The European Commission’s ruling against MasterCard’s interchange fees was a big victory for retail and could set a precedent that saves the sector more than a billion pounds a year. But, as Charlotte Dennis-Jones discovers, retailers shouldn’t get too excited just yet

Retailers had little time for celebration when they received a very welcome piece of news during the frenetic Christmas build-up of last year.

The European Commission decided that MasterCard charges imposed on retailers for consumers’ cross-border card transactions have violated competition rules for 15 years – a ruling that could save retail businesses millions of pounds a year.

Among the first to cheer at the announcement was the British Retail Consortium (BRC), which has campaigned against the Multilateral Interchange Fee (MIF) for years, arguing it is far higher than the transaction costs incurred by card companies.

While the fee has yet to be abolished officially, things do not look promising for MasterCard; if it fails to withdraw the MIF within six months, it faces the prospect of daily penalty payments of 3.5 per cent of its daily global turnover.

The implications of the European Commission’s conclusion have enormous repercussions for retailers. As BRC director of Europe Alisdair Gray says: “The highest competitive authority in Europe has said the present price structure is not legal, it’s not sustainable and consumers don’t receive any benefit.”

Cross-border transaction fees are not a huge part of UK retailers’ businesses – Tesco group treasurer Nick Mourant says that such transactions account for only 3 per cent of its total business. The real importance of the European Commission’s decision lies in the fact that it has set a precedent for other investigations – namely the Office of Fair Trading’s (OFT) probe into Visa as well as domestic debit card interchange fees. It is unlikely that its conclusion will be different to that of the European Commission’s.

In terms of timescales for the removal of MIFs, Gray anticipates that the OFT will make a decision by early summer at the latest and that, in a best-case scenario, MIF changes should kick in on the high street by Christmas.

The potential savings to be made on all interchange fees – including those within the UK – are significant. BRC figures suggest the fees cost the retail sector approximately£1.5 billion a year, while Mourant says that they cost Tesco£100 million a year. “To put that in perspective,” he continues, “if the interchange fee is 1 per cent and 20 per cent of customers are paying by credit card, that equates to 0.2 per cent on price levels. That’s a significant cost to bear.” What’s more, these are savings that can be passed on to the consumer.

Retailers are miffed

Retailers have several gripes about interchange fees. One of these, says Xavier Durieu, secretary-general of EuroCommerce – the body that represents the interests of retailers across Europe – is the lack of transparency about the way in which they are calculated.

The fees are designed to cover three components: the payment guarantee to help deal with fraud against consumers, the interest-free period that credit card companies offer to consumers and the cost of processing the transaction. However, retailers are not made aware of the exact proportions of these components within that fee. Moreover, retailers feel that the only part of this fee for which they should pay is the processing cost.

Another issue with MIFs is that they are entirely non-negotiable. When a retailer is charged for card transactions, the total Merchant Service Charge comprises a card acquirer fee, a card scheme fee and then the MIF. The card acquirer fee is a fixed transaction that is negotiable, but only amounts to a tiny part of the total cost. The MIF can amount to as much as 98 per cent of the total Merchant Service Charge, says Peter Robinson, DSGi commercial manager for payments and chair of the BRC’s Payments Working Group. “One of the concerns we have is that we don’t have any say,” he says.

As Tesco’s Mourant says, the MIF is “effectively a tax on consumers – the only decision retailers can make is whether we accept the cards in the first place.” Durieu points to the debit card change from Switch to Maestro as another example. Retailers had no choice but to go along with the decision and Durieu says Maestro offers “no functional improvement and yet the fee was 65 per cent higher”.

Equally controversial is the fact that MIFs are calculated as a percentage of the transaction. Robinson says: “Card schemes will say there is a risk associated with a transaction abroad, so the higher the transaction, the greater the risk. But who is responsible for assessing customers’ credit worthiness? The bank. It’s their customer, so why should we be paying?”

