Does EU Really Want to Ban Card Interchange?

Just as PayPal in the US was gearing up to challenge the established order of payment networks (see my previous blog), on the other side of the Atlantic, MasterCard (MA) received news that the European General Court upheld a decision by the European Commission (EC) that the scheme's multilateral interchange fees (MIF) violate EU antitrust rules. MasterCard said it would appeal again, but if upheld, the decision could have profound consequences for card payments not just in Europe, but also globally. For those who haven't followed this closely, back in 2007, the EC deemed MasterCard's MIFs for intra-regional cross border transactions illegal, and ordered MA to withdraw these fees within 6 months. MasterCard appealed, and in the interim, reached an agreement with the EC which allowed it to establish cross border interchange rates, provided they do not exceed 0.3% for credit cards and 0.2% for debit card transactions on a weighted average basis. This week's decision only applies to cross-border fees within Europe, which are "fall-back" rates when either bilateral agreements or multilateral domestic agreed rates do not apply. However, it's been watched closely by all the interested parties, and already variuos domestic retailer bodies, such as the British Retail Consortium, are calling for the ban to extend to the domestic arrangements as well. Also, the court's decision does not aply to Visa which has already cut its cross-border debit fees. The European Commission is now likely to turn its attention to Visa's credit fees. In other words, while the decision's immediate scope is limited, it sets a precedent and gives ammunition to the "anti-interchange brigade". What makes this decision particularly dangerous is that it appears to be challenging the actual concept of interchange, rather than the level of fees or the approach by which they are calculated. As reported by Finextra, the court said that it "does not accept the arguments relating to the objective necessity of the MIF to the operation of the MasterCard payment system". There is a big difference between arguing for a reduction in fees and banning them altogether. The ruling changes little in practice in the immediate term. MasterCard's stock started the day of the decision at $426 and was trading at $416 just over 24 hours later, a 2.3% drop, which implies it was not unexpected news to the investors. Also, the story isn't over - MasterCard already said they would appeal and I expect the pro-interchange lobbying efforts would only get bigger. The concept of interchange has been a cornerstone of four-party card schemes and many would say it's worth fighting for.