What others are saying
It’s not just Europe’s retailers who are complaining about the hidden card fees shoppers end up paying. Below is a selection of comments from regulators, bankers and academics on the unfair impact of the card companies' anti-competitive pricing.
Neelie Kroes, European Commissioner for Competition
Head of Europe’s competition watchdog, Neelie Kroes has been quite outspoken in her criticism of the hidden card fees facing Europe’s consumers. As the EU’s Competition Commissioner, it is Neelie Kroes who will ultimately decide on whether MasterCard and Visa’s practices as they now stand break European competition law. So what has she been saying?
“The state of competition in Europe's retail banking markets is, quite frankly, a cause of real concern.”
“[A leading retailer] in the UK applies a surcharge for payment by credit cards, to reflect the higher costs they incur for such a payment. How have customers responded? Unsurprisingly, many customers are now choosing to pay with debit cards, which are less expensive. This is an example of giving correct price signals to consumers, thus promoting the use of less expensive payment instruments. This is what I call transparency.”
“The costs of high interchange fees are of course being passed onto all customers through higher retail prices. Prices you pay whether you use cash, by cheque, debit or credit card. More transparency would enable customers and retailers to see the real cost of using their cards, and then make an informed decision on how to pay. Why should customers paying with debit cards or cash subsidise customers who pay with expensive credit cards?”
“What most people don't realise is that every year European consumers are paying fees worth €25 billion to banks for providing payment card services. That's quite a bill we all share!”
Speech: Getting more from financial services markets: greater competition for a better deal for consumers, The Future of Europe public lecture series, London School of Economics, 19/02/2007
“High card fees to firms – particularly SMEs – seem to produce high profits for banks.”
Speech: Competition Policy and Consumers, General Assembly of Bureau Européen des Unions de Consommateurs (BEUC), Brussels, 16/11/06
“We found several problems in the market for payment cards, arising from the way the industry sets card fees and from the rules that incumbents set to keep new entrants out of the lucrative payment cards market…”
“…payment card fees vary substantially across Member States. Retailers in some countries pay up to four times higher fees than in other countries. In my view these high fees are the result of a lack of competition in a market where 95% of cross-border card payments are made by two companies. The situation is even bleaker in some Member States, where there is only one single acquiring bank servicing retailers.”
“…the Commission has serious concerns about the level of interchange fees. Our inquiry has gathered the best empirical evidence available. And that evidence casts doubt on the various and often contradictory justifications advanced by payment card networks in defense of their practices. The current situation where consumers paying with debit cards or cash subsidize consumers paying with credit cards is unacceptable…”
“The Commission has an open case against MasterCard and once the Visa exemption decision expires, we will be looking again at their interchange fees too.”
Speech: 13th International Conference on Competition and the 14th European Competition Day in Munich, 26/03/07
Charlie McCreevy, European Commissioner for the Internal Market
“…the recent World Retail Banking Report sponsored by EFMA shows that prices for electronic payments in the eurozone decreased by 3% on average last year, [yet] prices are still 21% higher in the eurozone than in the rest of the world.”
“There is a justifiable concern that under current market developments, this increased [payment card] functionality is likely to come at the cost of increased market concentration and a more expensive payment card for the merchant. Furthermore, the existence of proprietary standards may reduce competition in payments card processing…The Commission has already expressed concerns regarding recent developments in the cards market and possible price increases linked to SEPA.”
“Improving the competitiveness of European card-based payments,” EFMA Cards and Payment Conference, Paris, 18 September 2007
The European Central Bank
The ECB has responsibility for overseeing the good functioning of the Eurozone’s payment systems. It too has come to some worrying conclusions about the health of the payment cards market, especially as it is seeking to break down barriers between payment systems in different countries.
“While the Eurosystem welcomes the willingness of Visa and MasterCard to offer domestic card services for the euro area, it is deeply concerned about a possible evolution whereby the two international card schemes progressively become the only providers of card payment services offered by banks in the euro area…”
“…Up to now, the two schemes have functioned with very similar business models, with relatively high cost structures and high interchange fees, which leads the Eurosystem to fear that competition limited to these two systems would be insufficient to maintain the present low level of fees in Europe. Additional worries are triggered by uncertainties about the governance of the two systems…”
“…Interchange fees can also be an obstacle to competition as they reduce the ability of merchants to negotiate the fees they pay to their acquirers.”
Document published by the ECB, ‘The Eurosystem's views of a "SEPA for cards"’, November 2006
UK Office of Fair Trade (OFT)
Sir John Vickers, Chairman of the UK’s Office of Fair Trade critisised the fees in September 2005. This was when the OFT ruled that a collective agreement between members of MasterCard’s UK Members Forum – setting the multi-lateral interchange fee – restricted competition. Sir John Vickers said: "The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services. This unduly high interchange fee was like a tax on UK consumers."
There are a number of academics who appear at conferences to defend Visa and MasterCard’s hidden fee structure – but even they have had to admit that not all is rosy with interchange fees…
“Merchants are likely to pass the extra costs, if any, of card transactions through to consumers in general, that is to cardholders and cash payers altogether.” Jean-Charles Rochet & Jean Tirole, ‘Externalities and Regulation in Card Payment Systems’, Review of Network Economics Vol.5, Issue 1 – March 2006
Additionally, several eminent academics and practitioners from outside Europe have also spoken out against the fees and the practices.
Harvard Law Professor Elizabeth Warren
On FRONTLINE’s 2004 programme called "The Secret History of the Credit Card,” Harvard Law Professor Elizabeth Warren explained that the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print."
As Professor Warren sees it, the industry is operating without fear of penalty. "There's no regulator, and there's no customer who can bring this industry to heel," Warren says.
The Better Business Bureau of the United States
Also on FRONTLINE, the American dispute settlement organisation called the Better Business Bureau, indicated that credit card and banking companies are the subject of a record numbers of complaints. "It's not an accident that the banking and credit card business generates more complaints nationally, across the country, than any other industry…Out of one thousand industries that we track, they are number one," says Pat Wallace, head of the San Francisco Bay Area Better Business Bureau. "There are irritated, unhappy, dissatisfied customers in this industry."
Henry O. Armour, President and CEO of the US National Association of Convenience Stores
“Because of the market power of the card associations, retailers have no choice about whether they accept cards. Second, the card associations exploit their market power by driving up fees and by veiling these fees and their rules in secrecy. Third, these fees are bad for consumers – particularly some middle and many lower income consumers who do not have easy access to credit and debit cards."
Mallory Duncan, US National Retail Federation’s Senior Vice President and General Counsel
“The activities you [state legislators] are doing in the states to shine a light on these [interchange] fees and make consumers aware of them is an important step in the right direction. When Visa and MasterCard take their cut, they don’t take it on just the retail sale, they take it on the entire transaction including the sales tax. That’s not their money. The sales tax is the people’s money, and they shouldn’t be trying to take a piece of it. That drives up prices even higher, and everybody ends up paying a tax on a tax.”
Philip Lowe, Assistant Governor of the Reserve Bank of Australia
“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 … it was clear that interchange fees played an important role. We felt it necessary to address [them]. 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… 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.”