The Role and Regulation of Interchange Fees in European Payments Cards
Bruxelles, 15 June 2011
Antitrust Assessment of MIF and the tourist
test
Andrea Amelio*
European Commission
*The views expressed are those of the author and do not necessarily reflect those of DG COMP or the
European Commission
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1. Introduction
–
Historical overview
–
Description of theory of harm
–
Use of MIT to correct for the harm
–
Caveats
–
Conclusions
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2. Historical overview



Visa I and Visa II decisions (2001/2002),
decision (2010)
MasterCard decision (2007), Visa
–
MIFs are a restriction of competition between acquirers by effect because they have an inflationary
effect on prices to merchants
–
To comply with competition rules MIFs need to be justified by efficiencies that are passed on to
consumers
MasterCard Decision:
–
MIFs a restriction of competition, but not prohibited as a matter of principle as possibility of an
efficiency justification explicitly accepted in the Decision
–
Efficiency justification brought forward by MasterCard prior to the Decision rejected
–
General allegations to efficiencies of payment card system as a whole are not sufficient
–
Instead, concrete demonstration of efficiencies generated by MIFs and the benefits brought to
merchants and their subsequent purchasers
MasterCard provisional settlement:
–
Based on “tourist test” at 0.3% (credit) and 0.2% (debit)
–
Data from national central bank studies
–
Additional transparency measures regarding the honour-all-cards rule (HACR), no-surcharge rule
(NSR), blending and exclusive dealing provisions
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2. Historical overview: VISA


Simultaneously:
–
MasterCard appeal of the 2007 decision in front of the Court of First Instance
–
Study commissioned to obtain more precise data for a wider set of EU countries
Visa SO in April 2009
–
April 2010 Visa offered commitments for immediate debit card transactions
–
To reduce its MIFs for cross-border and domestic transactions in nine
countries to 0.20%
–
Measures to increase transparency and competition along the same lines as
MasterCard
–
Commission made commitments binding for four years in December 2010
–
Investigation of Visa’s credit card transactions continues
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What harm can the MIF do?
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2. Interchange fees

MIF increases marginal cost of acquiring and decreases marginal
cost of issuing

Hence, it tends to incentivize issuing of cards to the detriment of
acquiring

Impact of the MIF:
1.
2.
Price structure: allows to decide who pays what share for payment
service, merchants or cardholders – or rather how consumers pay for
payment service: directly to their own banks or indirectly via higher
prices to the merchant and the merchant’s bank
Price level: if cost pass-through of issuing and acquiring is not identical,
MIF influences the total fee level (issuing plus acquiring fee)
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2. Interchange fees

Basically the MIF simulates three-party schemes’ greater
freedom in determining their prices across markets

In principle, there is nothing wrong with having asymmetric
price structures in two-sided markets (advertising media, game
consoles, …)

But there is one difference in payment card markets which is
significant: on the merchant side, typically no price signals are
transmitted because merchants normally do not (cannot) price
discriminate according to the payment instrument used
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3. Relaxing Baxter’s assumptions
Baxter (1983) is first two-sided market analysis of payment networks

–
–
Two strong assumptions of Baxter:

1.
2.
Merchants reject cards if they do not benefit from them
Banks are perfectly competitive
In reality, however, merchants’ willingness to pay for cards consists
of two factors:

–
–

banks can not influence overall price level but only the volume of
transactions
the output maximizing MIF level maximizes both total welfare and
consumer welfare
Transactional benefits (e.g., immediate cost benefits compared to other
means of payment)
Business stealing (e.g., the competitive desire to accept cards to offer
customers a good service)
However, second category does not constitute a genuine benefit to
merchants overall, because the benefits of business stealing
evaporate at an aggregate level
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3. Relaxing Baxter’s assumptions

Merchants are therefore reluctant to decline cards even if they impose
additional cost, which allows banks to agree collectively high MIFs

As a result, card usage increases merchants’ marginal cost relative to
other means of payment (recovered through increases in retail prices)

Instead of internalizing positive externalities, negative externalities are
created

Cardholders are generally not aware of this and do not take this
negative externality of card usage into account. Furthermore higher
retail prices are born by all consumers (including cash users), not the
individual card user
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3. Relaxing Baxter’s assumptions

Banks thereby introduce hidden cost, crowding out usage of potentially
cheaper payment instruments (eg, more use of credit cards vs. debit
cards, even if the cardholder does not value the credit element,
sponsored by higher MIF)

With imperfectly competitive banks, the cost pass-through of issuing
and acquiring will generally not be identical

Australian experience: pass-through in acquiring full, pass-through in
issuing less than full (imprecise estimates)

In this situation, increasing the MIF beyond the output maximizing level
(at a profit maximizing level) pays off for banks:

It shifts revenues to issuing (where a part can be retained as profit),
and shifts costs to acquiring (where they are passed on to merchants)
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“Optimal” MIFs:
Is tourist test an appropriate test for
101(3)?
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4. The “tourist test” MIF

With competitive issuers, optimal fee makes merchants
indifferent between payment instruments (see Wright, 2003):
Tourist test fee = merchants’ net transactional benefits (avoided
cost of non-card payments)

If tourist test fee is positive, it incentivizes adoption and usage
of an efficient payment instrument by consumers without
creating hidden costs

Optimal MIF internalizes usage and membership externalities
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4. The “tourist test” MIF

In Rochet and Tirole (2007), tourist test fee is below profitmaximizing fee for banks (as business stealing among
merchants is not exploited)

Relation to cost-based regulation: merchant benefit measured
on the acquiring side (additional cost of non-card payments)
rather than on the issuing side (issuing costs that “benefit”
merchants), avoiding also issues of cost allocation across sides.

With imperfect competition (pass-through in issuing below 1):
consumer welfare
tourist test fee
total welfare
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4. The “tourist test” MIF

Tourist test fee weighs efficiency and consumer benefits

It provides a benchmark that focuses on the primary market
failure (lack of price signals for final consumers on the merchant
side)

Tourist test fee makes market one-sided (equivalent to perfect
surcharging)

Tourist test fee is easier to measure than the precise consumerwelfare maximizing fee (measuring elasticities at all levels is
very difficult)
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4. The “tourist test” MIF

Farrell (2006) (an economic advisor to the Australian MIF
regulation) first recommended tourist test fee

Transactional benefits: exclude “additional spend”/business
stealing (cancel out across merchants or across time)

Difference between debit and credit not obvious

From a legal point of view, tourist test fee provides a reasonable
benchmark for applying Article 101(3): (i) contribution to
improve economic growth, (ii) consumers receive a fair share,
(iii) indispensable restriction, and (iv) eliminating competition in
respect of a substantial part of the products in question
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5. Some caveats

Full adoption: If consumer adoption and usage of payment
instrument would be almost complete even without MIF, limited
benefits can be achieved

If payment instrument is almost free of charge even without MIF,
further incentives may not be necessary


Hence, if adoption without MIF is wide and cardholder fees are low, it
may be possible that consumers lose with tourist test fee compared to
zero MIF
Less restrictive means of achieving efficiencies: in this case MIFs
are not justified. For example, per transaction MIFs do not seem
appropriate for direct debit as incentives can be provided directly by
the merchant to the payer given the long-term relationship between
them.
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Conclusion
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6. Conclusion

MIF might be used by payment card associations in an
anticompetitive way to extract rents from consumers and push
more expensive cards

However, if capped appropriately, MIF may generate efficiencies
by promoting efficient payment instruments

Possible policy benchmark: do not allow MIF such that card
payments would harm merchants (tourist test)

Additional cross-checks to make sure that the proclaimed
benefits of the MIF can work in practice
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