Where should the regulatory intervention of the French Competition Authority in the credit/debit card sector end?

Transcription

1 Where should the regulatory intervention of the French Competition Authority in the credit/debit card sector end? This article was first published in The Journal of Regulation, in January 2012, and is republished here with kind permission. Olivier Fréget Partner, Paris Tel olivier.freget@allenovery.com Athene Chanter Associate, Paris Tel athene.chanter@allenovery.com Todd Fishman Partner, New York Tel todd.fishman@allenovery.com

2 Interchange fees set by the main credit/debit card 1 associations play an important role in the retail banking sector, however they remain largely invisible to consumers. These fees have long been the focus of competition authorities around the world which continue to investigate them in an attempt to make the landscape of the retail banking industry more competitive. In this article, we look at the approach taken towards these fees in the US as well as at EU and national level. We discuss the fact that both the EU and the US competition authorities have taken their analysis to the outmost limits of competition law but seem to have given in at the last lap, refusing in the end to enshrine the measures taken by defining a direct regulation, letting the legislator to act if it deems necessary. The French Competition Authority's very recent decision concerning the reduction of interchange fees by the Groupement des Cartes Bancaires (GCB) shows its willingness to overcome this limit. In its decision, the Authority provides for the creation of a supervisory system of the commitments in the form of a committee which it will run. I. Card Payment Systems: Interchange Fees US and EU Background When a customer buys goods or services with a payment card under certain four-party payment systems 2 (see the schema below), such as those operated by Visa, MasterCard or the GCB 3, the merchant pays the acquirer (the financial institution that accepts payments on behalf of the merchant) a merchant service charge. The acquirer in turn pays the issuer (the financial institution that issues the customer's card) an interchange fee (IF) 4. Interchange fees may be agreed either on a bilateral basis, between issuers and acquirers, or on a multilateral basis, where the fee is applicable to all financial institutions participating in the payment card scheme. Generally, Multilateral Interchange Fees (MIFs) are integrated in the price that banks charge to merchants for handling a transaction. They bring about a cost which is in turn integrated by the merchants in the price of the goods or services sold to consumers. In practice, for cost reasons, bilateral interchange fees are rare. During 2011, the regulation of MIFs experienced a significant change in the United States. This may also be the case in the European Union in the months to come. The French Competition Authority recently addressed the subject of MIFs in its decision dated 7 July A. United States 1. Credit and Debit Card Interchange Fees in the United States Americans' use of payment cards for personal expenditures has increased dramatically in recent years. Since 2005, over half of all retail transactions in the United States have been paid for with credit, charge or debit cards 6. Four general purpose cards dominate this market: Visa and Although the term "credit/debit card" will be used throughout this article, it should be noted that the situation is different in France in that the Groupement des Cartes Bancaires (unlike the Visa/Master cards) does not make any distinction between debit and credit the GCB' cards are thus all charge cards. This term to describe payment systems such as those operated by Visa, MasterCard or GCB, which involve four separate participants, i.e. the cardholder, the issuing bank, the merchant and the acquirer: (i) the cardholder uses a payment card to purchase goods and services from a merchant network (ii), the cardholder's issuing bank markets and issues cards to consumers, (iii) the merchant accepts payment cards in exchange for goods and services and (iv) the acquiring bank enrols merchants into programs that accept the payment cards from a specific network (e.g. Visa). American Express, by contrast, functions under a three-party system. There are therefore two sets of fees paid by retailers each time a card is used for a payment: the merchant service charge (MSC) and the multilateral interchange fee (MIF).. When a cardholder makes a purchase, the retailer's bank (known as the acquirer) levies a fee for this transaction to the retailer (the "merchant service charge" or MSC). The acquirer bank keeps a percentage of this amount to cover processing costs and profit, and transfers the rest of the amount to the second bank to cover its fee for the entire transaction. This second fee is known as a "multilateral interchange fee" or MIF. In this article we consider the issue of MIFs. Figure taken from Jean Tirole's article Payment Card Regulation and the Use of Economic Analysis in Antitrust, published in CPI, Volume 7, Number 1, Spring Issuer of credit card create a revolving account and grant a line of credit to the consumer/user from which the user can borrow money (be it for payment to a merchant or to withdraw cash); the credit card thus allows the user a continuing balance of debt, subject to interest being charged. In contrast, debit cards pull money directly out of the customer's checking or brokerage account; these card do not create or increase a loan and if the available funds are insufficient, the transaction is not completed (also called payment card in the UK). For its part, a charge card requires the balance to be paid in full each month. As indicated above, in France, the GCB only issues charge cards.

