Kroes – the card giants’ flexible friend?

After months of build-up, the publication of the results of a European Commission’s inquiry into the retail banking sector was surprisingly subdued. Payment card companies had been threatened with legal action over their ‘outrageous’ fees but the fireworks were missing yesterday (31 January) when Competition Commissioner Neelie Kroes released her department’s findings.

The commissioner continued to make menacing noises on the subject of potential legal action against payment card companies in the event of continued abuses. Her desire to drive down expensive transaction charges, the so-called interchange fees, levied on consumers by companies such as Visa, was clear. Yet, debit and credit card companies emerged from the day’s announcements arguing that the previous animosity was based on a misunderstanding.

"There seems to be a better understanding for the need for interchange [fees]," said Javier Perez, president of MasterCard Europe, before the results were announced yesterday. He cited the case of Australia, where regulators in 2003 imposed artificial price caps on interchange fees with apparently disastrous results in the form of higher cardholder fees for consumers, as an example for the EU not to follow.

MasterCard, which is currently the subject of a statement of objections from the Commission on interchange fees, said the report was "a softening" compared to previous findings.

Before Kroes’s announcement, the card companies had been at pains to remind the world of their role in the creation of the single euro payments area (SEPA), a single market for low-value payments within the eurozone that will be fully implemented by 2010. "It is in our interest to eliminate barriers to entry. Let us do our job," said Perez. This message was not lost on Kroes, who conceded that the implementation of SEPA would help dismantle market barriers and allow for more competition in the payments market.

In terms of enforcing plans to lower interchange fees, Kroes stressed the need for strong EU competition enforcement in close collaboration with national regulators.

The inquiry highlighted the vast differences that still exist between member states’ markets. In 2004, for instance, banks in Luxembourg received €265 for each personal current account compared with just €22 in Sweden. Another discrepancy between national markets highlighted was fees on credit cards in Portugal, said by regulators to be more than double those in Slovakia. But caps on fees, such as those imposed in Australia, appeared to be ruled out. "As competition commissioner, I will not and cannot go further to specify what would be acceptable levels," said Kroes.

MasterCard rival Visa welcomed Kroes’s report, describing her approach as "measured". Peter Ayiffe, president and chief executive of Visa Europe, said Kroes appeared to have understood Visa’s argument that "there is a need to continue the constructive dialogue between the Commission and the financial sector".

The industry’s argument that consumers would have to bear the cost of lowered interchange fees did not, however, wash with the Commission. Credit card companies had "failed to substantiate the argument that lower interchange fees would have to be compensated with higher cardholder fees", said regulators.

All in all, credit card companies were relieved that Kroes had taken a step back from earlier hints that fees might be abolished. But the industry, worth €1,350 billion in total sales volumes, will be under considerable scrutiny from retailers and consumer groups in the months to come.

"MasterCard and Visa are so disconnected from reality that they have the nerve to ask the European Commission to ‘exempt’ their anti-shopper interchange fees from EU competition law," said Xavier Durieu, secretary-general of EuroCommerce, a lobby representing EU retailers. "This report shows that there is no way that the European Commission could even consider giving these hidden fees any form of exemption from competition law."

Other issues covered by the inquiry included concerns over the cross-border availability of credit data for banks wanting to provide retail services such as loans and product tying, the practice whereby consumers are forced to buy additional products when opening a bank account.

After months of build-up, the publication of the results of a European Commission’s inquiry into the retail banking sector was surprisingly subdued. Payment card companies had been threatened with legal action over their ‘outrageous’ fees but the fireworks were missing yesterday (31 January) when Competition Commissioner Neelie Kroes released her department’s findings.