MasterCard Fees Face Criticism In UK

by Robin Pilgrim, LawAndTax-News.com, London

08 September 2005

The UK's Office of Fair Trading on Tuesday announced that in its view, fees charged by MasterCard members are anti-competitive.

According to the OFT, the collective agreement between members of the MasterCard UK Members Forum (MMF), including most major banks, which set the multi-lateral interchange fee (the MMF MIF) paid on virtually all purchases in the UK made using UK-issued MasterCard credit and charge cards between 1 March 2000 and 18 November 2004, restricted competition and infringed Article 81 of the EC Treaty and the Chapter I prohibition of the Competition Act.

The Office explained that:

"In 2004, over 700 million purchase transactions were made in the UK using MasterCard cards with a total value of £42.7 billion. An interchange fee was charged on each of these transactions as a percentage of total transaction value."

"The OFT has found that the MMF MIF agreement had adverse effects on competition within the MasterCard scheme and also in relation to other payment systems. The collective agreement deterred issuers of MasterCard cards and merchant acquirers of MasterCard transactions from competing by negotiating their own interchange fees, different from the MMF MIF."

"In turn, this reduced competition between merchant acquirers because the MMF MIF – as a standard cost for merchant acquirers – directly affected the merchant service charges (MSCs) paid to merchant acquirers by retailers accepting MasterCard cards. The OFT also found that the MMF MIF was used to recover 'extraneous costs' for services which were not necessary for the operation of the MasterCard scheme as a mechanism for transmitting payments, such as the costs of the interest-free periods provided by card issuers."

"Recovering extraneous costs through the MMF MIF resulted in merchant acquirers paying a higher interchange fee to card issuers than if the MMF MIF had been used just to recover the costs of the payment transmission mechanism. This fee was passed on to retailers by the merchant acquirers through higher MSCs. Consumers, including those who do not use MasterCard cards, ultimately picked up the cost for the higher interchange fee through higher retail prices."

"As an increase in the standard costs faced by all merchant acquirers, the higher MMF MIF reduced the ability of merchant acquirers to compete on the amount of MSCs charged to retailers. The inclusion of extraneous costs in the MMF MIF provided a large flow of revenue to card issuers and the incentive to induce customers to hold and use MasterCard cards, for example, through loyalty schemes, advertising and funding the provision of an interest-free period."

The OFT argued that this distorted competition between the MasterCard scheme and alternative methods of payment such as debit cards, cheques or cash.

Sir John Vickers, Chairman of the OFT, explained that:

'The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services. This unduly high interchange fee was like a tax on UK consumers."

Although MasterCard introduced new arrangements for setting the interchange fee on 18 November 2004 which currently apply to all UK MasterCard transactions, the OFT has concerns that under the new arrangements the interchange fee applying to UK transactions may still be set with reference to extraneous costs and used to recover these costs.

The OFT revealed that it will commence an investigation into the new arrangements for setting the fallback interchange fee applying to UK MasterCard transactions unless this concern is addressed by MasterCard.

The MasterCard consortium is facing similar problems in the United States, where a group of five businesses in California, Minnesota and Connecticut has sought court permission to represent US businesses as a class in a lawsuit over transaction fees charged by banks to merchants when their customers pay for goods or services using a Visa or MasterCard credit card.

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