU efforts to attack their charging system could undermine plans for a Single Euro Payments System. Lorraine Mallinder reports.

Retailers and payment card companies are anxiously waiting for Neelie Kroes, the European commissioner for competition, to announce her plans for an overhaul of interchange fees levied on the use of credit cards.

The commissioner announced this month (3 December) that the issue was "top of the agenda". A decision on the fees charged by card-provider MasterCard for processing payments is expected next week.

In February, Kroes released the findings of her department’s inquiry into the retail banking sector and threatened legal action if card companies MasterCard and Visa Europe continued to abuse their market dominance with what she called "outrageous" interchange fees. The fees are charged to the retailers but the Commission says that they are then passed on to consumers.

The card industry claims that putting caps on interchange fees could have the effect of increasing cardholder fees, as happened in Australia when regulators introduced controls in 2003 - but Kroes refused to accept that argument.

Industry does, however, hold a weapon of sorts. Both Visa Europe and MasterCard have played an important role in the establishment of the Single Euro Payments Area (SEPA), a single market for low-value payments that will be fully implemented in 2010. Both companies warned last month that the wait for Kroes’s ruling on interchange fees, which has been expected for months, was delaying investment in new card schemes ahead of the launch of SEPA. This month, Peter Ayliffe, chief executive of Visa Europe, said that regulatory meddling in the interchange system could harm SEPA.

Retailers are calling for interchange fees to be drastically reduced. They reject the argument that SEPA will not work without interchange fees. A letter sent to the European Commission last month by EuroCommerce, the retailers’ lobby, says that the debit card schemes that will be introduced under SEPA are "more expensive than national systems, with no gain of efficiency, as they are based on the current, flawed, interchange fee mechanism...for which neither MasterCard nor Visa have been able to provide any justification".

EuroCommerce fears that SEPA will be a Trojan horse for the extension of the existing duopoly for credit cards to the debit card market. According to EuroCommerce, British retailers experienced price increases of 68% when the Switch debit card system was replaced by international debit system Maestro.

Both card companies and retailers may, from their different standpoints, be exaggerating the possible ill-effects. Nevertheless, the Commission’s decision on MasterCard could prove crucial to the future of SEPA, which is why the Commission’s internal market officials have been arguing with the competition regulators over the extent of changes that should be made to the structure of interchange fees.

Bank card firms claim that EU efforts to attack their charging system could undermine plans for a Single Euro Payments System. Lorraine Mallinder reports.

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