What are interchange fees?

Interchange fees are charged by a cardholder's bank (the 'issuing bank') to a merchant's bank (the 'acquiring bank') for each sales transaction made at a merchant outlet with a payment card.

Interchange fees are either agreed bilaterally, between one issuing and one acquiring bank, or multilaterally, by a number of issuing/acquiring banks or by means of a decision binding all banks participating in a payment card scheme. The industry refers to these multilateral interchange fees as "MIFs". A MIF can be a percentage, a flat fee or a combined fee (percentage and flat fee).

When a customer uses a payment card to buy from a merchant, the merchant receives from his bank (the acquiring bank) the sales price less a 'merchant service charge', the fee a merchant must pay to his bank for accepting the card as means of payment for that transaction. A large part of the merchant service charge is determined by the interchange fee. The customer's bank (the issuing bank), in turn, pays the acquiring bank the sales price minus the MIF and the sales price is deducted from the customer's bank account. The MIF is therefore a cost that is finally charged to the merchant (through the reduction of the purchase price) who passes the costs on to consumers in the price level of the good or service.

What are the Commission's competition concerns as regards interchange fees?

The concerns as regards interchange fees?

The Statement of Objections sent to Visa Europe on 3 April 2009 (see MEMO/09/151) outlined the Commission's preliminary view that the MIFs set by Visa Europe restrict price competition between acquiring banks by artificially inflating the basis on which these banks set their charges to merchants. They thereby effectively determine a minimum level for the merchant service charge below which merchants are unable to negotiate a price.

The restrictive effect of the MIFs is enhanced by the implementation of other system rules and practicerules and practices such as the "honour all cards rule", "no surcharge rule" and blending of merchants fees, which hinder the merchants' ability to manage their payment costs.

However, MIFs are not illegal as such. They can be considered compatible with EU antitrust rules if they have positive effects on innovation and efficiency and allow for a fair share of these benefits to be passed on to consumers in accordance with Article 101(3) of the Treaty on the Functioning of the EU.

Which commitments has Visa Europe offered as regards interchange fees?

Visa Europe has offered to cap the weighted average MIF for consumer immediate debit card transactions at 20 basis points (bps), i.e. 0.20% per transaction. For instance, if the average transaction value were €50 an average MIF of maximum 10 cents would be applied. The cap would be applicable to cross-border transactions within the European Economic Area (EEA) and, separately, to domestic transactions in each EEA country where MIFs are either set directly by Visa Europe (Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, Malta, the Netherlands, and Sweden) or the Visa Europe cross-border rates would apply by default.

How was the amount of the immediate debit MIF calculated?

The amount was calculated by comparing the merchants' costs of accepting payments in cash to those of accepting payments made by a payment card. These calculations are without prejudice to a further calculation should new information regarding the costs of cards as compared to the costs of cash become available.

Does this amount seem, at preliminary view, compatible with the EU antitrust rules?

Yes. Based on studies conducted by the central banks of several EU countries comparing the costs of cards with those of cash, the Commission is of the preliminary view that the MIF Visa Europe has committed to apply to consumer immediate debit card transactions is in conformity with the 'merchant indifference methodology' or 'tourist test'. The fee that meets this test (also referred to as the balancing fee) is set at such a level that the merchant is indifferent as to whether he receives a card or cash payment. The balancing is such that merchants do not pay higher charges than the value of the benefit that the card use generates for them.

For instance, such transactional benefits arise where card payments reduce merchants' costs as compared to cash payments e.g. because transportation and security expenses for cash are saved or check-out times at cashier desks are reduced. To the extent that the fee is passed on to the cardholder, it will ensure that cardholders make efficient choices across payment instruments. In that case, the MIF will allow giving correct price signals to cardholders who will adjust their behavior accordingly. Importantly, this approach prevents the MIF from being set at a level that would allow banks to take advantage, by collective agreement, of the fact that individual merchants feel compelled to accept a payment card even if it is more expensive than other payment instruments, fearing their customers would otherwise not make purchases at their store (e.g. because other merchants accept the card).

Will a MIF set in compliance with the merchant indifference methodology be automatically compliant with Article 101 (3) TFEU?

