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168/05 6 September 2005
The OFT has found that a collective agreement between members of MasterCard UK Members Forum (MMF), including most major banks, setting the multi-lateral interchange fee (the MMF MIF) paid on virtually all purchases in the UK made using UK-issued MasterCard credit and charge cards between 1 March 2000 and 18 November 2004 restricted competition and infringed Article 81 of the EC Treaty and the Chapter I prohibition of the Competition Act.
In 2004, over 700 million purchase transactions were made in the UK using MasterCard cards with a total value of £42.7 billion. An interchange fee was charged on each of these transactions as a percentage of total transaction value.
The OFT has found that the MMF MIF agreement had adverse effects on competition within the MasterCard scheme and also in relation to other payment systems.
The collective agreement deterred issuers of MasterCard cards and merchant acquirers of MasterCard transactions (see note 2) from competing by negotiating their own interchange fees, different from the MMF MIF. In turn, this reduced competition between merchant acquirers because the MMF MIF – as a standard cost for merchant acquirers – directly affected the merchant service charges (MSCs) paid to merchant acquirers by retailers accepting MasterCard cards.
The OFT also found that the MMF MIF was used to recover 'extraneous costs' (see note 4) for services which were not necessary for the operation of the MasterCard scheme as a mechanism for transmitting payments, such as the costs of the interest-free periods provided by card issuers.
Recovering extraneous costs through the MMF MIF resulted in merchant acquirers paying a higher interchange fee to card issuers than if the MMF MIF had been used just to recover the costs of the payment transmission mechanism. This fee was passed on to retailers by the merchant acquirers through higher MSCs. Consumers, including those who do not use MasterCard cards, ultimately picked up the cost for the higher interchange fee through higher retail prices.
As an increase in the standard costs faced by all merchant acquirers, the higher MMF MIF reduced the ability of merchant acquirers to compete on the amount of MSCs charged to retailers.
The inclusion of extraneous costs in the MMF MIF provided a large flow of revenue to card issuers and the incentive to induce customers to hold and use MasterCard cards, for example, through loyalty schemes, advertising and funding the provision of an interest-free period. This distorted competition between the MasterCard scheme and alternative methods of payment such as debit cards, cheques or cash. The recovery of extraneous costs through the MMF MIF also led to a distortion of competition between card issuers within the MasterCard scheme.
Sir John Vickers, OFT Chairman, 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.'
MasterCard introduced new arrangements for setting the interchange fee on 18 November 2004; they currently apply to all UK MasterCard transactions. The OFT has concerns that under the new arrangements the interchange fee applying to UK transactions may still be set with reference to extraneous costs and used to recover these costs. The OFT expects to start an investigation into the new arrangements for setting the fallback interchange fee applying to UK MasterCard transactions unless this concern is addressed by MasterCard.
1. A summary of the decision is available from the Competiton Act public register area of the site. The OFT has published a short companion paper (pdf 83 kb) that gives an outline of the investigation and the reasons for the conclusions reached.
2. This Decision only concerns MasterCard branded consumer credit and charge cards as far as they are used for domestic payment transactions in the UK. It does not concern and makes no findings in respect of MasterCard branded business cards (corporate credit and charge cards) or cross-border transactions. Purchases made using a credit or debit card generally occur in a four-party payment card system, which operates as follows: The cardholder purchases the goods or service from a retailer; the retailer sends the transaction details to its bank, the merchant acquirer; the merchant acquirer forwards the transaction details to the bank that issued the credit card, the card issuer; the card issuer pays the merchant acquirer the retail price of the goods or service less the interchange fee; the merchant acquirer pays the retailer the retail price less a merchant service charge and the issuer debits the retail price to the cardholder's account.
3. MMF members comprise the major UK banks that issue MasterCard credit and charge cards and which are licensed to use the trade and service marks of MasterCard in the UK. The purpose of MMF is to enable its members as issuers of MasterCard cards and/or acquirers of MasterCard transactions, to liaise over issues relating to the development of the MasterCard payment card scheme. MMF is responsible for the adoption of rules governing MasterCard transactions specific to the UK (the UK Domestic Rules).
4. The OFT Decision finds that only the costs of services which are necessary for the operation of the MasterCard scheme as a viable payment transmission mechanism can be recovered legitimately through the MMF MIF. Costs for the provision of other services are considered 'extraneous costs'. The Parties to the MMF MIF agreement have not justified the recovery of extraneous costs through the MMF MIF.
5. The EC Treaty and the Competition Act 1998 both prohibit anti-competitive agreements. Article 81 of the EC Treaty ('Article 81') and the Chapter I prohibition of the Competition Act ('the Chapter I prohibition') apply to agreements which prevent, restrict or distort competition. EC Regulation 1/2003 ('the Modernisation Regulation'), which entered into force on 1 May 2004, requires the OFT, as a national competition authority of a Member State, to apply Article 81, as well as the Chapter I prohibition, when the Chapter I prohibition is applied to agreements which may affect trade between Member States. The OFT has informed the European Commission of this decision under the Modernisation Regulation.
6. Prior to making today's Decision, the OFT issued a Rule 14 Notice in September 2001 and a supplementary Rule 14 Notice in February 2003 (see statement 11/02/03). A statement of objections giving notice to parties of a proposed decision was issued on 10 November 2004 (see press release 184/04).
7. The OFT is currently investigating an agreement between Visa members on the UK Domestic MIF applying to Visa transactions. This Decision makes findings only in relation to the MMF MIF agreement. However, where the OFT applies competition law to other interchange fee arrangements, it expects to do so in a consistent manner.
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