3 MasterCard together account for approximately 71 percent of U.S. credit card purchase volume 7 ; American Express for 24 percent; and Discover for 5 percent. As in Europe, these companies set maximum interchange fees, from which issuing banks rarely deviate. Interchange fees vary considerably among each brand of card: in 2009, Visa domestic credit card interchange rates ranged between.95% and 2.95% of the value of the transaction, while MasterCard rates ranged between.90% and 3.25%. The total value of interchange fees paid in the United States has also increased dramatically, from approximately $20 billion in 2002 to between $35 billion and $45 billion in While part of this increase is due to the rise in volume of payment transactions, there has also been an increase in the interchange rates charged by payment card companies. In response, merchants have become increasingly vocal about the cost of the interchange fee, which makes up most of the "merchant discount fee" paid by retailers whenever they participate in a payment card transaction. For the last fifteen years, major U.S. litigation against payment card companies has focused on what merchants describe as anti-competitive features of interchange fee payment. Merchants point to the disconnect between the interchange fees charged on a payment card to the merchant (and transferred only indirectly to the consumer) and the consumer's decision to use that card. To remedy this problem, federal and state government agencies and private retailers have used the courts to invalidate restrictions prohibiting merchants from persuading consumers to use lower-cost payment options. The United States Congress also joined the fight in 2010 and passed legislation to regulate debit card interchange fees. 2. In re Visa Check/MasterMoney Antitrust Litigation In 1996, Wal-Mart led a class-action lawsuit challenging Visa's and MasterCard's "Honor-All- Cards" rule, which required that a merchant accepting any Visa or MasterCard-branded cards would have to accept all such cards of that brand, even those that carried higher fees. Merchants objected to the obligation of accepting debit cards which carried higher interchange fees at the time as a condition to accepting credit cards. The case proceeded to the summary judgment stage, where Judge John Gleeson of the Eastern District of New York found, as a matter of law, that merchant demand for credit card services was distinct from merchant demand for debit card services, and that many merchants would refuse to accept debit cards if presented with the option to do so. The central questions of the case whether the "Honor-All-Cards" rule actually harmed competition, and whether MasterCard and Visa acted together to produce that result were left for trial. Shortly before the trial was to begin, Visa and MasterCard settled with the plaintiffs for approximately $3.4 billion, agreed to abandon its linking of credit cards and debit cards, and promised to lower their debit card fees. However, both companies maintained a policy that if a merchant accepted one of its credit cards, it must accept all of its credit cards (and likewise with debit cards), thus limiting the merchant's flexibility in accepting or rejecting high-cost cards. And while debit fees dropped, both companies began increasing the interchange fees on its credit cards. 3. United States v. American Express In October 2010, the U.S. Department of Justice disclosed that it had been investigating Visa, MasterCard, and American Express for violating antitrust law by placing anti-competitive restraints on merchants, which prevented merchants from providing incentives to promote the use of lowercost credit cards. For example, the Department pointed to a Visa policy that prohibited a merchant from offering a discount at the point of sale to a customer choosing a MasterCard, American Express, or Discover card, unless an identical discount was also provided to Visa cardholders. The Department claimed that these restraints were uncompetitive because they blocked merchants from "foster[ing] competition among networks at the point of sale." The civil antitrust suit was settled with Visa and MasterCard in October 2010, before the allegations 7 Visa and Mastercard interchanges apply to cross border payment transactions.

4 were made public. The final judgment, approved the following July by Judge Garaufis in the Eastern District of New York, prevented these companies from adopting any rules restricting merchants from providing discounts or other benefits for use of particular cards or other forms of payment, such as cash, check or debit card. American Express is still fighting the Department's charges, claiming that its market share less than 25 percent of credit card transactions in the U.S. is not large enough to force merchants into unfavorable agreements. Since American Express generally charges higher merchant fees than Visa and MasterCard, it may be particularly vulnerable to any agreement allowing merchants to incentivize use of lower-fee cards. While public response to the settlement was generally positive, some merchants expressed concern that the decision could be hard to implement if MasterCard and Visa were not required to clearly identify each type of card (credit or debit, "cash-back" or "rewards points", etc.) so that it could be distinguished at the point of sale. 4. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation On June 22, 2005, merchants filed a lawsuit in the Eastern District of New York, claiming that Visa, MasterCard, and its member banks had imposed anti-competitive restraints on merchants. Over 50 similar complaints were filed against the companies and their member banks, and these suits were consolidated in re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, currently pending before Judge Gleeson. The plaintiffs' claims are broader than those raised by the Department of Justice in United States v. American Express. In addition to objecting to the merchant restraints at issue in that case, the plaintiffs claim that the defendants collectively fixed interchange fees at a supracompetitive level and argue that the networks "tie" and "bundle" distinct services into a single interchange fee that limits competition. On May 14, 2008, Judge Gleeson denied MasterCard's motion to dismiss, finding that the plaintiffs had made sufficient allegations of monopolization and rejected MasterCard's contention that, with only a 30 percent market share, it did not have sufficient market power to qualify as a monopoly. The case is currently in discovery. The complaint alleges that damages will "range in the tens of billions of dollars," and the defendant companies recently estimated that a settlement would likely cost four billion dollars. 