EC Ruling on MasterCard Interchange Could Foster Regulation in the U.S.

A European Commission ruling that MasterCard Worldwide's interchange-fee structure is illegal in that region will affect relatively few transactions in Europe but could encourage regulators?including those in the U.S.?to act on interchange, among other bleak implications for bank and network executives. “On balance, the EC decision is negative,” says Eric Grover, principal at Intrepid Ventures, a Menlo Park, Calif.-based consulting firm and a former executive at Visa International, in an e-mail message to Digital Transactions News. Arguing that market forces rather than regulation should set interchange rates, MasterCard has said it will appeal the EC's ruling at the European Court of First Instance in Luxembourg. In the Dec. 19 ruling, the EC stopped short of striking down the concept of interchange itself. Instead, it said the rates on cross-border MasterCard and Maestro transactions are anti-competitive and gave MasterCard six months to propose a new interchange structure that would comply with the Commission's competition law. About 40% of bank cards in the European Union are MasterCard-branded. MasterCard has a good chance of swaying the appeals court in its favor since its appeal “will be argued and decided on narrow legal grounds,” notes Grover. At the same time, the EC's decision affects only a small percentage of MasterCard transactions, and, says Grover, the card network's transaction-processing and licensing fees “will not be directly affected.” Still, the decision has broader, unfavorable implications for MasterCard. For example, it could hamper the company's ability to foster transaction growth and compete with other card systems, observes Grover. More ominously, it “will spur regulators in other jurisdictions to intervene and treat card payment networks like public utilities,” he says. Interchange has come under scrutiny by regulators around the world, with the Australian central bank four years ago capping interchange rates in that country in a sweeping move whose effects have proven controversial. Last year, more than 50 merchant lawsuits challenging bank card interchange in the U.S. were consolidated into a massive class-action case in a federal district court in Brooklyn. A common feature of bank card pricing, interchange is a fee paid by acquiring banks to issuing banks and is typically expressed as a percentage of the transaction plus a fixed amount, usually a nickel or a dime. In practice, merchants end up paying the fee as acquirers pass it on as part of their discount-fee pricing. The likelihood that the Federal Reserve would intervene in the interchange matter is small, Grover notes, given that the central bank has said that the fees are outside its jurisdiction and that such pricing should be left to market forces. Still, he says, the EC decision could embolden members of Congress who have been examining the issue. In July, the 19-member antitrust task force of the House Judiciary Committee held hearings on interchange, following a similar move by a Senate Judiciary Committee panel a year earlier. With the Democratic takeover of Congress a year ago, the odds of intervention in the matter are greater, Grover says. “Two years ago, I would have rated the chance of Congress passing legislation curbing interchange as close to zero,” he observes. “While still unlikely, the chances are higher today.” Nor is MasterCard competitor Visa Inc. likely to go unscathed. Once the EU publishes its full guidance on what form of interchange it will find acceptable, Visa Europe will have to change its pricing practices as well, Grover says. At the same time, he says, the decision against MasterCard is likely to prove only a “small negative” for Visa as it prepares its initial public offering of stock, expected this year.