Given that there are so few competitors in the card scheme market, retailers also suffer as a result of marketing drives, continues Robinson. “Visa and MasterCard are competing against each other to attract the same card holders. If a card issuer says, for instance: ‘I’m going to offer customers 5 per cent cashback on all items bought with a MasterCard-branded card’, that will attract new customers for them. But who ends up paying? The retailer,” he says.

Durieu stresses that retailers and the various bodies that have campaigned against the MIF are not against the banks making money. But he points out that Australia is proof that the MIF can be scrapped and banks remain profitable.

In Australia’s case, MasterCard was outwardly sceptical about whether the retailers’ resultant savings were being passed on to the consumer. But Gray says: “The way we compete is through price. As soon as you lower the input costs, these savings have to go through to consumers.”

Of course, this would be the obvious response from the retail industry. However, the Reserve Bank of Australia – a neutral third party – also sided with the retail sector. When the debate was in full swing in March 2006, the bank’s assistant governor Philip Lowe said: “I know a lot of people believe that this cost saving has not been passed on to consumers, but instead has flowed through to merchants’ profits. This is not a view that we share and it is one that sits uncomfortably with the normal dynamics of a competitive market. If firms have lower costs, eventually prices will be lower, too.”

However, MasterCard argues that the changes in Australia have had the reverse effect. “It has resulted in higher card-holder charges, reduced card features and benefits, less competition and diminished investment and innovation,” says MasterCard Europe president Javier Perez. “There is no evidence that consumers benefited from lower merchant prices as regulators predicted.” MasterCard is appealing the European Commission’s decision.

One fee for all

The probable abolition of MIFs does not mean that there will be no fee at all; it is accepted that the overall Merchant Service Charge still needs to include the cost of processing transactions. The BRC is calling on card companies to ensure any new charging system includes the cost of processing and operates on a fixed fee-per-transaction basis, rather than a percentage.

But retailers be warned; the BRC has unearthed a new trick that card schemes have up their sleeves. Aware that they were going to be found in breach of EU law, they have begun looking at other ways to make money – well before any MIF changes come into effect. Some of the BRC’s members have alerted it to sudden, unexplained rises in card scheme fees.

Continuation of the retail industry’s committed campaigning against such fees will be vital; MasterCard and Visa have far greater lobbying and legal powers than retailers could ever hope for. Durieu stresses that retailers’ active campaigning and involvement to date has been instrumental in the European Commission’s decision in December. “Their assistance in this campaign was of huge importance, particularly with regard to provision of the facts and figures,” he says.

Durieu adds: “There is a lot to be done to ensure that public authorities understand the magnitude of the system and the reason why it’s unfair. It’s important to raise awareness that, ultimately, this is a cost that affects all consumers – whether they pay by card or cash.”

Given the emerging changes in card scheme fees and potential appeals from card companies, the future is not certain. Retailers are undoubtedly in a better place than they were a few weeks ago, but one thing is for sure: the card schemes won’t give up without a fight.


What are Multilateral Interchange Fees?
They are the fees charged by a card holder’s bank to a retailer’s bank every time a sales transaction is made. When a shopper uses their card, the retailer receives the retail price less a Merchant Service Charge – most of which comprises the interchange fee.

Why do retailers dislike them?
MIFs are non-negotiable and there is no transparency about how card issuers calculate the fee. Also, the fee covers far more than the cost of simply processing the transaction – retailers have to pay for components that are of no benefit to them, such as the interest-free credit period offered to customers. The fee is a percentage payment – retailers want a fixed fee per transaction.

What does the European ruling mean?
The European Commission has ruled that the MIFs in cross-border transactions are unlawful and violate competition rules. The ruling is an important development, because it has set a precedent for impending decisions about Visa, as well as domestic debit card interchange fees, presently under investigation by the Office of Fair Trading.

Are interchange fees likely to be abolished?
Probably – the European Commission is the highest competitive authority in Europe. According to the BRC, retailers could see cost savings as early as December 2008.

If they are abolished, does the future look rosy?
Abolition would be great news for retailers, but there are signs that card issuers are looking at other revenue streams and ways to make money from card transactions.