UK: General Court Hands Down MasterCard Judgement

Last Updated: 23 July 2012
Article by Elisabetta Rotondo

1. On 24 May 2012, the General Court of the European Union handed down judgment upholding the decision by the European Commission (the "Commission") in 2007 that the member bank delegates of MasterCard had collectively set cross border fall back multilateral interchange fees ("MIF"). This amounted to a decision of an association of undertakings to fix prices which restricted competition in the market for the acquiring banks contrary to Article 101 of the Treaty on the Functioning of the European Union ("TFEU").

Market Definition

2. MasterCard argued that the payment card sector had two-sided demand and should be characterised as one single joint product supplied by a joint venture with joint demand from card-holders and merchants.

3. The Commission however, considered that there was an upstream "network" market in which the card scheme owners compete to persuade financial institutions to join their schemes and on which they provide services to those institutions. MasterCard Incorporated competes with other card scheme providers on this market. The Commission also considered that there are two downstream markets in which the banks provide services: an issuing and an acquiring market. The Commission concluded that the relevant product market for the purposes of the competition analysis in this case was the acquiring market. This is because of the differences between the two markets: the acquiring banks' customers are merchants, whereas the issuing bank's customers are card holders, the product characteristics of the acquiring market fundamentally differ from those of the issuing market and pricing of acquiring services is structured differently from that of issuing services (the acquiring bank charges a fee per transaction rather than an annual fee paid by the card-holder to the issuing bank).

How does the MIF work?

4. An interchange fee is a fee paid by the merchant's bank (the "acquiring bank") to the bank which issued the payment card to the customer ("issuing bank"). When the cardholder uses his/her card to buy from the merchant, the acquiring bank pays the merchant the retail price of the purchase less a merchant service charge ("MSC"). The issuing bank pays the acquiring bank the retail price minus the MIF. The issuing bank receives from the customer the retail price plus an annual fee.

5. The Commission's decision also only relates to four party intra-EEA fall-back interchange fees and SEPA fall-back interchange fees which apply to cross-border MasterCard or Maestro branded card payments in the EEA. These fees are fall-back fees in that they apply only in the absence of a bilateral agreement between the issuing and acquiring bank in a cross-border transaction.

6. The Commission's Decision does not apply to domestic MIFs although the effect of the judgment will be felt in relation to the level of domestic MIFs because, in the absence of a bilateral agreement between the domestic acquiring and the domestic issuing bank, cross-border MIFS are used as a benchmark.

What did the General Court decide in the MasterCard case?

Article 101 TFEU

1. The General Court upheld the Commission's decision that the decision by MasterCard to operate a MIF constitutes an agreement between undertakings within the meaning of Article 101 TFEU. This was in spite of the fact that MasterCard Inc was floated on the stock exchange and therefore came under a different ownership structure during the period in question. The Court held that i) governance of MasterCard in Europe remained under the control of the banks and ii) MasterCard and the banks retained a commonality of interests in relation to the MIF. As a result the Commission was entitled to take the view that the decision to set the MIFs at that level and in that manner constituted a decision of an association of undertakings before and after the floatation.

2. The General Court also upheld Commission's decision that implementation of a four party (multilateral) intra - EEA fall back interchange fee and a SEPA fall back interchange fee was an appreciable restriction of competition within the internal market contrary to Article 101 TFEU. The MIF restricts competition between acquiring banks by inflating the base on which acquiring banks set charges to merchants (the Merchant Service Charge ("MSC") and thereby set a minimum price for each MSC. In the absence of the MIF, the MSC would be lower.

Objective necessity

3. MasterCard claimed that the MIF was objectively necessary for the MasterCard system because it was a default transaction settlement procedure. Without a MIF, the issuing banks would be able to determine the level of the interchange fee unilaterally and acquirers would be obliged to accept that fee because of the "honour all cards" rule which requires acquiring banks to accept all payments made with a MasterCard.

4. The General Court held that the MIF was not indispensable for the operation of the MasterCard scheme as could be seen by the existence of a number of other payment card schemes which operate without a MIF and by the fact that when the Reserve Bank of Australia reduced MasterCard's MIF in Australia, there was no notable impact on the system's viability.

Article 101(3) exemption criteria:

5. Even if the agreement had been found to be a restriction of competition, if MasterCard could prove that it satisfied the Article 101(3) TFEU criteria, it could benefit from an exemption. MasterCard had to prove that the identified restriction contributes to:

a. improving the production or distribution of goods or to promoting technical or economic progress; and

b. consumers must receive a fair share of the resulting benefit, and the restrictions:

i. are indispensable to the attainment of these objectives; and

ii. do not make it possible to eliminate competition in respect of a substantial part of the products in question.

6. The General Court rejected MasterCard's argument that the benefits of the payment scheme as a whole had to be taken into account when a

ssessing whether the Article 101(3) TFEU criteria had been met. The General Court stated that "the improvement must in particular display appreciable objective advantages of such a character as to compensate for the disadvantages which they [the restrictions] cause in the field of competition."1

In other words, it had to be demonstrated that the MIF itself contributed to technical and economic progress.

