MasterCard on the dock, OFT finds its fee violates competition rules |
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Wed, 07 Sep 2005 13:05
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LONDON: Britain's competition watchdog, the Office of Fair Trading, has charged that the fee credit card association MasterCard is levying on retailers violated competition rules and led to higher retail prices. It estimated that consumers in Britain are paying more than 100 million pounds a year in illegal taxes imposed by the card company and warned that it should change the unfair practices or face penalties.
However, MasterCard International reacted to the charge saying it disagreed with the contention and would appeal. The OFT decision would affect services offered to cardholders and lead to higher cardholder fees and charges, it said.
The OFT in its communiqué to the card organisation and the member-banks said the collective agreement between the MasterCard UK Members Forum (MMF) deciding on the fee paid by retailers to issuing banks on purchases between March 2000 and November 2004 restricted competition. OFT chairman John Vickers said the parties to the agreement set the interchange fee that brought revenues from retailers and their customers over and above the costs of providing the payment services. "This unduly high interchange fee was like a tax on U.K. consumers."
Describing the interchange fees a tax on consumers, which breached both British and European Union competition laws, the OFT said even customers, who do not use MasterCard's cards, paid the cost for the higher interchange fee as a result of higher retail prices.
The OFT had released an interim finding in November last and MasterCard had changed some of its practices then. However, the watchdog said these changes are peripheral. An OFT spokesperson said, "We are concerned that the new arrangements for the interchange fee continues to be set with reference to costs over and above actual transactions. It is using the interchange fee to recover extra costs."
While the findings pertain to the fees levied between March 2000 and November last year, the OFT said that it would scrutinise the association's new fee structure. If it conducts a new inquiry, it is empowered to levy fines on MasterCard of up to 10 per cent of the "relevant market".
In defence of the interchange fee, MasterCard said consumers stood to benefit from greater choice as more retailers accept credit cards and retailers benefit as card usage expands. MasterCard, Northern Europe general manager John Bushby said the OFT ruling failed to recognise that interchange fees had helped expand new technology and more secure means of payment.
The OFT ruling did not impose any penalties at this point, but gave a chance to MasterCard to correct the anomalies. Though credit card companies do not disclose their fee structure, a government study in 2000 indicated that the interchange fee amount to 1.1 per cent of the purchase price. According to records, as many as 700 million transactions were made on MasterCard in 2004 at a total value of 42.7 billion pounds.
There is uncertainty in Britain about fees charged but consumers continue to use the card and draw up huge amounts in debts even as an overall slowdown in spending prevails in the country. According to official figures, Britons had 55 billion pounds in credit card debt in July.
The OFT said its objection primarily pertains to the single "interchange fee" levied by MasterCard to those retail banks rather than allowing them to negotiate their fees individually. It is also against the card issuer including charges to take care of inducements to acquire the card, such as interest-free periods and membership rewards, which meant the consumers paid for services, which they do not want.
Another investigation is on now by the OFT into practices followed by Visa.
MasterCard, owned by 1,400 financial institutions, is planning a 1 billion-pound IPO.
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