UK Ruling Could Be Beginning Of End For Interchange Fee

UK Ruling Could Be Beginning Of End For Interchange Fee

[Correction] The final seven paragraphs were amended on June 25 to reflect the correct name of the CMSPI speaker, Callum Godwin; two of his quotes were also clarified. 

  • Pressure now on regulators to follow the ruling
  • Court declared schemes’ fees are anti-competitive

The UK Supreme Court’s landmark decision on interchange fees last week could be the first step towards the controversial charges being abolished entirely.

The Supreme Court largely upheld previous decisions by the Court of Appeal (CoA) which found that Mastercard and Visa’s multilateral interchange fees (MIFs) restricted competition in the card acquiring market.

It determined that the MIFs charged by Mastercard breached competition rules and were not exempt under Article 101(3) of the Treaty on the Functioning of the European Union (TFEU), which provides for such exemptions under certain, limited circumstances. Visa’s fees were also found to be in breach of competition rules but the question of exemption has yet to be decided by the Competition Appeal Tribunal (CAT), as is the case in Sainsbury’s claim against Mastercard.

The court found the schemes restricted competition within the meaning of the EU, as well as UK law.

The decision is expected to bring many more claims for damages against the card schemes, although some experts have said that the biggest impact of the ruling may be the future of MIFs themselves.

Frances Murphy, a partner at Morgan, Lewis & Bockius who acted for Sainsbury’s in its claim against Visa, said that Mastercard’s inability to prove that merchants received any “overriding benefit” from paying the MIFs meant that it could be impossible to justify the fees going forward.

Only if the card schemes had been able to prove that merchants received benefits from the MIFs could they have gained exemption from the competition infringement under Article 101(3) of the TFEU.

There is a duopoly in the card acquiring market — a 2015 Retail Banking Research report found that Visa and Mastercard together accounted for 86 percent of the European cards market.

“No one can go elsewhere because the market’s completely tied up,” Murphy told VIXIO PaymentsCompliance.

“There’s no negotiation around the MIF — the banks get together, they agree it, and so merchants have no involvement in trying to negotiate it down and that’s the principal reason why the courts have found it to be a restriction of competition.”

But merchants may have to wait some time before the MIFs, which are currently capped by the Interchange Fee Regulation (IFR), are abolished.

Murphy said that the schemes “aren’t going to be quick to react” considering the number of similar claimants “waiting in the wings”. If they were to cut interchange fees unilaterally, they would leave themselves open to claims of historical redress similar to the cases ruled upon in last week’s decision.

However, merchants are unlikely to wait before taking action.

“It essentially seems to me to be a ruling that there’s no exemption,” Callum Godwin, chief economist at payments consultancy CMSPI, told VIXIO.

“On the evidence of all the legal and economic arguments put forward in the decisions made by the Supreme Court I simply do not see how you could ever decide that the interchange fees are exempt at any level.”

It will be up to the Payment Systems Regulator (PSR) in the UK or the European Commission to determine whether last week’s ruling is the last legal nail in the coffin for MIFs.

But the PSR told VIXIO that “the cases relate to fact pre-Interchange Fee Regulation and we will continue to follow this matter to its conclusion with interest”.

Although the IFR sets a cap on fees of 0.3 percent for credit card transactions and 0.2 percent for debit cards, this was expressly done without prejudice to any application of competition law; Murphy described it as a “stopgap” measure while investigations were ongoing.

Godwin added that it will be interesting to see if the PSR addresses the issue in its card acquiring market review, or waits until any decision by the CAT. There is also an ever increasing issue with unregulated card fees popping up. “It’s like a game of whack-a-mole.”

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