5. Durbin Amendment As this litigation has progressed, Congress began to pay increased attention to the issue of interchange rates. Over the last several years, the legislature had held a string of congressional hearings and proposed several laws that would monitor these fees directly. Congress' financial reform overhaul presented a window of opportunity for interchange fee regulation, and Senator Dick Durbin of Illinois successfully added a provision to the Dodd-Frank Wall Street Reform and Consumer Protection Act that provided for regulation of debit card interchange fees. This provision, known as the Durbin Amendment, amended the Electronic Funds Transfer Act to require that the interchange fee charged to a merchant on any debit transaction be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction", as implemented through regulations promulgated by the Federal Reserve. Additionally, the Amendment eliminated arrangements in which debit transactions were processed exclusively on one debit network, and required that each transaction be processed on at least two networks. It also limited the certain types of merchant restraints imposed by debit card networks. In proposing a standard for a "reasonable and proportional" interchange fee level, the Board of Governors of the Federal Reserve initially proposed a twelve cent "cap" per debit transaction. After a period for notice and comment, the Board issued a final rule that provided a significantly higher cap of twenty-one cents plus five basis

5 points (one-hundredth of one percent) of the total transaction amount. The cap can be increased by one cent per transaction if the issuer adheres to certain fraud prevention policies. The Board exempted small issuers (those with assets of less than $10 billion) from the caps, but specified that it would monitor how this exemption worked in practice. Many government-administered programs and prepaid cards are also exempted. The rule went into effect on October 1, The rulemaking process and public response underscore the difficulties of setting a price to mimic a competitive market. Even before Congress had passed the Durbin Amendment, economists at the Federal Reserve had observed that, while direct regulation of the level appears straightforward and is thus a tempting policy option, "[c]alculation of [an efficient fee] requires knowledge of social costs and benefits that are difficult, if not impossible, to measure accurately". Setting the fee equal to certain bank costs generally involves an "arbitrary" determination of which fees to include, and ignoring the externalized costs and benefits (such as increased ease and security) has no basis in economic theory. The amendment restricted the Federal Reserve to consider only the "incremental cost" incurred by the issuer in authorizing, clearing, and settling a particular transaction; indirect costs and benefits to the banks were excluded from the analysis. The Federal Reserve reevaluated the allowable costs before issuing its final rule, but it remains unclear whether its calculation will make sense in the marketplace. Many commentators have pointed to possible unintended consequences of the amendment. Issuers may focus on taking advantage of its exemptions by promoting cards that are exempt from the cap. Unsurprisingly, the interchange fees for non-regulated cards are much higher than those for regulated cards. Banks have tried to recoup debit card expense in other ways, and some fear that the decrease in profitability will lead banks to not offer debit card services to lower-income customers. B. European Union The European Commission (the Commission) has consistently taken the view that MIFs restrict competition because they produce a "knock-on" effect in the bank-customer relationship. According to the Commission, this occurs because the bank that pays the interchange fee typically passes this cost along to its customers 8. The Commission's approach to MIFs has evolved throughout the years. Initially, the Commission held in a number of decisions 9 that multilateral agreements with regard to bank's fees may be exempted as the alternative would be for the banks to enter into bilateral agreements. This was deemed to be an unworkable solution 10. In the Commission's Eurochèque Helsinki Agreement 11 decision, the Commission ruled that an agreement under which French banks charged French retailers the same commission for cashing foreign eurocheques as they charged for paying by bank card infringed Article 101 and imposed a fine. This is in contrast to the earlier Eurochèques case where the Commission exempted an agreement between national banking associations of the member states on the charging of uniform rates of commission for clearing eurocheques. In December 2010, as a final solution to direct debit MIFs, the Commission introduced a proposal for a new Regulation. The Proposed Regulation Luc Gyselen, Multilateral Interchange Fees Under E.U. Antitrust Law: A One-Sided View on a Two-Sided Market?, 2005 Colum. Bus. L. Rev Comm CE, déc. 85/77/CEE du 10 décembre 1984, aff. IV/30.717, JOCE 1985, n L.35, p Comm. CE, déc. 87/103/CEE du 12 décembre 1986, aff. IV/31.356, JOCE 1987, n L. 43, p. 51. According to Davis S Evan's paper on interchange fees (Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, 2011, Competition Policy International) bilateral negotiation would involve high transaction costs in systems, like those in the US, with large numbers of issuers and acquirers and it may not be feasible in such systems. Comm EU, December 92/212/CEE dated 25 March 1992, case.iv/ a OJ 1992, n L.95, p.50. On 25 March 1992, The Commission adopted a decision in the Eurocheque Helsinki Agreement case, imposing a fine of ECU 5 million on the Groupement des Cartes Bancaires, which represents all French banks which are members of the Eurocheque system and a fine of ECU 1 million on Eurocheque International for concluding an agreement in 1983, which was in force until 1991, under which French banks charged French retailers the same commission for cashing foreign Eurocheques as they charged for payment by bank card. Not only did the agreement constitute a pricing agreement prohibited by Article 85(1), but it also infringed the Package Deal agreement of 1980, which the Commission exempted in 1984 on the understanding that a Eurocheque would be free of charge to the recipient, with the payee's bank receiving an interbank commission debited to the drawer's bank. This was the first time that the Commission imposed fines in the banking sector. Proposal for a Regulation of the European Parliament and of the Council establishing technical requirements for credit transfers and direct debits in Euros and amending Regulation (EC) No 924/2009, 16 December 2010.

