Peter Mair worked for almost 40 years with the Reserve Bank and is now Australia’s leading advocate for consumer reform in banking. The recent cave-in to Visa by the European Commission on credit card interchange fees is a tragedy and Peter is looking for some answers.

And that suits the banks — and the politicians. Banks know that ‘hidden’ fees, further obscured by the deft use of ‘no-charges-at-all’ smoke and mirrors, is a facade behind which they can effectively overcharge. Transactions that most bank customers have been led to believe are ‘free’, are actually the most highly priced transactions of all. On average, credit card transactions have a hidden cost of $2 or more, paid by the customers in loaded retail prices.

A year or so back, in the UK and Australia, official reports were released that showed how banks (internationally) were grossly overcharging for ‘credit card ‘ transactions. Last October the European Commission served notice on Visa (and MasterCard) that it was about to severely curtail the overpricing of credit card transactions, indicating that the ‘interchange’ fees especially were literally ‘offensive’.

A few days ago, however, the European Commission did an about face and without explanation let Visa off the hook. The following letter sent to the European Commission asks for that explanation.

Globally, the revenues flowing to banks from collusive credit card agreements are of a magnitude to make Ali Baba blush. In Australia alone the arrangement unfairly bolsters bank profits by some $1 billion a year. Worldwide, credit card schemes entail now-at-risk bank revenues of some $US25 billion a year or more. Big bucks are at stake here.

Big bucks vs the public interest — who will win in Australia when the Reserve bank delivers its decisions later this year?

The Reserve Bank knows that the banks’ agreements on interchange fees are ‘wrong’ — they would also be increasingly aware that eventually they will have to get this tiger off the back of the banks. The sooner the better, one might think. Lets hope.

Peter Mair, 26 August 2001

Letter to the European Commission after Visa cave-in

European Commission

Directorate-General Competition


Case COMP/29.373 __ Visa International

I am hoping that the European Commission might consider a response from abroad to the invitation to submit observations about the way that the Visa credit card case has apparently unfolded. The focus of this response is the changed attitude of the EC to the role that interchange fees for credit card transactions might properly play in the Visa and like transaction network schemes.

Proposed EC policy decision – last October

Last October, in a media release dated 16 October 2000, it seemed that the emerging attitudes in the EC against the legitimacy of credit card interchange fees resonated with those emerging in other countries. Around that time, similar views had been expressed in the UK (Cruickshank Report) and in an Australian report prepared jointly by the central bank and the competition authority (RBA and ACCC).

In short, the interchange fees matter was topical and not surprisingly, I suggest, there was a broadly based international consensus that the prevailing arrangements were excessive and offended against ‘competition policy’ — that they were a collusive price-fixing arrangement that operated clearly contrary to the public interest.

I believe it is generally fair to say that everyone that ever looked at credit card interchange fee arrangements from a public policy perspective saw the same thing — clearly inappropriate commercial behaviour that was breathtaking in its audacity.

At that time, the European Commission itself commented to the effect that,

the Commission doubts whether the interchange fee is acceptable under EC competition law;

“the interchange fees for international operations amounts to a collective price agreement which is restrictive of competition”;

“Visa International had not so far put forward any convincing reasons showing that the interchange fee fulfils the cumulative conditions for exemption under the EC anti-trust rules”;

interchange fees were not necessary for the functioning of the scheme; and

merchants ought not to be forced by the card companies to foot the bill for transactions made with cards.

These comments resonated with emerging public policy attitudes worldwide. Visa was invited to comment.

EC’s new position in August 2001

On 11 August the EC foreshadowed a final decision on the Visa matter that, in essence, would:

first, require only a marginal and delayed reduction (some 20%, to 0.7%, over a five-year period) in the interchange fee that is effectively jointly agreed between Visa credit card issuers;

second, newly authorise the introduction of an interchange fee for debit card transactions of some $US0.25; and

third, exempt a relatively new class of business-to-business commercial cards, with specific characteristics, from restrictions on charging uniform interchange (and other) fees for B2B transactions.

The statement went on to say (under the heading “objectivity”) that Visa would disclose separately for credit and debit cards, three categories of costs involved in supplying network payment services. These cost categories are the cost of providing transactions; the cost of free funding the float (interest-free period) and the cost of providing the payment guarantee.

