SPEECH/08/9

Neelie Kroes

European Commissioner for Competition Policy

Europe's systems after the MasterCard decision

ERRT Conference (European Retail Round Table)

Brussels, 14th January 2008

Ladies and gentlemen, Thank you for this opportunity to speak about Europe's retail payment systems. Today's conference is very timely. Europe is at the beginning of a new era in the field of . And just before Christmas the Commission took a prohibition decision in relation to Mastercard's multilateral . This was an important decision - not only for consumers but also for the good functioning of the issuing and acquiring markets. It was equally important for retailers. And finally, it was a key decision as far as the roll-out of SEPA is concerned. Our decisive action will reinforce and strengthen the goals of SEPA: it will bring more competition into the market and will help to achieve better card payment services for a better price for consumers and businesses alike. I would like to start with a few more words on SEPA. As you know, SEPA is a self-regulatory initiative led by the European Payments Council (EPC). The design and implementation of the SEPA project are therefore the result of agreements and co-operation between undertakings which are normally deemed to be competitors. For this reason, the Commission together with national competition authorities have a clear responsibility to ensure that both SEPA and the EPC deliver this project in line with the EC competition rules. During the development of the SEPA project, a series of issues have caused us concern. The most pressing of these relates to the migration of cards.

Migration of cards is a key issue At the heart of this issue is our concern that low cost national card schemes should not be replaced by more expensive schemes, using SEPA as some sort of pretext. The UK and Austrian experience sadly shows that when national card schemes migrated to international brands, there was an increase in fees charged to retailers. And these fees were of course ultimately passed on to customers in the form of higher prices on the shop shelf. Today, there are very few international schemes for payment cards. Retailers and consumers are increasingly worried that with less they will inevitably pay more as banks are led to abandon efficient and cheap national systems. In such a scenario, SEPA would - despite all its pro-competitive goals - end up delivering at best a 'European' . The knock-on effects of such a reduction in the degree of competition in these markets would be both negative and highly damaging. But why is a to international card schemes so attractive for banks? On the one hand, there does seem to have been uncertainty about what SEPA compliance really meant. Market participants appear to have interpreted the SEPA Cards framework in a way that a is only SEPA compliant if it covers all 31 states of the SEPA territory. This condition would presently only be met by one single international scheme for debit cards and two international schemes for credit cards, all presumably well known to you. On the other hand, the attractive multilateral interchange fees (or MIFs) of the international schemes seem to have been enough of an incentive on their own to convince banks to join the international schemes. I'll say more about this in a moment. But first let's look at the geographic dimension.

2 It is clear that SEPA compliance cannot be interpreted in a way that a scheme has to cover all the 31 SEPA states. Banks must be able to decide for themselves whether joining one or other card scheme represents a good business case to them. In other words: market forces alone shall decide which SEPA states and how many of the SEPA states should actually be covered by a particular payment scheme. The EPC has just recently confirmed this interpretation. This obviously means that there is no need for national systems to be replaced by the existing international schemes because of SEPA. And this obviously also means that new schemes are guaranteed a real chance to enter the markets. This is important, because, together with the European Central Bank, we consider it far preferable that there are more than just two pan-European card schemes in Europe at the end of the SEPA process. So I am following with great interest the efforts of banks, schemes and others to set up alternatives. Clearly it is not my job to engage in industrial policy. The only thing that matters is to reach a healthy market situation where competition thrives, to the benefit of the whole economy. In this respect, I do believe that big retailers like you have to play a strong role in the ongoing developments. Look, for example, at what Discover did in the 1980s in the US. Forced by the Visa/MasterCard duopoly, the biggest US retailer of the day decided to create a completely new alternative brand. Of course I am not suggesting that European Retailers should copy exactly the same model. But the introduction of SEPA does provide excellent opportunities for European retailers to analyse their needs in the field of payments and to take initiatives. You may well find that efficient national existing debit schemes, some of them without MIF, fit your needs in the field of payments. If this is the case, why not think about how to help them to grow into pan European schemes? Or if you find that some of the other emerging alternatives in the payment market provide you with the services you need, have the courage of your convictions and back them! SEPA will make it possible for more players to be present on the market – and as always, the greater the competition, the better the prospects for innovative, high quality products at a fair price. I'm confident that there will be many more payment services providers and many more schemes for you to choose from in the future. Why? Well, with the clarification by the EPC of what SEPA compliance really means, and with the Commission's MasterCard decision, which took away the incentive of banks to switch to easy and illegal profits, the market participants, new entrants, or maybe also you - the big retailers - will make full use of the possibilities of the Single Payment, and hence make the payment market a more competitive one. I said there were a couple of issues which concern us. Another one relates to transparency. I am very aware that various stakeholder groups, such as retailers and consumers, complain that they are not properly involved in the standardisation work of EPC and about a lack of transparency. I do think that it would be useful to set up an effective forum (and not a mere talking-shop) in which these views can be properly discussed and issues of concern addressed. Who knows: it certainly cannot be excluded that these stakeholders will actually come up with business models and technical proposals of interest to the banking community itself.