6 explicitly prohibits MIFs for direct debit payments. A MIF will be able to be charged for a limited set of transactions which "cannot be properly executed by a payment service provider because the payment order is rejected, refused, returned or reversed (R-transactions)" 13 The Proposed Regulation attempts to regulate the methodology for calculating the MIF requiring it to be strictly cost based and "aimed at efficiently allocating costs to the party that has caused the R-transaction, while taking into account the existence of transaction costs and the aim of consumer protection.". The Commission's lack of tolerance towards MIFs has continued in recent years. 1. MasterCard Proceedings The MasterCard case established that MasterCard's MIF had a restrictive effect on competition between acquiring banks 14. The Commission held that MasterCard's cross-border MIF infringed Article 101(1) EC by inflating the cost of card acceptance for merchants as the MIF has the effect of appreciably restricting and distorting competition in the acquiring markets by creating an important cost element common to acquirers 15. The Commission also found that MIFs were also not indispensible to the good functioning of a payment card system 16. The Commission did not impose a fine, as the arrangements had been previously notified, but it ordered MasterCard to withdraw the fees within a six month period or it would incur a daily penalty payment of 3.5% of its turnover. MasterCard appealed the decision to the General Court in March In June 2008, MasterCard provisionally cancelled its cross-border MIF, but subsequently increased its scheme fees. In April 2009, MasterCard gave three undertakings to the Commission, to be applied during the period of the appeal. These consisted in MasterCard (i) changing its methodology for calculating its cross border MIFs, based on the merchant indifference test, which resulted in substantially reduced average weighted MIFs (0.3% for consumer credit and 0.2% for consumer debit cards), (ii) cancelling its October 2008 scheme fee increases, and (iii) adopting transparency measures including offering unblended rates. In view of these undertakings, the Commission held that it would not be appropriate to pursue MasterCard for non-compliance with the 2007 decision. MasterCard's appeal against the Commission's 2007 infringement decision on the MasterCard MIF remains pending before the General Court. It is evident that the Commission's ruling in this case is much more rigid than in the 2002 Visa case. Not only did the Commission decide to intervene again in order to regulate the MIF but it was also particularly severe in its approach towards MasterCard which resulted in the fees being heavily reduced. 2. Visa Commitments (Visa II) The MIFs in relation to Visa Europe's debit and credit card schemes was originally exempted by the Commission in However, shortly after prohibiting the MasterCard MIF in , the Commission opened formal proceedings against Visa Europe 19. A Statement of Objections was issued against Visa Europe in April 2009 and an oral hearing was held later that year. In April 2010 Visa Europe offered the Commission a set of commitments which were made legally binding on 8 December Ibid, Article 6. Commission Decision (EU) of 19 December 2007 in Competition Case COMP/ MasterCard - Section 7.2. Commission Decision (EU) of 19 December 2007 in Competition Case COMP/ MasterCard - Section 7.2. Commission Decision (EU) of 19 December 2007 in Competition Case COMP/ MasterCard - Section 7.2. Commission Decision (EU) of 24 July 2002 in Competition Case COMP/ In 2002, the Commission exempted the MIF proposed by Visa International after Visa International offered substantial reforms. In the proceedings leading to the Commission decision of 2002, Visa offered to progressively reduce the level of its MIF from an average of 1.1 per cent to 0.7 per cent until the end of 2007 and to cap the MIF at the level of costs for specific services. In this decision, the Commission considered that the MIF was restrictive as per paragraph 1 of Article 101 TFUE as it consisted in an agreement between competitors limiting the power of each bank to determine its own prices. An exception was granted as the Commission held that (a) the Visa network would be of use to a greater number of cardholders if the number of merchants was as high as possible and (b) the maximum number of users of the system would be affected if the cost for each category of users was as close as possible to the marginal use of the system for the category of users in question. The Commission held that this number would not necessarily be achieved if each bank deducted fees from its own clients and admitted that a certain type of multilateral agreement which would come in play automatically if no other existed was necessary but that the exemption from this agreement should be considered on a case to case basis. Commission Decision (EU) of 19 December 2007 in Competition Case COMP/ Commission Decision (EU) of 6 March 2008 in Competition Case COMP/ Commission Decision (EU) of 8 December 2010 in Competition Case COMP/

