The mystery around bank interchange fees
While the world of bank interchange fees can at best be described as murky, competition regulators across the globe have been searching for clarity by scrutinising these fees and how service providers, primarily Visa and Mastercard, impose these fees.
Essentially, interchange fees are charged by a retailer’s bank to a customer’s bank when a card transaction is processed. The retailer’s bank then passes the fee onto the retailer, who in turn passes the cost onto the consumer. It is fairly unclear how these fees have been set between banks but it has been alleged in some jurisdictions that the setting of these fees is anti-competitive and, in some cases, can amount to price fixing. Against this background, competition regulators began digging.
The French Competition Authority has been the most recent to investigate this area. The Authority commenced an investigation in February 2009 into major providers Visa and MasterCard in response to complaints from French retailers. The Authority took the view that the mechanism by which the rates are set – collectively by Visa and MasterCard and their members – may be anti-competitive. In May this year, the Authority secured fee reductions from the two companies and this offer was made binding in September, with Visa and MasterCard agreeing to reduce their fees by 44% and 49% respectively.
These recent events in France reflect the broader changes being made to interchange fee regulation in Europe. In July, the European Commission (EC) announced a new set of rules that will introduce a cap on interchange fees across the European Union. The EC has been investigating the anti-competitive effects of interchange fees for a number of years, securing commitments from Visa this year, with investigations into MasterCard continuing. The new rules aim to prevent excessive fees being charged and to promote consumer welfare in the EU.
The approach taken across the Atlantic in the US, whilst similar, has taken on a more litigious flavour. In 2011, the Federal Reserve cut the interchange fee on debit card transactions, leaving in place the fee that can be charged for credit card transactions. In response to this, retailers commenced class action proceedings against the major banks for a breach of antitrust laws. A proposed $7.2 billion settlement looks to be under threat, with the Court yet to make a decision on whether to approve the deal. Many of the retailers involved in the dispute have expressed significant concerns about the terms of the settlement, which features a clause that forces the retailers to give up their right to sue in the future. It has also been argued that the changes Visa and MasterCard are required to make as part of this settlement will do little to stop them from continuing to charge the fees in the future.
While events in these jurisdictions seem to indicate a trend towards greater regulation of the interchange fee system, exceptions to the rule always exist. Closer to home, Singapore’s Competition Commission (SCC) has recently granted clearance for Visa’s interchange fee system, seven years after Visa voluntarily notified the SCC that the system may breach competition laws. Ultimately, the SCC found that there was no conclusive evidence that the system would diminish competition in the market for both consumer and seller’s card payments.
In Australia, Visa and Mastercard have been designated by the Reserve Bank of Australia (RBA) as payment systems for purposes of the Payment Systems (Regulation) Act 1998 and are, therefore, subject to the RBA’s regulation and oversight. Under the Payment Systems (Regulation) Act, the RBA is empowered to determine and publish Standards to be complied with by participants in a payment system. Standards have been determined in relation to interchange fees for designated credit cards and debit cards which sets a common benchmark fee which must not be exceeded. In addition, a recently published standard came into force on 1 July 2013 which sets a benchmark ceiling fee for bilateral and multilateral interchange fees for the EFTPOS system, with the stated purpose of the standard (and other such standards) being to promote efficiency and competition in the Australian payments system.
In a nutshell, there appears to be an increasing global trend towards greater regulation of interchange fees, in an attempt to prevent banks charging excessive fees or engaging in anti-competitive practices. However, this is not an issue in Australia due to the RBA’s oversight of these fees.
Authors: Kim de Kock and Chris Murphy