Commission exempts multilateral interchange fees for cross-border Visa card payments

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IP/02/1138

Brussels, 24 July 2002

Commission exempts multilateral interchange fees for cross-border Visa card payments

The European Commission has exempted under the European Union competition rules certain multilateral interchange fees (MIF) for cross-border payments with Visa cards, after the card organisation made major changes to the system. The new MIF will not only be reduced in absolute terms, but will also be capped at the level of relevant costs, significantly improving the situation for retailers and, ultimately, the consumer.

A multilateral interchange fee or "MIF" is an interbank payment made for each transaction carried out with a payment card.

In the Visa system, it is paid to the cardholder's bank by the retailer's bank and constitutes a cost for the latter which is normally passed on to retailers as part of the fee they pay to their bank for each Visa card payment. The default level of the Visa MIF - which applies unless two banks agree otherwise – is set by the Visa Board and laid down in the Visa International payment card rules, which have been notified to the Commission for clearance.

The Commission in September 2000 formally objected to the current Visa MIF which the Visa Board can set at whichever level it sees fit and which is considered to be a business secret and, therefore, not transparent (see press release IP/00/1164).

After long discussions with Visa and consultation of interested parties, a package of reforms was submitted by Visa to the Commission, which enables it to grant an exemption under Article 81(3) of the EU treaty.

First, Visa will reduce the level of its MIFs for the different types of consumer cards. As concerns Visa’s deferred debit card and credit card payments, the weighted average MIF rate will be brought down in stages, to a level of 0.7% in 2007. For debit card transactions Visa will introduce immediately a flat-rate MIF of €0.28.^¹
Secondly, the MIF will be capped at the level of costs for certain specific services provided by issuing banks, which in the Commission's view correspond to services provided by cardholders' banks which benefit those retailers who ultimately pay the cross-border MIF. These services are: transaction processing, payment guarantee^² and free funding period^³. These will be determined by a cost study, to be carried out by Visa and audited by an independent accountant. This ceiling will apply regardless of the reductions in the level of the MIF offered by Visa (that is, if the cost cap is below 0.7%, then the MIF will have to be below 0.7%).
Furthermore, Visa will allow member banks to reveal information about the MIF levels and the relative percentage of the three cost categories (currently considered business secrets) to retailers at their request. Retailers are to be informed of this possibility.

Exemption starts only after MIF changes

The exemption will enter into force as soon as the modifications have been implemented by Visa - which Visa has undertaken to do very shortly after the adoption of the decision - and it will be valid until 31 December 2007, after which date the Commission will be free to re-examine the Visa MIF system, in the light of the effects of the revised MIF on the market.

The exemption decision only applies to cross-border payment transactions with Visa consumer cards (credit cards, deferred debit cards and debit cards) at retailer outlets within the European Economic Area, which represent about 10% of all Visa card transactions in the EEA. The decision does not apply to MIFs for domestic Visa payments within Member States, nor to MIFs for corporate Visa cards (that is, cards used by employees for business expenditure).

The assessment of the exemptability of the reformed Visa MIF was carried out by the Commission in the context of cross-border payments within the Visa payment scheme only. An assessment of MIFs for domestic payments, or in different payment systems than Visa, would have to be made in the light of the different market conditions applicable to such cases. In particular, the question of what constitutes a reasonable and equitable MIF might be answered differently in different circumstances.

The Commission’s policy on the Visa MIF is in line with previous case-law on MIFs. It holds that the multilateral setting of the Visa MIF between competing banks constitutes a restriction of competition. However, it concludes that a multilaterally-fixed interchange fee can lead to beneficial efficiencies and economies within a payment network, and therefore can benefit from an exemption, but only if it is set in a reasonable and equitable manner.

Visa’s MIF was the subject of a formal complaint in 1997 by EuroCommerce, a European organisation of retailers. EuroCommerce's complaint also concerned MIFs in the Eurocard/Mastercard system, which have been notified to the Commission. That case, and certain others concerning payment cards, remains pending.

This Visa MIF exemption does not affect the Regulation on cross-border payments in the euro-zone^⁴, which came into force at the beginning of July and which imposes the same pricing for equivalent payments at cross-border and domestic level within the euro zone. That Regulation applies to prices charged to bank customers, and not to interbank payments such as the MIF.

1 The levels of MIFs prior to these reductions cannot be revealed as they are considered business secrets by Visa; however, Visa estimates that the effect of the modifications (debit, deferred debit and credit cards combined) on interchange revenues for issuing banks from cross-border transactions will be a reduction of more than 20% over the five year period 2002-2007.

2 The term "payment guarantee" is used to describe the promise of the cardholder's bank to honour payments made by cardholders, even those which turn out to be fraudulent or for which the cardholder ultimately defaults, on condition that the retailer undertakes all the necessary security checks. This effectively constitutes a kind of payment insurance for retailers.

3 The "free funding period" corresponds to the time period before the cardholder must either pay the card bill or (for credit cards only) "roll over" the balance of the credit card bill into the extended credit facility, to which a rate of interest is applied. This "free funding period" is considered by the Commission to benefit retailers in a cross-border context by stimulating additional sales.

4 See press release IP/02/941.