Inquiry Finds Competition Barriers In European Retail Banking

by Ulrika Lomas, for LawAndTax-News.com, Brussels

01 February 2007

The European Commission on Wednesday announced that it has published the final report of its competition inquiry into the retail banking sector.

The inquiry found a number of competition concerns in the markets for payment cards, payment systems and retail banking products.

Particular indicators are large variations in merchant and interchange fees for payment cards, barriers to entry in the markets for payment systems and credit registers, obstacles to customer mobility and product tying.

Some market participants offered voluntary reforms following the publication of preliminary findings on payment cards in 2006, but the Commission will use its powers under the competition rules to tackle any serious abuses, working closely with national competition authorities.

The outcome of the inquiry should boost retail banking competition in the run-up to the creation of the Single Euro Payment Area (SEPA).

Competition Commissioner Neelie Kroes stated that:

“The inquiry has found widespread competition barriers which unnecessarily raise the cost of retail banking services for European firms and consumers. The Commission will make full use of its powers under competition law to tackle these barriers, in the market for payment cards and elsewhere when they result from anticompetitive behaviour.”

Concerns raised by the inquiry with regard to payment cards and payment systems included:

• Highly concentrated markets in many Member States, particularly for payment card acquiring, which may enable incumbent banks to restrict new entry and charge high card fees;
• Large variations in merchant fees across the EU. For example, firms in Member States with high fees have to pay banks three or four times more of their revenue from card sales than firms in Member States with low fees;
• Large variations in interchange fees between banks across the EU, which may not be passed on fully in lower fees for cardholders. The Commission is not arguing for zero interchange fees; however, their operation in some payment networks raises concerns;
• High and sustained profitability – particularly in card issuing – suggests that banks in some Member States enjoy significant market power and could impose high card fees on firms and consumers; and
• Rules and practises which weaken competition at the retailer level; for example blending of merchant fees and prohibition of surcharging and divergent technical standards across the EU prevent many service providers from operating efficiently on a pan-EU scale.

With regard to retail banking product markets, the sector inquiry found indications of competition problems in several areas:

• In some Member States, the conjunction of sustained high profitability, high market concentration and evidence of entry barriers raises concerns about banks’ ability to influence the level of prices for consumers and small firms;
• Some credit registers, holding confidential data that lenders use to set loan rates, may be used to exclude new entrants to retail banking markets;
• Some aspects of cooperation among banks, including savings and cooperative banks, can reduce competition and deter market entry;
• Product tying, e.g. where a loan customer is forced to buy an extra insurance or current account, is widespread in most Member States. This could reduce customer choice and increase banks’ power in the market place to influence prices; and
• Obstacles to customer mobility in banking – notably the inconvenience of changing a current account – are high. The inquiry’s analysis suggests that banks’ profit margins are lower where customers are more mobile.

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