7 The main element of Visa Europe's commitments consisted in putting in place a cap on the maximum weighted average MIF applicable to debit card cross-border transactions and to national debit transactions in countries where MIFs are set directly by Visa Europe. The level was set at 0.2 per cent of the value of the transaction. As with MasterCard's informal undertakings of April 2009, Visa Europe agreed to calculate the MIF based on the merchant indifference test 21. The commitments also required Visa Europe to "further improve" 22 a number of transparency measures. These measures included maintaining the prohibition of unblending and "publishing all cross-border 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" 23. Compliance with the commitments is monitored by a trustee. The Visa commitments are limited to immediate debit and do not include all the elements investigated by the Commission. This aspect raised particular concerns during the market testing phase of the investigation 24. The Commission, however, held that "competition investigations involve a case-by-case analysis" and that "the Commission intends to continue its investigation of Visa Europe's credit and deferred debit card MIFs". It remains to be seen what impact the General Court's judgment in the MasterCard case will have on the Commission's ongoing investigations regarding interchange fees, as well as investigations concerning interchange fees carried out by national authorities. The Commission continues to apply competition rules to a wide range of other actors in the banking and financial institutions sector. These include ongoing investigations into payment card schemes, ratings agencies and insurance companies. The common element in these investigations is a broad internal market requirement, i.e. seeking to improve access to the market, levelling playing fields and addressing fundamental market failures. However as these investigations continue, political pressure is beginning to mount for regulatory intervention, especially with regard to the setting of MIFs 25. In addition, there have been only limited developments in the past year in other areas of this sector in terms of ongoing investigations or new cases. The creation of the Single Euro Payments Area (SEPA 26 ) also plays an important role with regard to card payments. Since its launch there has been great hope that once completely developed, a large number of obstacles to competition which were a legacy of the time preceding the advent of the Euro will disappear 27. II. Decision of the French Competition Authority on Interbank Fees Dated 7 July 2011 In a decision dated 7 July 2011 concerning interbank fees, the French Competition Authority (the Authority) made a series of commitments proposed by the Groupement des Cartes Bancaires CB (the GCB) legally binding. As with all commitment decisions, the agreement reached was obtained under the threat that in its absence, the GCB May suffer a possible indictment. This decision marks another decisive step in the Authority's scrutiny of the banking sector, in particular interchange fees. It is the second intervention in the past year of the Authority with regard to MIF issues (2.1). However, the Authority which has taken a decisive stand from a legal point of view by putting in place a true regulation of the system (2.2). These regulatory measures trigger some questions about the legitimacy of the Authority's intervention Commission Decision (EU) of 8 December 2010 in Competition Case COMP/39.398, recital 57 et seq. Commission Decision (EU) of 8 December 2010 in Competition Case COMP/39.398, recital 26. Commission Decision (EU) of 8 December 2010 in Competition Case COMP/39.398, recital 26 (c). Commission Decision (EU) of 8 December 2010 in Competition Case COMP/39.398, recital 43. The Application of European Competition Law in the Financial Services Sector, Thomas Jestaedt and Marcus Pollard, Journal of European Competition Law & Practice (2011) 2 (4): SEPA (Single Euro Payments Area) is a self regulatory initiative set up by the European banking industry and aimed at achieving an integrated Euro payments area, ensuring that cross border payments become as easy and efficient as domestic payments. SEPA covers credit transfers, direct debits as well as payments by cards. Concurrences: Banque, Finance et Concurrence, Table Ronde: les accords dans le secteur bancaire: De la standardisation à l'entente. 30 Novembre 2006.

