MasterCard Must Stop Hurting EU Merchants

(CN) - The EU General Court has slammed MasterCard for charging merchants to process credit card transactions.

Under the MasterCard system, a card-issuing bank retains part of all charges that a consumer applies to his payment cards. Since the merchant must swallow that loss, known as multilateral interchange fees (MIFs), the European Commission found that it constituted a price-competition restriction.

In 2007, the agency ordered MasterCard to repeal the MIFs within six months or face fines of 3.5 percent of its daily consolidated global turnover.

MasterCard and two subsidiaries appealed the commission's decision to the EU General Court, claiming that banks would have to offer competing payment cards or reduce cardholder benefits if they lost the MIFs.

Though MasterCard said both options would affect its viability, the Luxembourg court found that MasterCard has plenty of other sources of revenue aside from MIFs.

The court pointed to several banks that do not charge MIFs and noted that banks in the U.K. make 90 percent of their income from credit card interest, and only 10 percent from interchange fees.

"It must be observed that the existence of such revenues and benefits makes it unlikely that, without a MIF, an appreciable proportion of banks would cease or significantly reduce their MasterCard card issuing business or would change the terms of issue to such an extent as to be likely to result in holders of those cards favoring other forms of payment or turning to cards issued under three-party schemes, which might affect the viability of the MasterCard system," according to the ruling.

"In other words, while a reduction in the benefits conferred on cardholders or the profitability of the card issuing business might be expected in a system operating without a MIF, it is reasonable to conclude that such a reduction would not be sufficient to affect the viability of the MasterCard system."

Since the fees are not objectively necessary to MasterCard's economic viability, the commission correctly considered how MIFs affect competition, the court ruled.

The commission found that, without the MIF, merchants could exert greater competitive pressure on costs they incur for accepting credit cards.

MasterCard also failed to shuck the bank label that the commission applied, though its 2006 Initial Public Offering forced financial institutions to give up control of the company.

"It is nevertheless apparent from the matters of fact and of law ... that the banks continued, collectively, to exercise decision-making powers in respect of the essential aspects of the operation of the MasterCard payment organization after the IPO, both at a national and at a European level," the court found.

"Those banks, as the commission rightly pointed out ... benefit, by virtue of the MIF, from a minimum price floor which readily enables them to pass on the MIF to merchants," according to the court.

"Thus, in the context of the banks' acquiring business, the MIF represents a cost for the banks only if they decide to absorb it themselves," it added. "However, it is apparent ... that that is the exception rather than the rule."

The judges also upheld the commission's threat of fines to force compliance as neither excessive nor disproportionate.

"The obligation formally to repeal the MIFs, to modify the association's network rules and to repeal all decisions on MIFs ... is a direct consequence of the finding that those MIFs are unlawful," the court concluded. "It is not disproportionate therefore, as it is confined to bringing the infringement at issue to an end."

MasterCard has 60 days to appeal the court's decision to the Court of Justice, on points of law only.

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