Reactive analysis – immediate disbelief

As someone that has closely followed the debate on interchange fees in Australia and other countries, the announcement that the EC intends to adopt a favourable position concerning credit card interchange fees was, to say the least, a complete surprise. One can only wonder about the content of Visa’s response to the ‘invitation to comment’ that was extended by the EC last October.

One reasonably asks for Visa’s response to be made public. One would also like to have access to the EC’s assessment of the points put by Visa, and its own internal analysis generally. Put differently, many would be keenly interested to understand the changed attitude in the EC. A change that can fairly be regarded as both dramatic and odds with still-current, indicative attitudes in other countries, albeit perhaps still embryonic.

It is only to be expected that competition authorities in other countries would be seeking to learn from this public policy precedent about to be set in Europe. My earnest hope is that the benefit of such further explanation also be made available more widely to interested and potentially affected communities around the world. I would like to know.

On more thoughtful reflection, still disbelief

One obvious analytical sticking point concerns the reasonable avoidability of some costs proposed to be included in the interchange fee for credit card transactions that is deemed to be acceptable by the European Commission.

In particular:

if customers’ debit card arrangements allowed for an overdraft line of credit to be attached, the need for either merchants or card issuers to extend ‘free credit’ would be avoided; and

as debit card transactions are usually finalised in real-time, the cost of providing the payment guarantee would presumably also be avoided by substituting debit card transactions for credit card transactions.

One might, accordingly, reasonably ask why debit card facilities are typically not made available in association with a line of credit. One might reasonably ask why some transactions (eg over the ‘phone and internet) are generally only permitted to be made using credit cards. One might reasonably ask a number of questions that have as their rhetorical intent the demonstration that the credit card product is now essentially redundant and that the terms on which credit cards are made available, including as an exclusive transaction device, render it a contrivance against the public interest.

An additional criticism of the EC decision is that the cost of processing transactions on behalf of merchants and cardholders could be recovered directly and explicitly from ‘merchants’ and ‘cardholders’. Fees could be charged directly to merchants by transaction acquirers (including the cost of passing the transaction to a card issuer) and fees charged directly to cardholders by card issuers. Many would say that the case for any interchange fees in mature network transactions schemes is a weak one — and the danger that such fees would disguise profiteering, one best avoided.

A special circumstance

The same line of argument would argue against interchange fees for debit card transactions, except in recognition of a special circumstance (and one always ‘hates’ to acknowledge a legitimate special circumstance lest it also become an avenue of market abuse).

That said, a ‘special circumstance’ could be said to arise if the application of an interchange fee were to allow the removal of all other explicit fees for direct debit card transactions. For one thing, the attendant loading of retail prices by merchants (to recover an interchange fee paid to card issuers) would be less it the fee paid by merchants were tax-deductible (while a fee paid explicitly by cardholders, would not be).

Such a public policy position — in essence, the tax-deductibility of personal bank fees for debit card transactions — may be defensible on two scores:

first, and most importantly, the absence of explicit fees for EFTPOS, debit card transactions would partly compensate for the practical inability of merchants to charge separately for costly cash-currency transactions; and

second, in a second best world, subsidising the provision of debit card transaction facilities would compensate for the comparable subsidy of cheque transactions that arises in some countries from banks bartering interest-free transaction deposit balances in exchange for free-of-charge or under-priced cheque writing facilities (in which case personal income tax is avoided on the personal interest income not received).

Both these points are about protecting the scope for commercially viable innovations to be made in payment technologies. Innovations, like stored value cards, that will promote the substitution of electronic funds transfers in transactions now made with conventional ‘cash’ currency, cheques and credit cards.

End Piece

Everything I know of the public policy debate about pricing retail banking services and credit card transactions in particular tells me that the EC is proposing to make a ‘wrong’ decision by legitimising excessive interchange fees for credit card transactions.

In my view, the proposed decision is ‘wrong’ in terms of the EC’s own prior inclinations last October. It is ‘wrong’ in terms of the precedent and expectations that will be argued to support similar decisions in many countries where, unlike Europe, the credit card is unfortunately a major retail payment instrument. It is ‘wrong’ in terms of the yet unexplained contrariness of such an important decision of the EC, when assessed against the universal inclination elsewhere to proscribe or otherwise severely curtail the scope for banks to levy such fees.

I would like to see the EC now explain an intention to do something that many would regard as inexplicable.

It is more important that you respond to the world than to me.

Yours faithfully,

Peter Mair (23 August 2001)