3 Multilateral Interchange Fees (MIFs) I'd now like to turn more specifically to the issue of multilateral interchange fees. MIFs are of huge importance for everyone in the payment chain. And MIFs are a core issue in the SEPA project. As you know, before Christmas we adopted a prohibition decision addressed to MasterCard Europe, MasterCard International and MasterCard Incorporated regarding MasterCard's intra-EEA Fallback Interchange Fees for debit and consumer credit cards. We found that MasterCard's MIF inflated the costs of card acceptance by retailers since the MIF accounts for a large share – up to 70% in some Member States - of the final price companies pay for accepting MasterCard's payment cards. Let me be clear on one point: we did not conclude in our decision that all MIFs are illegal per se. However, the reason we found this MIF illegal was because MasterCard could not demonstrate that its MIF contributed to objective efficiencies (technical and economic progress), or that it benefited consumers. We therefore prohibited it. MasterCard has six months to comply and we may impose a periodic penalty payment in case it fails to do so. I very much trust we will not get to that sort of position, and that MasterCard will comply fully and in a timely manner. This case really demonstrated the significance of MIFs in terms of impact on end consumers. To the extent that retailers pass the fees on to their customers, consumers ultimately foot the bill. Cardholders thereby pay twice for card usage: once through annual fees to their own bank and a second time through inflated retail prices. Consumers paying in cash are obviously also suffering from these high costs, since they are exposed to exactly the same retail prices. For this reason, I think there is a great deal to be said for more transparency in the use of cash, cheques, debit or credit cards. Many cardholders seem to believe – almost naively – that their cards come for free, just because they pay little or no fee to their issuing bank. But we all know that there is no such thing as a free lunch. More transparency would enable customers and retailers to finally see the real cost of using their cards, and then make an informed decision on how to pay. Why should customers paying with debit cards or cash subsidise customers who pay with expensive credit cards? By saying this, I am aware I am opening the whole debate about surcharge, additional fees to be paid when you use an expensive payment instrument. I know it is a sensitive subject. But it is an important one that cannot be pushed into the long grass. Let's look at a concrete example: IKEA in the UK applies a surcharge for payment by credit cards, to reflect the higher costs they incur for such a payment. How have customers responded? Unsurprisingly, many customers are now choosing to pay with debit cards, which are less expensive. If you give the right price signals to consumers, this will promote the use of less expensive payment instruments. That is what I call transparency! You too, as retailers have a role in informing the consumer about the cost of the various payment instruments. Information is the starting point for competition. Ladies and gentlemen, I have of course heard some voices who say that our decision against MasterCard is jeopardising SEPA, even killing it. No way! The MasterCard decision supports the SEPA project in two ways.

4 It obliges MasterCard to refrain from implementing its new "SEPA" interchange fees for the Euro-zone. This ban will ensure that SEPA does not lead to permanent price increases linked to payment cards. In several Member States (such as in the Nordic countries) efficient domestic payment schemes operate perfectly well without a MIF. If the existing debit cards were to be replaced by cards, MasterCard's MIF would inflate the cost of card acceptance in these countries. I said at the start that we are entering a new era. There are of course many who would prefer to take a conservative stance. I'm sure there were also reticent voices in Australia when the central bank decided to halve interchange fees for credit cards. But we know today, that neither MasterCard nor Visa suffered from this intervention and that both schemes kept increasing their sales volumes. One of the arguments made by banks in Australia was the reduction of interchange fees would not deliver strong benefits for cardholders, since merchants would simply increase their profit margins. The Reserve Bank's assessment was that such behaviour was very unlikely – because of the fierce competition between retailers. . However, retailers in Europe must be aware that they will face similar arguments. It is therefore in your own interest to pass cost savings straight on to consumers. In this manner you will contribute to ensuring that interchange fees will further be reduced, to everyone's advantage. Why not inform your customers if you can reduce a price due to the decrease of your card fees? SEPA must provide tangible, visible benefits for consumers. And you, Europe's top retailers, are best placed to ensure this. I've said a lot about MasterCard. So let me say a few words regarding the other large payment card scheme in Europe, VISA. The adopted an exemption decision on VISA's MIF in 2002. This decision expired on 31 December last year. As a "third interested party" in the MasterCard proceedings, VISA already knows about the reasons the Commission came to its decision and underlying objections. I thus trust that the MasterCard decision will also provide VISA with very useful guidance for the way ahead.

Conclusion Ladies and gentlemen, Ensuring that the single market for payments can work efficiently is a top priority for the Commission. We will remain particularly vigilant in this area and address any competition restrictions that threaten to hamper the proper functioning of the market. The costs of failure – for consumers right across Europe – are simply too great to risk. Safeguarding and further improving the competitive elements of the SEPA process, and encouraging more competition in payments markets, will guarantee cheap, secure and efficient payment systems. I am confident that all stakeholders, including European retailers, will come together to help us pursue this ambitious goal. Thank you for your attention and your support.

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