"Contributes to technical and economic progress

7. The General Court rejected MasterCard's arguments that the MIF contributes to technical and economic progress by enabling the payment scheme to maximise output by balancing cardholder and merchant demands and that this in turn benefits cardholders (by providing a free funding period on charge and credit cards which encourages more cardholders to sign up) as well as enabling merchants who benefit from the payment guarantee borne by the issuers and funded by the MIF.

8. The General Court upheld the European Commission's view that in general payment systems may enable revenue transfer between issuing and acquiring banks which in turn may create efficiencies. However, MasterCard had failed to provide empirical evidence that the MIF provided advantages for merchants (who were the main group to suffer from the higher MSC created by the MIF). While an increase in the number of cards may increase the utility of the scheme as far as MasterCard, the banks and card holders (who benefit from discounts) are concerned, the increase in the number of cards would increase the market power of the banks but reduce the merchant's ability to constrain the level of the MIF. The adverse consequences for a merchant of refusing to accept that payment method would therefore be greater.

9. Furthermore MasterCard failed to prove that there was a sufficiently clear correlation between the costs involved in the provision of those services and the level of the MIF. Those costs must also include other revenues obtained by issuing banks on the provision of those services or by including costs which are indirectly linked to them

10. The General Court also noted that the second limb of Article 101 (3) was also not satisfied as consumers do not get their fair share of the benefits which result from the efficiencies of an MIF. Furthermore merchants may benefit through enhanced network effects on the issuing side, this does not offset their losses from having to pay inflated MSCs.

Remedy imposed

11. MasterCard has not been fined because it originally notified the payment scheme under the previous competition structure which required an individual exemption to be obtained by notifying agreements to the European Commission. The corollary of that notification scheme was immunity from fines if the agreements were found to be anti-competitive.

12. The General Court's judgment requires that MasterCard identify a method of setting the MIF which would satisfy the Article 101(3) TFEU criteria. If MasterCard fails to do this within six months of the General Court's judgment, MasterCard could be subject to daily periodic penalty payments of 3.5% of MasterCard Inc's daily consolidated global turnover in the preceding business year. The European Commission could also require the MIF to be removed from the scheme completely.

13. MasterCard has appealed the judgment to the European Court of Justice. It will therefore be a while before this case is finally resolved.

14. The remedy does not apply to MasterCard's MIF for commercial cards, as the Commission intends to further investigate this area.


15. The judgment of the General Court may at first glance appear surprising given that the Commission decided that VISA 's cross-border MIFS satisfied the Article 101(3) exemption criteria in 2002.

16. The General court in MasterCard distinguished the case of VISA because VISA clearly demonstrated that the MIF was determined by reference to three categories of costs corresponding to services that could be regarded as being provided, at least in part, for the benefit of merchants. These were: i) the cost of processing; ii) the cost of providing payment guarantee and iii) the cost of the free funding period. In addition, VISA offered commitments to reduce the level of the MIF for credit cards to 0.7% and to 0.28% for debit cards. It also agreed to cap the MIF at the level of costs for the following services provided by issuing banks: transaction processing, payment guarantee and free funding period.

17. MasterCard failed to propose any commitments which would satisfy the European Commission at the time of the investigation and therefore received an infringement decision against it. However subsequent to the Commission's infringement decision in 2007 and pending the judgment of the General Court, MasterCard offered the European Commission undertakings to satisfy its concerns. The European Commission announced that these undertakings satisfied the Article 101(3) exemption. Among other undertakings given, MasterCard agreed to reduce level of the MIF to 0.3% for credit cards and 0.2% for debit cards. MasterCard also agreed to increase the transparency of its cross-border fees. These undertakings expired on the day of the General Court's judgment.

18. MasterCard is clearly keen to fight until the end to retain higher levels of MIF, however it remains to be seen whether, pending the judgment of the European Court of Justice, it will extend the period for which its original undertakings apply or indeed whether it will in the end offer a permanent solution to the Commission along similar lines as those undertakings.

19. What is clear is that by accepting the Visa Commitments and MasterCard's undertakings, the European Commission has given strong signals that a zero rated MIF is not the only way to satisfy the Article 101(3) criteria.

Implications of the judgment

20. The Office of Fair Trading ("OFT") has been investigating MasterCard's domestic MIFs for some time. The OFT recently supported the competition analysis provided for in the European Commission's decision and the General Court's judgment and noted that it considers the same analysis applies to domestic MIFs. This suggests that the OFT may issue an infringement decision in relation to domestic MIFS in the UK. This could have the effect of reducing the domestic MSC for retailers which could, in turn, reduce prices of goods for consumers in the UK.

21. If the European Court of Justice finds against MasterCard, merchants who have paid higher MSCs for cross-border MIFs and third parties who have suffered loss as a result of MasterCard's high MIFs will have a right to claim follow-on damages in the Competition Appeal Tribunal or in the High Court against MasterCard for breach of competition law. If the OFT issues an infringement decision, they will also have a right to claim follow-on damages in relation to domestic MIFS. Follow-on damages are actions which rely on the finding of the regulator to prove the infringement.

22. However there is no need to wait until the final judgment as it is possible to bring actions for damages in the High Court by proving that MasterCard infringed competition law and then by proving causation and loss. MasterCard already faces a damages action before the High Court by certain retailers including Asda, Morrisons, Next and Debenhams.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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