No. The 'tourist test' provides a reasonable benchmark for assessing a MIF level that generates benefits for merchants and consumers. As explained in the previous paragraph, it allows determining a MIF that triggers the promotion of efficient payment instruments, while at the same time preventing abuses to the detriment of the scheme's users.

However, the general applicability of the 'tourist test' for the purposes of Article 101 (3) TFEU depends on the specifics of the markets at hand. Some (non-exhaustive) cautionary examples are listed below:

While a MIF at appropriate levels makes the use of efficient payment instruments more attractive for consumers, other, maybe less-restrictive, mechanisms may achieve the same result. This is the case, for instance, if merchants themselves can be expected to efficiently incentivize the use of less costly payment instruments by applying rebates to those means of payment. In such a scenario a MIF may not be necessary, as direct incentives given by merchants may internalize network externalities between merchants and users of payment instruments more directly.

When a payment card would reach universal usage in a market even without MIF, the need to promote the issuing of such a card in terms of network effects would vanish.

More generally, there must be a reasonable channel through which interchange fees can promote the use of cards. For instance, the reward programs for credit cards, which directly incentivise the use of these cards, typically do not exist for debit cards and cardholding across Member States is already widespread (but not complete). Therefore, possible future increases of the 'tourist test' estimation for debit cards cannot automatically justify an increase in the debit card MIF, unless payment card associations can ensure that the banks receiving such a higher MIF have appropriate cash-back programs for debit cards that would directly incentivise a wider use of debit cards on a per-transaction basis.

Conversely, circumstances may arise under which justifications for higher MIFs could be demonstrated by payment card associations. However, significant objective evidence would be needed to establish that this is the case.

More generally, where a MIF would be considered as a restrictive business practice under Article 101 (1) TFEU the parties to the agreement may be able to demonstrate that despite its restrictive effects the agreement meets the exemption conditions of Article 101 (3) TFEU, namely:

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the MIF creates efficiencies that outweigh the restriction of competition;
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consumers get a fair share of those benefits;
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there are no less restrictive means of achieving the efficiencies; and
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competition is not eliminated altogether.

In this respect, there is a need to ascertain that the MIF is set at a realistic level, based on an analysis that shows that the MIF indeed yields the objective efficiencies which are passed on to consumers. The burden of proof to demonstrate the fulfilment of the four conditions under Article 101 (3) TFEU lies upon the scheme and its members.

Economic literature shows that under a number of conditions MIFs for payment cards that are fixed at the "merchant indifference level" are economically efficient. Under this test it also appears that the conditions of Article 101(3) are met and these commitments have been analysed by the Commission using this methodology.

The commitments only cover transactions with debit cards. What happens with the ongoing case concerning credit cards and deferred debit cards?

The commitments offered by Visa Europe only cover transactions with debit cards (which do not have a credit facility attached to them). The commitments do not cover MIFs set by Visa Europe for consumer credit cards and deferred debit cards (which allow consumers to settle their bill at a later moment, for instance at the end of the month).

The Commission's ongoing antitrust investigation and the Statement of Objections (see MEMO/09/151), though, cover the fees for all three of these types of transactions. If, after a positive market test, the Commission concludes that the commitments are suitable to remedy its competition concerns regarding debit cards, the Commission would close the proceedings on this particular issue. This would be the first time that the Commission accepts partial commitments in an antitrust investigation.

The investigation regarding MIFs for credit and deferred debit cards would continue. Following certain changes introduced by Visa Europe to fees for cross border transactions shortly before the issuing of the statement of objections, the Commission intends to extend the scope of the investigation so as to include also those fees.

Why do the proposed commitments not cover payments with credit cards?

The dialogue between Visa Europe and the Commission has to date not led to an agreement concerning the application of the merchant indifference methodology to consumer credit and deferred debit transactions. Discussions on this issue continue.

How will Visa Europe increase transparency?

