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Interchange Fee Settlement

posted by Adam Levitin

MasterCard settled a lawsuit brought by the European Commission's Directorate General for Competition, which alleged that MC (and Visa's) "Multilateral Interchange Fee" (MIF) an interbank fee for cross-border transactions in Europe (basically good old US interchange) was anticompetitive. While the settlement allows MC to keep charging an MIF, MC agreed to drop the weighted average of the fee from between .8% and 1.9% to .3% for credit cards and .2% for debit cards. As the Commissioner for Competition Policy noted, "MasterCard could not justify their level with any solid methodology, or explain what, if any, efficiency gains were being passed on to merchants and consumers at the end of the day." Visa has not settled in the litigation.

MasterCard's MIF was always much lower than US interchange, which is somewhere upwards of 2.0% (and that's not the full merchant discount fee, just the interchange component). But now we see that MasterCard has decided that it can survive by charging just .3% interchange on credit cards in Europe. So why are American merchants going to pay seven times as much in interchange for credit card transactions? Are American banks or merchants seven times riskier? Or is US antitrust law just seven times weaker?

Comments

If this is the cross border fee, it is not interchange, but a surcharge (above and beyond interchange) added to transactions that are made in one country on cards from another country. I can't access the link above to confirm.

Oh, and interchange is a bit lower than 2%, especially for card swipe transactions. You don't approach 2% except with card not present and other non-qualified transactions.

EU operates as a country (financially speaking), individual countries operate much like states. Making a distinction between Interchange fees and Cross border fees is mincing words. The question stands, why is it 7 times more expensive to use cards in some types of transactions within the US than it is in the EU. If the EU is a more business friendly environment than the US then we have surly reached the end of our capitalist days.

Gary,

Interchange has been lower overseas than in the U.S. for many years (at least to early '90's, when I started dealing with credit card processing). In the industry, it was understood that the U.S., because we were the largest single market for cards, and the market with the most fraud and costs, that we paid the penalty for that. Kind of turns the idea of "volume efficiency" on its head, in some ways. This also lead to some companies with operations overseas using those branches as the center of their card processing, to take advantage of the lower costs.

Visa & MasterCard try to recapture that by making overseas transactions qualify for card interchange at an increased rate. They also tried to sell multi-currency processing to avoid monetary interchange, and, if I read some recent statements correctly, want to tack a surcharge on to me as a cardholder if I use my card outside the U.S.

It's all about the revenue, no matter how friendly they try to make the ads.

There is probably a more direct way to do this, but I wanted to make sure that the link below was brought to the attention of some of the bloggers here. It's a very interesting discussion of mortgage modifications and defaults:

http://www.calculatedriskblog.com/2009/04/fed-paper-on-reducing-foreclosures.html

Adam,

Seems you have missed a number of issues. I would refer you to Mastercard's Press Release, which they state. http://www.mastercard.com/us/company/en/newsroom/european_commission_announcement.html

1. They continue to pursue the case for interchange, while putting this fee into effect.

2. "MasterCard Europe had temporarily reduced these fees to zero in June 2008 in order to ensure its conformity with the decision." Thus this is a fee increase while Mastercard continues to pursue its rights under EU law.

3. "However, we do not believe this level of interchange is adequate to sustain strong competition in the European payments industry or to encourage the investment and innovation that will be required to provide European consumers and merchants with better payment products in the future. That is why these rates are only interim, and why we are pursuing our appeal in the European Court of First Instance of the European Commission’s December 2007 decision. We believe we have strong arguments that the decision should be reversed."

Mastercard has not said that they can, will, or want to sustain these prices. The fees as levied are to ensure they do not run afoul of justice system in the EU while the appeal continues. In essence, this is no different than a posting a bond while a civil infringement trial is ongoing.

Adam, Good write-up. Thanks for the heads-up.

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