UK: Mastercard fee found to infringe UK and EU competition law

Last Updated: 14 September 2005
Article by Susan Hankey and Simon Leathley

On 6 September 2005, the OFT decided that the fee charged by banks issuing Mastercards and paid by the bank of the retailer accepting a Mastercard payment (the "multilateral interchange fee" or "MIF") infringes both the UK and the EC prohibition on restrictive agreements (Chapter I prohibition of the Competition Act 1998 and Article 81 EC Treaty). The decision finds that the MIF restricted competition both within the Mastercard scheme and with other payment schemes. The decision covers transactions using UK-issued Mastercard credit and charge cards from 1 March 2000 to 18 November 2004.

Most major banks in the UK which issue Mastercards have to date agreed collectively on the level of the MIF, rather than individually entering into agreements with Mastercard to determine the level of the fee. While the OFT recognised that a collective agreement was preferable due to the difficulty and cost involved in each bank coming to an individual agreement with Mastercard, it found that the MIF was nevertheless too high. It has decided that the MIF allowed banks to recover more than just the costs integral to the operation of the Mastercard payment scheme. For example, the agreed MIF allowed banks to recover the costs of interest-free periods provided by card issuers.

The OFT also examined the impact of the MIF on the fees paid by retailers for processing credit card transactions (the "Merchant Service Charge" or "MSC"). It found that due to the high MIF, MSCs were also higher than would otherwise have been the case. It also found that the higher MSCs for retailers were generally passed on to consumers in the form of higher prices that applied whether or not the consumer used a Mastercard.

The OFT’s decision relates to the MIF in place between 1 March 2000 and 18 November 2004. No fine was imposed in this case as the parties notified the agreement to the OFT as soon as the Competition Act 1998 came into force (an option which is no longer available since "modernisation" changes in May 2004).

The OFT has however stated that it is concerned that the MIF in place since 18 November 2004 is too high and that it expects to open an investigation into the current arrangements unless Mastercard addresses its concern.

The key points to note from this decision are as follows:

  • the OFT recognises that payment card networks provide benefits to customers and in principle they can be acceptable under UK and EU competition law if set at an appropriate level
  • for such schemes, the appropriate level must be no greater than the costs of the payment transmission services incurred by issuers
  • in practice, these networks need to be able to show that consumers receive a fair share of the benefits – the authorities will scrutinise closely if and how costs are passed on to consumers
  • recovery of costs other than those integral to the operation of the system is likely to give rise to competition concerns.

The OFT’s Mastercard decision comes against a background of intense competition scrutiny of payment card systems. The OFT is currently also investigating the agreement setting the MIF for Visa cards and the European Commission is in the process of studying interchange fees. The OFT has identified credit markets as a key priority area. In addition, June 2005 saw the launch of a European Commission inquiry into the financial services sector, focusing first on payment cards.

For the OFT’s press release on this, please click on or copy/paste the following link:

http://www.oft.gov.uk/News/Press+releases/2005/168-05.htm

For the companion paper to the OFT’s decision, please click on or copy/paste the following link:

http://www.oft.gov.uk/NR/rdonlyres/6CC8A113-4BA9-49C7-992E-01C0A74055B0/0/oft811.pdf

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 13/09/2005.

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