MasterCard has six months to scrap the non-negotiable interchange fees it charges for cross-border transactions or face daily penalties, under a ruling by the European Commission (EC).
The EC has ruled that multilateral interchange fees (MIF) charged for cross-border transactions made with MasterCard and Maestro debit and credit cards "violate EC Treaty rules on restrictive business practices".
The EC says its investigation found that MasterCard's fees "inflated the cost of card acceptance by retailers without leading to proven efficiencies". The card network now has six months to comply with an order to withdraw the fees.
If Mastercard fails to comply, the EC says it may impose daily penalty payments of 3.5% of MasterCard's daily global turnover in the preceding business year.
"Multilateral interchange fee agreements such as MasterCard's inflate the cost of card acceptance by retailers," says EC Competition Commissioner, Neelie Kroes. "Consumers foot the bill, as they risk paying twice for payment cards: Once through annual fees to their bank and a second time through inflated retail prices paid not only by card users but also by customers paying cash."
MasterCard Europe has released a statement saying it intends to appeal the ruling to the European Court of First Instance. The card network says it will comply with the Commission's order but will take legal action so that its "payment products remain competitive".
The company says its decision to appeal is "based on its firm conviction that market forces, not regulation, should drive key decisions such as the setting of interchange fees and retailers' choices over which forms of payment to accept".
"If left unchallenged and adopted by national regulators, the Commission's approach would not only be bad news for consumers but a blow to investment and innovation in the European payments industry, resulting in slower implementation of the single euro payments area (Sepa)," says MasterCard's statement.
Commenting on the decision, Javier Perez, president, MasterCard Europe, says: "After years of review of MasterCard Europe's transparent, default cross-border interchange fees, the Commission failed to appreciate that without a mechanism to fairly share costs among all the participants in a payment system that functions across Europe and around the globe, consumers will be hurt."
"The Commission has also ignored the experience in Australia where regulators forced down interchange fees, resulting in higher cardholder charges, reduced card features and benefits, less competition, and diminished investment and innovation," adds Perez. "There is no evidence that consumers benefited from lower merchant prices as regulators predicted. Not surprisingly, the Australian payment card business has seen slower growth since regulation was introduced."
Perez claims a large reduction in issuers' revenues would also force cutbacks on the investments in new services and technology: "This goes directly against the goal of establishing a single market for payments throughout the euro area and the European Union as a whole."
MasterCard's cross-border interchange fees, which were introduced in 1992, range from 0.4% and 1.2% of each transaction. The fee is kept by the customer's bank and charged to the merchant's bank, which then takes this cost element on board in setting its prices to merchants.
Kroes says card networks can charge these fees only if they can prove a greater benefit for consumers or the economy.
In its statement the EC says: "During four years of investigation MasterCard failed to submit the required empirical evidence to demonstrate any positive effects on innovation and efficiency which would allow passing on a fair share of the MIF benefits to consumers. The Commission therefore concluded that MasterCard's MIF does not lead to objective efficiencies that could balance the negative effects on price competition between its member banks."
In the EU over 23 billion payments, exceeding a value of EUR1350 billion, are made every year with payment cards. Some 45% of European payment cards carry a MasterCard or a Maestro logo.
Retail association EuroCommerce welcomed the news, saying it would result in lower prices for European consumers.
"Consumers should not pay twice for the bill. Retail is a competitive sector where all actors compete on prices and services", says Feargal Quinn, president of EuroCommerce. "The outcome of this decision could exceed EUR10 billion per annum in the years ahead."
The new ruling will as act as a guide for Visa Europe. In 2002 Visa negotiated an 'antitrust exemption' agreement with the EU's Competition Commission and agreed to reduce levels of interchange fees for processing card transactions in return for immunity from legal action.
However the Visa exemption ends at the end of this month and Kroes told reporters that she would re-investigate Visa's fee structure from January.