UK's OFT To Probe MasterCard, Visa Interchange Fees

In view of developments since the MasterCard decision was made, the OFT has concluded that it is far better to look at MasterCard's and Visa's arrangements at the same time, and in the wider context of UK interchange fees on payment cards as a whole.

The proceedings in the CAT raised serious procedural problems which led the OFT to consent to the setting aside of its original decision. This leaves the OFT free to devote its resources to carrying out simultaneous investigations and reaching decisions in respect of MasterCard's and Visa's current arrangements, rather than continuing action on historic arrangements.

OFT Chief Executive John Fingleton said: 'We still believe that the interchange fee arrangements that are now in place could infringe competition law and are harmful to consumers, who pay higher prices as a result of these fees. Continuing to defend appeals against the original decision before the Competition Appeal Tribunal diverts us from dealing most effectively with the overall problem of interchange fees. Our resources are better spent in reaching decisions on MasterCard's and Visa's current interchange fee arrangements rather than continuing with these appeals which concern only MasterCard's historic arrangements.'

He continued: 'It's in the best interests of consumers and businesses to see this serious problem addressed quickly through focussing on current and future arrangements. This will allow OFT to focus on action which delivers real benefits to business and final consumers.'

NOTES

1. Interchange fees are payments made between banks on virtually all purchases in the UK made using Visa and MasterCard cards. These are passed on to merchants and ultimately, in OFT's view, to all consumers through higher prices.

2. The original MasterCard decision was made on 6 September 2005 and announced in press release 168/05. A new investigation into MasterCard's current credit card interchange fee arrangement was announced in press release 20/06. The OFT's investigation into Visa's current credit card interchange fee arrangement was discussed in press release 195/05. MasterCard UK Members Forum (MMF), MasterCard International Incorporated, MasterCard Europe Sprl and Royal Bank of Scotland Group appealed that decision to the CAT. Visa and the British Retail Consortium intervened in that appeal. It is that decision that OFT consented to being set aside by the CAT.

3. The MasterCard decision found that a collective agreement between members of 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 1998. The OFT also found that the MMF MIF was used to recover 'extraneous costs' for services. These are costs which in OFT's view are 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.

4. In appeal proceedings, MasterCard advanced for the first time a new approach to calculating those elements of the interchange fee allowable in terms of the reasoning of the original decision. If accepted by the Competition Appeal Tribunal, this new approach would have allowed much higher interchange fees than the OFT had previously been led to understand, resulting in higher costs for merchants and consumers. This would have left the original decision of little, if any, value to consumers.

5. However, even apart from that, the OFT wished to rely in the CAT on arguments not contained in the OFT's original decision; and that fact in itself raised very serious procedural problems which led the OFT to conclude that it was better to focus its energies on MasterCard's and Visa's current arrangements rather than MasterCard's historic arrangements.

6. MasterCard and Visa account for between them, over 90 per cent of credit cards in issue and a similar proportion of credit card transactions. 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.

7. 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.