8 A. The content of the two recent decisions of the Authority 1. The decision concerning the collusion by banks when processing cheques In April 2003, the Authority launched an investigation at its own initiative in order to assess whether the fees applied to cheque transactions were justified 28. Following the creation of a new digital system for processing and clearing interbank checks, the main French banks met and colluded in order to agree on the practicalities of running the new system. The banks decided to raise a number of fees together 29. In a decision dated 20 September 2010, the Authority imposed a sanction of million Euros on eleven banks for having charged unjustifiable fees during the transition towards a new digital system for processing cheques. 2. The GCB decision of 7 July 2011 Following a complaint lodged in February 2009 by two trade organisations which represent the retail industry (the Fédération des Enterprises du Commerce et de la Distribution and the Conseil du Commerce de France) the Authority launched an investigation concerning the legality of the fees levied by the GCB. The GCB, which represents over 130 banks, applied for a settlement procedure and proposed commitments to lower interchange payments fees and interchange withdrawal fees. The complaint was based on competition law provisions prohibit anti-competitive agreements unless they are shown to pass the tests contained in Article 101(3) TFUE or, its equivalent under French Law, Article L of the Code. More particularly, the prohibitions apply to "agreements between undertakings, decisions by associations of undertakings or concerted practices ( ) which have as their object or effect the prevention, restriction or distortion of competition". However, the agreements will not be deemed anti-competitive if it contributes to improving production or distribution or promoting technical or economical progress with consumers getting a fair share of the resulting benefit. In addition, the agreement must not contain restrictions not indispensible to attaining those objectives nor eliminate competition. This decision appears to mark another decisive step in the Authority's scrutiny of the banking sector, in particular interchange fees. In its decision, the Authority did not challenge or question the legitimacy of the interchange fee, but held that the fixing of MIFs deprived banks of the possibility to determine the amount of the fee bilaterally and independently and could be construed as a form of concerted practice. The Authority stated that: "set by mutual agreement, the multilateral inter-bank fees impose a joint charge on banks that prevent them from determining their amount on the basis of their own costs. This is why the [Authority] has investigated these fees with regard to competition law". Following the Authority's conclusion that the setting of fees could harm competition, the next question concerns exemptability, i.e. if the arrangement is anti-competitive, does it pass the tests? It is very hard to come to a definite conclusion on the place of MIFs in a healthy competitive landscape. For instance, there is no presumption that the public interest would be best served by an interchange fee of 0%. An interchange fee agreement may in principle contribute to economic and technical progress within the meaning of Article 101(3) TFUE. For example, in a payment card system characterised by network externalities, interchange fees may help optimise the value of the network to its users (merchants and cardholders). Equally, there is no presumption that MIFs enhance the efficiency of card schemes. In both the MasterCard and the Visa II decisions, the Commission did not dispute that an interchange fee agreement may fall within the scope of Article 101(3) TFUE. Indeed, "theoretical models such as the one written by William Baxter in 1983 aim, based on certain assumptions, at calculating such Décision n 10-D-28 du 20 septembre 2010 relative aux tarifs et aux conditions liées appliquées par les banques et les établissements financiers pour le traitement des chèques remis aux fins d'encaissement. Autorité de la Concurrence, press release dated 20 September 2010.

9 optimal allocation of issuing and acquiring costs using interchange fees. However, whether in practice a MIF should be paid by acquirers to issuers or vice versa, and at which level it should be set to enhance scheme output, cannot be determined in a general manner by economic theory alone. Rather, a casual link between the MIF and concrete efficiencies must, in particular, be demonstrated empirically". In the MasterCard and Visa II cases, the Commission held that the efficiencies of MIFs depend on concrete evidence provided by the parties. In addition, in an inquiry relating to competition barriers in retail banking, the Commission stated that "[it was] not arguing for zero interchange fees". The Authority took into consideration whether the fee setting procedure was anti-competitive as the main banks operating within the GCB on the French retail banking market jointly determine the level of interchange fees. Although the joint setting of interchange fees is not, according to the Authority, "necessarily reprehensible in itself 30 " and having been held several times as not infringing competition law in view of its very nature 31, previous competition law decisions have stated that the fees must be justified by objective factors. e.g. security, interoperability or advance funds, and may not be supported by current market conditions as they were set when the GCB was created 20 years ago. The Authority seems surprised by the fact that, despite the increase in the use of charge cards by end-customers and a considerably evolved competitive landscape, the calculation and level of fees have not been updated since then. This is clear by the fact that the Authority reiterates this statement several times 32. Two main categories of MIFs were reviewed by the Authority. It appears essential to the Authority that the fees be justified by the costs they are supposed to cover and therefore be clearly identifiable: - systematic fees (i.e. MIFs on charge cards) were held by the Authority as being likely to affect competition on both sides of the market (issuer and acquirer), creating a floor price on the acquisition market. However, according to the Authority, the fees must match the costs actually incurred by the issuing bank in connection with payment cards and should not be so high as to make card payments more expensive for the merchant than a cash payment would be; - ad hoc fees, i.e. MIFs charged on specific transactions or operations such as R-transactions (e.g. operations which cancel a payment made by mistake) in turn, tend to undermine the freedom of creditor banks to determine independently the amount of the fee on the basis of their own costs. Thus, according to the Authority, this kind of fee should be benchmarked against the costs incurred by the most competitive bank on the market for the same card payment service. Following the GCB's initial commitments submission on 4 April 2011, the Authority launched a market investigation in order to obtain observations from other market-players. The Authority