Whether you use a credit card or not, you pay a hidden fee on virtually every transaction you make. The fees have an inflationary effect and they add up. They cost European shoppers tens of billions of Euros every year.

Terminology varies from country to country, but broadly speaking, payment cards include:

There are two sets of fees paid by retailers... and therefore two sets of fees ultimately paid by their customers each time a card is used for a payment: the merchant service charge (MSC) and the multilateral interchange fee (MIF).

Have a look at the diagram on the left – it illustrates how it works in practice. Start off on the bottom left as the cardholder purchasing something for €100. Follow the arrows all around to the retailer and you’ll start to get the picture. If you follow the arrows up to the top right, you’ll see that the retailer’s bank (known as the acquirer) levies a fee for this transaction to the retailer of €3 – which is known as the “merchant service charge” or MSC. The acquirer bank keeps €1 to cover processing costs and profit, and sends the remaining €2 to the second bank to cover its fee for the entire transaction. This second fee is known as the “multilateral interchange fee” or MIF and is decided behind the scenes, either by Visa or MasterCard or by the banks hiding behind them – all without input by retailers or shoppers, and often without their knowledge. As a result of this fee, shops actually receive less than the full price paid by the cardholder.

The card companies say they need the money from the MIF in order to cover three services:

Retailers dispute the legitimacy of these costs, questioning whether they are based on actual costs and believe that a host of other costs are covered by the interchange fee such as reward programmes and advertising.

And interchange fees can vary according to the kind of credit or debit card used – often without the cardholder having any idea. So cards given by businesses to their employees, known as ‘commercial cards’, can incur interchange fees up to 50% higher than normal cards – and retailers and their customers have to foot the bill!

First of all, Visa and MasterCard do not inform customers of these interchange fees, they simply set them with the banks behind them and charge retailers and their shoppers accordingly. We believe you have the right to know more about these fees.

It is even more unfair for shoppers who do not use the credit or debit cards. That’s because these hidden fees are not charged just to cardholders - that is forbidden the rules of by some card schemes and banks. The high cost of card payments must be passed on across all purchases. This drives up the cost of goods and services for all consumers whether they pay with plastic or cash. This has a serious knock on effect for the wider economy.

A European Commission report demonstrated the high level of profits that go to the banks behind Visa and MasterCard for these interchange fees. In 2004, for example, the activity of issuing Visa and MasterCard gave a profit-to-cost ratio was 65%. That means for every Euro in costs, these banks generate €0.65 in operating profit. The report also noted that if the interchange fee increases by €1, experience shows that only €0.25 is passed on to the card holder in lower fees.

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The average European household pays €139 per year on interchange fees alone. Visa, MasterCard and their banks will tell you that interchange fees were designed to cover the costs of the banks which issue payment cards to cardholders. Rather, interchange fees are a hidden way of providing issuing banks with additional income at the expense of all shoppers, whether they are cardholders or not.

Furthermore, even though new technology and economies of scale continue to reduce the cost of credit and debit card transaction processing, card companies are still charging fat interchange fees. Indeed, a 2006 report found that only 13% of the fees go toward these processing costs, with the rest going to bank profits, expensive advertising campaigns and rewards. The same study found that 44% of the interchange fees pay for reward programmes for consumers and banks.

Transactional or processing costs like credit card interchange fees should drop with volume, but instead these fees keep rising. In 2006 MasterCard announced an increase in its cross-border interchange fees in some markets – of up to 25%.

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Unless constraints are imposed by regulators, payment card companies and their banks can increase interchange rates at any time by any amount. In the words of the European Competition Commissioner, Neelie Kroes, “these high fees are a result of a lack of competition in a market where 95% of cross border payments in Europe are made by two companies. The situation is even bleaker in some Member States, where there is only one single acquiring bank servicing retailers.”

We believe you have the right to know about these fees bringing inflationary pressure on to the cost of your purchases. So what would happen if there were lower or no interchange fees? Experience shows that savings in the retail supply chain are passed through to shoppers due to the intense competition in the retail sector.

Yet because of the banks’ anti-competitive rules, businesses are not able to negotiate on card fee levels. Retailers and their customers have no choice but to pay the excessive fees! Shoppers would get a better deal if retailers were free to negotiate the cost of card payments on an open market. Just as savvy shoppers shop around to get the best price, retailers want to do the same for card payments.

Shoppers like have a range of payment options available to them – cash and cards are both popular – and that is why businesses want to accept both cards and cash. But few shoppers realise that how they pay for a transaction can have serious cost implications for the business they are buying from. Indeed, €25 billion goes straight into the pockets of the banks for providing payment card services. And it’s the shops, businesses and ultimately their customers who pay those fees.

And in many countries, interchange fees vary according to the type of shop or business or the size of the business. Why should that be? The actual cost of processing a card transaction is the same whether it is for a €15 bunch of roses or a €1 500 television. But Visa and MasterCard and the banks behind them often try to impose different interchange fee rates on different types of business. The fact that interchange fees vary so greatly reflects the fact that they are simply slapped on as a commercial decision by Visa and MasterCard and they are not based on real costs faced by the banks. And we know that shops and businesses have no control over these fees either.

The European Commission, acting as Europe’s competition watchdog, ruled on Visa’s operating regulations for cross border transactions, finding them to be anti-competitive but a “necessary evil.” However the ruling did establish important key principles and required that Visa’s system of multilateral interchange fees had to undergo major modifications.

In 2003, the European Commission initiated legal proceedings against MasterCard’s multilateral interchange fee for cross-border transactions on the belief that the system is anti-competitive. By May 2004 Visa and MasterCard had agreed to publish their cross-border multilateral interchange fees on their respective websites as a direct result of pressure from the European Commission to improve transparency.

But still the European Commission was not satisfied. It commissioned a thorough investigation of the payment cards market which confirmed that:

The Commission is continuing its investigations of MasterCard’s hidden interchange fees in Europe and is due to rule on their legality in the coming months. A subsequent re-investigation of Visa’s fees is due for 2008.

By the beginning of 2008, the European banking sector is set to launch the new Single European Payments Area (SEPA), which is intended to for payments by card what the euro did for cash.

For shoppers, SEPA is supposed to allow you to pay for goods and services electronically across EU countries using a payment card with ease. It is supposed to also allow you to be able to transfer money from your home bank account to an account in another EU country faster and cheaper.

And yet this new scheme might actually lead to higher prices if it is not properly controlled. There is a real risk that SEPA may result in higher prices, less competition and a worse deal for consumers. This risk comes because banks may use SEPA as an occasion to abandon the relatively low-cost national debit card schemes in place in many Euro zone countries. In their place, banks would move to MasterCard or Visa’s pan-European debit card systems based on more costly and anti-competitive interchange fees. Obviously these schemes make the banks more money. This would mean that any advantages of SEPA would be undermined by higher payment card costs – costs which would have to be borne by retailers and their customers.

SEPA should mean: