What is happening in Europe is not an isolated case. Visa, MasterCard and the banks that hide behind them try around the world to continue and spread their anti-competitive activities. Yet in some countries, they are no longer able to get away with it.

In the US, the redress system works primarily through litigation. Back in 2003, major American stores including Wal*Mart and Sears took Visa and MasterCard to court for anti-competitive behaviour in forcing retailers to a) accept all cards bearing the Visa and MasterCard logos and b) pay artificially high prices for debit card transactions as these were around 10 times higher than those related to debit cards using a Personal Identification Number (PIN). Out of court settlements were reached separately with Visa and MasterCard in which MasterCard agreed to pay $1 billion and Visa $2 billion. The settlements also allowed shops and businesses to choose which cards to accept or not and on what terms. But since then, Visa and MasterCard have been up to their old tricks again and have repeatedly increased interchange fees, most recently in April 2007.

On the regulatory front

Within a one year period, there have been three Congressional hearings during which Members called for a closer examination of credit card interchange-related practices and policies:

• The US Senate Banking Committee held a hearing on Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers on 25 February 2007.
• The US Senate Judiciary Committee held a hearing on Credit Card Interchange Rates: Antitrust Concerns on 19 July 2006.
• The US House of Representatives Subcommittee on Commerce, Trade and Consumer Protection of the Energy and Commerce Committee held a hearing on the Law and Economics of Interchange Fees on 15 February 2006.
  

Yet, according to US Senator Chris Dodd (Connecticut Democrat) who has tried numerous times to introduce legislation to curb industry practices, “every one of the attempts has failed.” Dodd says that the credit card industry "has become very, very powerful. And it's very successful in defeating every legislative attempt that's been made over the last several years to inject some responsibility on the part of this industry."

In his opening statement at the hearing in his Committee, Senator Dodd also criticized interchange fees saying: “Interchange fees are growing exponentially. These opaque fees — assessed on merchants — are passed on, in part or whole, to consumers who have no knowledge or understanding that a fee is even part of the cost of bread or milk or any other consumer product.”

Another US Senator, Arlen Specter (Republican, Pennsylvania), who was the Chairman of the US Senate Judiciary Committee at the time of this Committee’s hearing (July 2006) on antitrust concerns related to interchange rates, had this to say about the practices: “We may need to modify our antitrust laws to stop credit card companies from engaging in activities to gouge and jack up prices.”

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	According to US Senator Arlen Specter: “We may need to modify our antitrust laws to stop credit card companies from engaging in activities to gouge and jack up prices.”

Click here to get more detail about what is happening on payment cards in the United States.

The Reserve Bank of Australia (RBA), in its role as national watchdog of banks, began investigating interchange fees in the mid-1990s and determined that competition among payment card issuers was “having the perverse effect of raising interchange fees”. After unsuccessfully seeking a voluntary reduction in interchange fees, the RBA in 2003 forced Visa and MasterCard to cut their credit card fees by bringing them to an average as low as 0.55% of the cost of the transaction, down from 0.95%. The decision also increased transparency in the way the fees are calculated and allows for non-banks to enter the card market thereby insuring greater competition. Since 2003, there is a standard or cost-based benchmark on interchange fees. It is a transparent benchmark based on a breakdown of costs. As a result of this system, shops and businesses are allowed to charge customers a fee for paying with a payment card. Since the change, interchange fees and merchant service fees have fallen by a similar amount as acquirers passed on their lower costs.

At a Federal Reserve conference in 2005, Philip Lowe, Assistant Governor of the RBA explained why Australia took these measures:

“We formed the view that existing access arrangements and restrictions on merchants imposed by the card schemes were stifling competition. When we looked at why the relative prices were so far out of line with relative resource costs it was clear that interchange fees played an important role. The end result was that merchants had little option other than to charge higher prices to all their customers to pay for the relatively large subsidies to credit card users… We felt it necessary to address interchange fees. These fees are not subject to the normal forces of competition and in the RBA’s view were distorting the use of payment methods in Australia.”

“The reform process has also been subject to legal challenges. In the case of the credit card reforms, both MasterCard and Visa took the RBA to court, arguing that it had overreached its powers. After a six week hearing, preceded by more than eight months of intensive preparation, the challenges were comprehensively rejected and MasterCard and Visa were ordered to pay the RBA’s costs.”

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	According to Philip Lowe, Assistant Governor of the Reserve Bank of Australia: “These fees are not subject to the normal forces of competition and in the RBA’s view were distorting the use of payment methods in Australia.”

Similarly the New Zealand Competition Commission has been investigating domestic interchange fees. Once again, MasterCard and Visa were unable to convince the Commission that their interchange fees worked in favour of consumers. In November 2006, the Commission filed a law suit against Visa and MasterCard and 11 financial institutions for price-fixing so as to require an end to the anti-competitive practices and seek penalties.

The Commission alleged that fixing the interchange fees and doing so while restricting retailers is anti-competitive. “Retailers are not permitted to charge customers extra to use credit cards, and so must recover the fees by increasing prices, regardless of whether customers pay by credit, cash or EFTPOS.”

The Commission did not allege any collusion between Visa and MasterCard. The alleged price-fixing was between Visa and its shareholder financial institutions, and between MasterCard and its member financial institutions. The companies face penalties of up to $10 million per price-fixing breach, or three times the commercial gain resulting from the breach, or 10% of a company’s turnover. The matter is now before the Courts.


Other countries

MasterCard and Visa and their interchange fees have also aroused the interest of regulatory authorities and central banks in a range of further countries across the world. These include: Brazil, Columbia, Mexico, South Africa, Singapore, Switzerland, and Israel.

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