also held two hearings so as to allow the complainants and the banks to discuss the CB card system. As a result of the market test and of the hearings, the GCB adapted its proposed commitments by significantly reducing further the amount of the interchange fees. The GCB also made an undertaking to reduce the main commissions (payments and withdrawals) on cards by between 20% and 50%. In order to take into account the evolution of the market, the length of the commitments was reduced by the Authority from five years to four. A steering committee chaired by the Authority has been created in order to ensure compliance with the commitments and to reassess interchange fees by the time the commitments come to term in Indeed, the most significant element of the decision is that it not only enacted prices in absolute value, which were the results of a sort of negotiation between the Authority and the GCB, something which under competition law is generally not welcomed (to say the least), but it also put in place a regulatory mechanism in the form of "a steering committee in charge of defining the characteristics Autorité de la Concurrence, press release dated 7 July Decision n 11-D-11 of the French Competition Authority dated 7 July, paragraphs 142 to 170. Decision n 11-D-11 of the French Competition Authority dated 7 July, paragraphs 5, 37,

10 and the implementation of the merchant indifference test that may be used as a reference for assessing the level of interchange fees at the end of the period of four years provided for in the commitments. The steering committee will combine the services of the Competition Authority's investigation services and the parties to these proceedings. The parties present at the hearing, representing the GIE CB and the complainants, have agreed to this proposal". B. A step towards regulation, a step back for competition law? In the wake of the EU Commission's measures concerning MIFs, the Authority seems to believe that the analysis carried out by it on the stability of the level of interchange fees set by the major charge card associations some years ago justifies an intervention. However, unlike the Commission, the Authority goes much further by creating a committee to calculate these fees and to define a methodology, both prerogatives which normally are within the scope of sector-specific or dedicated regulatory bodies put in place by the Legislator. This is in order to address the fact that the previous methodology for calculating the fees was approved by the (French) Competition Council 33 in These measures form a device for regulating prices which does not usually fall within the scope of competition law. This approach raises several questions, some purely legal, with regard to (a) the limitation of the ability of a competition authority to acquire a real legislative power on the one hand and (b) the opportunity to exercise this regulatory power on the other. 1. The principle of "legal mutability" as the source of the Authority's regulatory power? In the present case, as pointed out by the GCB, the Competition Council's statement to the effect that "[the method of calculating the CIP] was finally approved by the Competition Council in Decision No. 90-D-41, dated 30 October 1990 and which the GCB was required to apply by the Competition Council" was likely to affect the Authority's decision. The Authority circumvented this difficulty by denying that this previous decision was pertinent in view "of the changing economic and legal context since the decision was taken". The Authority, by basing itself on the doctrine of the legality of administrative acts implicitly admits that its decisions are based on a "principle of mutability" of law which is only limited by the theory of acquired rights. This reasoning is surprising in that the Competition Authority does not have any specific normative legislative or regulatory competence. By applying a doctrine which allows the administration, when it has jurisdiction, to change the adapt its regulations to evolving circumstances, the Authority is in fact granting itself the right to do so. Not surprisingly, given the strength of this supposed "principle of mutability," the Authority overturns the objection that the decision dated 30th October 1990 may constitute a barrier to its use of its regulatory power. The Authority holds that it validated only the requirement to comply with an injunction, which in itself does not create a right for the GCB. Again, the Authority's reasoning is surprising. The injunction in that case was consistent with the law in force at the time. The fact that the GCB's behaviour was found to be consistent with the injunction itself means that the GCB's behaviour was necessarily compliant with the law in force. This argument, like the previous one, can therefore only be rejected. 2. The need for "regulatory" intervention? While the decision contains important developments caused by the Authority's radical application of the law which allows it to create regulation when imposing commitments (however, this statement is not limited to the commitment procedure), it is silent on whether such regulatory 33 Predecessor of the French Competition Authority.

11 intervention is relevant within the framework of competition law. The first question is whether regulatory measures are at all necessary with regard to MIFs. Regulatory intervention is in general required when there is a non challengeable malfunction of the market. In the event such market failure is established, an intervention should be carried out only if a clear presumption exists that it would be able to successfully resolve the problem. This is a complex question and as determined in a number of cases 34, requires a great deal of evidence. However, this should not be a reason for no intervention whatsoever. There are obviously issues on the EAA card market, although the distortion of this market cannot be purely attributed to MIFs. These issues are also caused by the market environment in which MIFs operate, as well as the current competitive landscape. The combination of these elements therefore may cause MIFs to function inefficiently, potentially to the detriment of economic and social interests. Although cost-based interchange fee regulation may result in the improvement of the efficiency of the payment system, there are two reasons why this is unlikely to be a regular event. The first is that regulating interchange fees will not necessarily have a significant effect on the variable prices paid by the cardholders and therefore on the volume of card transactions. The second is that even if the interchange fee is regulated, cost-based regulation will not be able to achieve optimal prices on a regular basis. Based on current theoretical and empirical knowledge, it is uncertain to say whether cost-based regulation would increase efficiency on the market 35. Interchange fee regulation may therefore not be the appropriate intervention for correcting distortions in payment systems. According to the Authority: "the significant reduction of the payment fee will put France in fifth place among European countries with the lowest levels of interchange fees. It should lead to a reduction in the charges applied by banks to all their customers, both retailers as well as individuals, who are cardholders." 