Mastercard must prove interchange benefits, retailers tell judge
20 April 2018. By Simon Zekaria.
Mastercard must prove its multilateral interchange payment model has benefits for retailers and consumers that outweigh burdens placed upon them by the payment system, a group of UK retailers told a UK appellate judge today.
Mastercard and rival Visa are fending off a host of UK antitrust claims for damages over the card network charges at a multiday trial at the UK’s Court of Appeal. Interchange fees are paid between a retailer’s bank, known as acquiring banks, and the cardholder’s bank, known as issuing banks, when consumers use credit or debit cards.
The European Commission in 2007 said Mastercard's fees on cross-border credit and debit cards breached antitrust rules and inflated the cost of card use for retailers and shoppers. However, the commission didn’t outlaw the interchange fee and said it may be “indispensable” to creating efficiencies that outweigh any restriction of competition.
The commission also sent separate charges to Visa over the fees, which led to the company making commitments to regulators. But retailers still sought compensation from the company for alleged losses.
UK courts have been witness to contradicting rulings over the legality of the fees, and the Court of Appeal has brought the cases together.
— Costs and benefits —
On Friday, the fifith day of a 10-day trial, Jon Turner, representing Asda, Argos and Wm Morrison, told Judge Terence Etherton, alongside Judges Julian Flaux and Geoffrey Vos, that the payment-card operators need to show “cogent evidence” that the payment model is more beneficial than deleterious.
While it is “possible in theory” there are benefits from interchange that would deem to “outweigh the costs” — such as payment guarantees and member benefits for cardholders, and higher-volume, lower-cost transactions for retailers — it is “likely” the retailers are worse off by being locked into the scheme, said Turner.
“It would still be likely the merchants are worse off, even in the cardholders are getting all these benefits. The merchants don’t see that,” said Turner.
Turner also said the vast majority of consumers use the cards for daily conveniences that they would have done anyway, regardless of the benefits of being in a card-network scheme.
On interchange, the card network operators need to demonstrate why “this particular restrictive agreement is needed,” said Turner.
“All efficiency claims must be substantiated,” added Turner.
For the claimants, retailers are bound by Visa's and Mastercard’s agreements with member banks, thereby incurring a non-negotiable cost they would escape from under bilateral deals. This restricts or distorts competition in the market for the supply by acquiring banks services to retailers, they say.
Turner, like other lawyers at the trial, focused his analysis on a series of so-called counterfactual, or hypothetical, scenarios — circumstances that would have existed in the absence of the fees. These scenarios, key to establishing competition rule breaches, include the competitive dynamic if the card fee was set at zero and whether there would be a “death spiral” where, if only one of the card companies had its fees outlawed, one would go out of business as banks flocked to the other to benefit from the fee charges. These scenarios have been interpreted differently in various UK rulings.
The fees can’t be deemed “objectively necessary” to the running of the payment-card system, add the retailers. The networks argue that the fee is intrinsic to running a four-party payment system.
Mastercard says the level of competition between acquiring banks for retailers remains the same whatever the level of the interchange fee and that, if it is deemed to be high, it is a matter for price regulation, not a finding of infringement through the application of competition law.
— UK rulings —
The legality of interchange fees, subject to scrutiny by EU courts, has been tested in the UK following a series of rulings.
In 2016, Sainsbury’s won damages from Mastercard at the Competition Appeal Tribunal, a specialized competition court.
In January 2017, another set of retailers, including Asda and Argos, was unsuccessful in their pursuit of damages from Mastercard, losing a case in the UK's High Court before Judge Andrew Popplewell.
Those same retailers also sued Visa, but they reached an out-of-court settlement, leaving Sainsbury's to pursue its fight against Visa alone. That case ended in November with a Visa victory after Judge Stephen Phillips of the High Court dismissed the grocer's damages claim. However, Phillips handed down another ruling saying that Visa had failed to convince the court that its fees could be set at a level that deserved an exemption from antitrust enforcement.
Outside the appeal trial, the interchange fee debate has also resulted in a collective action filed against Mastercard on behalf of UK consumers.
The trial continues.