Visa Europe made the commitment to continue and further improve the transparency measures introduced by the Visa Europe Board in March 2009. In particular, Visa Europe has committed to:

maintain the separation of merchant services charges applicable to more than one payment card system or more than one type of Visa Europe's cards (no "blending" of charges) and require acquirers to invoice merchant service charges itemised according to card types;

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continue to require Visa Europe members to register all MIF rates and apply them to cross-border issued and cross-border acquired transactions;
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continue to publish all intra-regional and domestic MIFs on its website in a way that identifies an applicable interchange rate for all types of transactions and to require acquirers to inform merchants of the publication;
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ensure that all commercial cards issued in the EEA are fully visibly identifiable for merchants and can be electronically identified at Point Of Sale terminals by the acquirer and the merchant if the terminal is equipped to that effect;
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maintain the 'Honour All Cards Rule' (HACR) as it applies to consumer debit transactions and to inform merchants that they are free to choose to accept VISA branded cards and/or VISA Electron branded cards and/or V PAY branded cards;
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continue allowing merchants to have different acquirers for each type of payment card within the Visa Europe system and/or competing schemes.

How long will the commitments be in force?

Visa Europe has undertaken to observe the proposed commitments during four years. However, the Commission may, in agreement with Visa Europe, modify the weighted average cap should new information regarding the costs of cards as compared to the costs of cash become available. In particular, the Commission has carried out a pilot to prepare a study with a view to improving the factual basis for assessing the level of MIF that would be in accordance with the merchant indifference methodology. The study is expected to be launched at the end of 2010. Stakeholders, including Visa Europe, will be consulted on the methodology and scope of the study.

What are the expected benefits for consumers and merchants of Visa Europe's proposed commitments?

Setting interchange fees at efficient levels will help reduce costs for consumers, including the costs they currently bear without knowing it.

Retailers pass on the merchant service charges, including MIFs, to their customers through higher prices for the goods and services they sell. Therefore, consumers ultimately pay the fees that banks charge merchants. This means that cardholders pay twice for card use: once to their bank and once through increased retail prices. Even consumers that never use a card but pay in cash are bearing these costs, as they are exposed to exactly the same retail prices as cardholders.

In general, shops do not display the fees attached to different means of payment and consumers are therefore often unaware of the true costs. This allows payment card schemes to raise their fees to levels where each card payment becomes more expensive than non-card payments. In that case, a payment made with a card imposes a hidden cost on consumers as compared to a payment without a card.

Currently, consumers do not see what they are paying for. It is therefore important for consumers that MIFs are set at an efficient level and that customers and merchants know and pay the real cost for using their cards, in order to make an informed decision on which means of payment to use. The balancing fee ensures that card payments do not create extra costs for customers, because the fee is set at a level that makes card payment no more expensive than cash payments and consequently merchants are not forced to raise prices just because customers make card payments.

Some concerns have arisen, that lower MIFs may have a negative impact on consumers, for example through higher fees for cardholders, and through merchants requiring consumers to contribute to the cost of card payment or offering rebates for using less expensive forms of payment. However, consumers already now pay for the use of cards, even if some of those costs are hidden in retail prices. Ultimately, retail prices have to cover all of a merchant's costs, including those for accepting card payments; and a large part of the merchant's cost for card payment is made up by the MIF.

What is the relevance of the proposed commitments for other payment schemes?

The proposed commitments are in line with the undertakings offered by MasterCard in April 2009 (see MEMO/09/143) as regards the methodology used for calculating the MIF for immediate debit card transactions and the corresponding MIF level.

Therefore, Visa Europe's commitments represent an important step towards the creation of a level playing field in the payments card market and in ensuring the success of the Single Euro Payments Area (SEPA) since, like the MasterCard undertakings, they provide a benchmark for setting MIFs that allow consumers and retailers to enjoy a fair share of the benefits they generate.

However, the Commission needs to examine each case on its own merits and take account of the specificities of each payment system when assessing MIFs under the TFEU competition rules.

What are the next steps?

Pursuant to Article 27 (4) of Regulation 1/2003, the Commission has published a "market test notice" with a summary of the proposed commitments in today's EU Official Journal, inviting interested parties to present their comments. If, following the results of the market test, the Commission reaches the conclusion that the proposed commitments are suitable to remedy its competition concerns, the Commission would adopt a decision pursuant to Article 9 of Regulation 1/2003, making the commitments legally binding on Visa Europe. The Commission's ongoing antitrust investigation would be closed with regard to MIFs for debit cards transactions.