36 However, a review of the competitive circumstances in many European countries suggests that it is unlikely that significant reductions in interchange fees would result in an improvement in the situation of consumers, at least through price effects. The impact of the interchange fees reductions on consumer banking fees is likely to be big and rapid. In addition, banks are likely to experience a significant reduction in revenue for their current accounts and as a consequence may increase fees to compensate for this loss. In contrast, the reduction in merchant prices to consumers is likely to be minimal and delayed, with retailers benefitting from a small decrease in their overall costs. There is evidence to suggest that they would not pass on much of this saving to consumers in the short run and, on average, only about half of it in the long run 37. The Commission itself held in a sector inquiry in 2007 that there are "large interchange fees between banks across the EU, which may not be passed on fully in lower fees for cardholders". 38 In view of its ongoing scrutiny of the banking sector, the Authority should therefore have conducted the empirical research and analysis necessary to determine what restrictions on interchange fees, if any, would best serve the public interest. This brings us to the second question which is whether the evolution of the competitive environment of the card payment market will not in itself solve the issue. In this context, it is interesting to note that prospective competition is not mentioned in the Authority's decision. The concentration of the retail banking market and the existence of entry barriers have traditionally been viewed as refraining competition which Commission Decision (EU) of 19 December 2007 in Competition Case COMP/ MasterCard and Commission Decision (EU) of 6 March 2008 in Competition Case COMP/ Visa II. Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, 2011, Competition Policy International David S Evans. Bruno Lasserre, President of the Autorité de la concurrence: Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, 2011, Competition Policy International David S Evans Based on theoretical and empirical evidence collected, the author states that banks are likely to pass along the costs of revenue they have lost from retailers to consumers in the form of higher fees (or reduced services). Banks are likely to impose these increases quickly given that they would lose a significant portion of retail banking as a result of the decreased fees. According to this paper, although there would be great variation across retailer categories on average, retailers would be likely to pass on only half of the cost savings in the long run. Commission Press Release: Commission sector inquiry finds major competition barriers in retail banking, 31 January 2007.

12 would in turn have caused the decrease of merchant fees. Nonetheless, due to the development of the internet and of various competing means of payment, such as payment via mobile phones or alternatives solutions proposed by other internet players, these entry barriers may soon decrease. The reluctance of customers to switch providers, loyalty to established brands and the preference for banks with local branches, all of which was resulting in customer inertia, could rapidly change. In the UK, although barriers to entry and expansion in aspects of retail banking have been assessed previously in a number of reports 39 and still raise significant challenges for new entrants in attracting customers and expanding their market shares in retail banking, new firms have entered the sector, and more are expected to do so. One should also consider whether the situation of the French retail banking sector may not improve rapidly with the increase of competition caused by new entrants, especially with regard to the price of cards. A report published in 2005 concerning exit costs 40 and which highlighted the existence of significant exit costs which it classified into three categories: (i) contractual costs, (ii) technological costs and (iii) management costs is now perhaps outdated. Encouraging new entry may therefore be achieved by assisting new entrants on the market, should they require help. It should be taken into account that in the Authority's decision dated 7 July 2011, the investigation was launched following the complaint by two trade organisations which represent the retail industry (the Fédération des Enterprises du Commerce et de la Distribution and the Conseil du icommerce de France). These organisations tend to be more in favour of state intervention than the implementation of competition law measures. Finally, even if the level of the fees was too high, instead of being a competition issue, maintaining this level temporarily may, on the contrary, create an economic area allowing the penetration of the market by new entrants, even before they manage to achieve sufficient economies of scale. Potential excessive pricing may therefore be a helpful signal for new entrants. Further, before setting a price, it is always better to check whether barriers to entry on the market may not be overcome in the medium term. III. Conclusion It is clear that the competitive assessment of interchange fees is far from over. Most recently, the Commission has put on hold its scrutiny of card transaction fees whilst the EU General Court reviews the appeal by MasterCard of the European Commission's decision. This was followed by a similar position adopted by other "regulators", including the OFT, which decided to wait for the landmark judgement before proceeding with their investigations. However, it appears clear that interventions to arbitrarily reduce interchange fees, in hope that the reduction will be passed on to consumers, are rooted on several assumptions which would require further analysis. Furthermore, one may doubt that the economic studies which are mentioned have already reached the level of certainty which is required to justify and ground a regulatory intervention, especially under the cover of competition law. The economic doctrine appears as still evolving and conclusions as to which methodology should be used to analyse the wider context in which the MIF is operated (for example, are the banks invoicing or not the other means of payment they offer?) have not yet been finalized 41. This last decision may thus appear as the result of a "mimetic effect" between Competition authorities which does not, in itself, provide any guarantee that it produces good and sound law The 2000 Cruickshank Report on banking, the 2002 Competition Commission investigation of SME banking, the OFT's 2003 market study into payment systems and the work of the Payment Systems Task Force, the Competition Commission's 2007 investigation into personal accounts in Northern Ireland, Rapport sur les couts de sortie 22 septembre 2005, Philippe Nasse M. le Ministre de l'industrie. For an in-depth analysis of these issues, see Jean Tirole Payment Card Regulation and the Use of Economic Analysis in Antitrust, published in CPI, Volume 7, Number 1, Spring 2011.