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An article relating to this blog post on Finextra:

EC hits Visa Europe with interchange antitrust charge

The European Commission (EC) has accused Visa of violating antitrust rules over cross border interchange fees just days after reaching agreement with MasterCard on the same issue.


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What's Wrong with Making a Profit?

Why is it that the EC has such a problem with the card associations over cross-border fees, and interchange generally?  What do they think is going to happen when these organisations find that doing business in the EU is simply too unprofitable?

Surely, the fact that we have two large (and one smaller) associations competing for business means that there is competition.  If the fees are similar, then that is because neither dare stray too far from the other, for fear of losing business - that's what competition does over time.

If the EU thinks that it is a success to either stop fees, or reduce them to the level where providing the service is a loss maker, then they (and we) will find that the service either becomes unavailable, or unreliable, as costs are cut to suit.

Part of the argument against the fees is that they diminish competition.  Not really; the cost charged by the associations to the banks is a base cost that the banks must take into account.  This is one cost amongst many that an acquirer must take into account when determining their own price (the MSC), just like the cost of people, IT, utilities, premises, etc. also have to be taken into account - not to mention the margin they want to make.  There is plenty of scope within all that financial make-up to enable healthy price competition between the financial companies that provide acquiring services.  The Associations have to be able to not only cover their costs but also make profits that they can use to develop their services and infrastructure further, and deliver a return to their shareholders.  If they don't, maybe they will withdraw their services, which will help no-one.  At the end of the day, if the charges got too oppressive, one of the associations would probably see the opportunity to build market share and the price would come down - that's what happens in a healthy competitive situation.

I don't think those in the EU responsible for harrassing the associations understand all this.

In any case, the EU itself is a huge monopoly.  We don't get much say in whether we want to pay for the overbearing dictatorship that is the Commission, and we certainly are not getting the ability to regulate the obscene expenses that they claim.  Maybe they should allow competition to emerge in how we are governed - even some kind of proper democratic say would be nice...

Talk about kettle calling pot black. 

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Comments: (2)

Nick Collin
Nick Collin - Collin Consulting Ltd - London 07 April, 2009, 10:58Be the first to give this comment the thumbs up 0 likes

Well said Roger!  The other point which the EU can't seem to grasp is that the interchange fees are not actually paid to Visa and MasterCard - the fees are paid exclusively by one bank to another - from an acquirer to an issuer for non-ATM transactions.  So the long term effect of reduced interchange fees (which seems inevitable) will be that merchants pay less, and consumers will pay more, once issuers respond to reduced interchange income by increasing other forms of revenue such as annual fees, which as a consumer I think would be a pity.  There will be no net effect on the incomes of MasterCard and Visa unless the total volume of card payments drops.

Jan-Olof Brunila
Jan-Olof Brunila - Swedbank - Stockholm 09 April, 2009, 10:12Be the first to give this comment the thumbs up 0 likes

Dear Roger,

Having dealt with competition authorities since 1995 in interbank fee matters, I do believe that the EU Competition Authority understands that businesses need to make a profit. The problem is that we banks and the card schemes invited them into the game since we have been using multilateral interbank fees. This means that banks as a collective in the role of card scheme members, agree these fees thus creating an industry level agreement on an important cost component for merchant acquiring, the pos interchange. Normally competing companies would not work together to establish a commonly used cost component, but instead try to undercut each other with more effective cost structures in order to make a better profit and/or attract more business. The banks in Sweden decided to get out of this trap by establishing a bilateral agreement structure on interbank fees and we have since then been checked by the authorities a couple of times due to complaints from merchant organisations and received SCA approval. In my mind the card schemes should work around the multilateral  obstacle or change their business model. 

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