EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 About EuroCommerce EuroCommerce is the principal European trade association representing European retailers and wholesalers. EuroCommerce’s membership includes leading multinational retailers, such as Carrefour, Ikea, Metro, and Tesco; national retail trade associations in 31 countries; and affiliated trade federations representing specific retail and wholesale sub-sectors. Overall, EuroCommerce represents 5.4 million businesses, employing 29 million people (one in seven European jobs), and serves 500 million consumers over one billion times a day. About Zephyre Zephyre is a specialist antitrust and economics advisory firm focusing on the financial services and technology sectors. Zephyre advises businesses, public sector bodies, and civil society organisations. Zephyre is currently advising on various EU antitrust and regulatory actions. Zephyre partners with other leading advisory firms. 1 EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 Contents 1. Executive summary. 4 2. The Commission’s review must comprehensively evaluate the Interchange Fee Regulation. 11 3. The objective of the Interchange Fee Regulation was “lower prices for everyone”. 15 3.1 EU antitrust enforcement has consistently found that payment card scheme wholesale prices and rules harm competition. 18 3.2 The EU’s 2012 retail payments Green Paper set out a vision and objective that retailers and consumers should be “able to benefit from cheap, efficient and secure electronic payment solutions”. 23 3.3 The Commission proposed ongoing regulation of payment card interchange fees and other payment card scheme rules. 27 4. The Interchange Fee Regulation must regulate all fees that have equivalent object or effect as interchange fees. 30 5. The Interchange Fee Regulation must ensure neutrality between card-based and non-card-based payments. 50 5.1 The regulated interchange fee caps appear inconsistent with the stated basis for setting the caps in the Regulation. 52 5.2 The Regulation creates a continuing distortion of competition between card and non-card payment methods. 60 6. The Interchange Fee Regulation must regulate all payment card interchange fees. 66 6.1 The exemption of commercial cards from the Regulation has resulted in a large growth of commercial card costs for merchants. 71 6.2 Exemption of inter-regional cards has caused large costs to European merchants and consumers. 79 6.3 Exemption of three-party card schemes causes further high costs to merchants and consumers, and associated distortion of competition. 87 6.4 Exemption of virtual card payment fees and business rules raises a wide range of antitrust concerns. 93 6.5 Exemption of ATM cash withdrawals creates a further large distortion of competition, and additional costs to merchants and consumers. 100 2 EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 7. Major infringements of the Interchange Fee Regulation appear to have gone unchallenged. 113 7.1 Article 5 prohibits circumvention of the interchange fee caps. 115 7.2 Article 6 prohibits territorial restrictions in licensing agreements or payment card scheme rules. 122 7.3 Article 9 requires card schemes to “unblend” the amount of interchange fees and scheme fees applicable to each category and brand of payment cards. 125 7.4 Article 10 prohibits the “Honour All Products” element of the “Honour All Cards Rule”. 128 7.5 Article 11 prohibits steering rules restricting competition between payment card schemes. 133 8. Major reforms of the Interchange Fee Regulation are now needed. 135 9. Annex: Application of Chapter III of the Interchange Fee Regulation to ATM cash withdrawal transactions. 144 3 EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 1. Executive summary. 1. Executive summary. continued EuroCommerce welcomes the European Commission’s (“the Commission”) review of the EU Interchange Fee Regulation – Regulation (EU) 2015/7511 – (“the Regulation”), which regulates payment card scheme wholesale fees, known as “interchange fees”, for consumer debit and credit card transactions carried out within the European Economic Area (EEA), among other payment card scheme rules. Payments of course are a central function of the European economy, on which jobs, growth, and investment in every other sector depends. EuroCommerce2 first brought complaints to the EU about Mastercard’s and Visa’s anti-competitive fees and platform rules almost 30 years ago. The Commission’s subsequent antitrust investigations – in which “the Commission and EU Courts have consistently found that rules providing for default multilateral interchange fees in 4-party payment card schemes harm competition”3 – and adoption of the Regulation have been greatly welcome to European retailers, and of course to consumers. The Regulation was a response in particular to the Commission 2012 Payments Green Paper’s call for “more competition […to] mitigate the current domination of the [European] payment cards market by the two existing international card schemes [Mastercard and Visa] [including…] more choice and transparency for consumers”4. EuroCommerce strongly supported and welcomed these objectives. However, since the Regulation came into force in 2015, Mastercard’s and Visa’s market share, profitability, and dominance of the European payments market have continued to grow, as illustrated by data from the European Central Bank (“the ECB”) at Figure 1 below, and echoed in recent media comments by the Financial Times: “These days, consumers have more ways than ever to pay for things. Companies from Apple and Starbucks to PayPal and Amazon have all devised new ways for [consumers] to make purchases. In theory, their rise is supposed to disrupt the lock that credit card companies have on the payment business. In practice, they simply offer different ways to connect a card to execute a transaction. As a result, credit card issuers and 1 REGULATION (EU) 2015/751 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 29 April 2015 on interchange fees for card-based payment transactions. 2 And the British Retail Consortium. 3 European Commission observations (Amicus curiae observations to national courts) in Visa and MasterCard MIFs (several cases under appeal) in the England & Wales Court of Appeal, February 2018. 4 “GREEN PAPER: Towards an integrated European market for card, internet and mobile payments”, European Commission COM (2011) 941 final (2012). 5 EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 1. Executive summary. continued processors have seen their positions strengthened, not weakened, by the proliferation of payment options. […] All this is translating into good times for [the] credit card industry. Shares in sector leaders Visa, Mastercard and American Express have all set new highs this year.”5 Figure 1: International payment card scheme market position in Europe continues to grow. Source: European Central Bank6. These data and observations illustrate that Mastercard and Visa remain essential and unavoidable suppliers to the European retail sector. The Commission’s objective in launching the Regulation was to address the “hidden fees imposed on retailers for accepting payment cards [in particular, fees known as payment card interchange fees, which…] retailers in turn pass on to consumers in higher prices […and which] neither retailers nor consumers can 5 “Best of Lex Midweek: New York gets credit for subway switch”, Financial Times, 16 October 2019. 6 “Card payments in Europe Current landscape and future prospects: a Eurosystem perspective’, European Central Bank, 2019. 6 EuroCommerce submission to the EU Interchange Fee Regulation Review February 2020 1. Executive summary. continued influence”7. This would then achieve the European Parliament’s aim of “lower prices for everyone”8, namely of lower retail prices for goods and services throughout Europe. EuroCommerce strongly supported and welcomed these objectives and intentions of the Regulation. EuroCommerce is concerned however that the Regulation has only brought temporary savings to merchants – and consumers – which are rapidly being undone. EuroCommerce is concerned in particular that the card schemes have made large increases in unregulated fees imposed on merchants, commencing immediately after the Commission’s evaluation period for the Regulation9. Such fee increases reflect various ways that the schemes have found to escape the purpose of the Regulation. Indeed, such fee increases – including announcements of further large increases to come – have already substantially negated the benefits of the regulated interchange fee caps. Alongside these changes, choice and transparency of payment methods for consumers – such as access to cash – has weakened. Overall, these developments have had the effect of reinforcing the market position of the card schemes in Europe – and of card-based payments – while hastening the demise of cash and creating barriers to new non-card based- payments, and demonstrates that reform of the Regulation is now needed. Concerns about the Regulation and market position of the card schemes are reflected in recent ECB comments10: “The objectives of the [Interchange Fee Regulation (IFR)] are to enhance competition and increase the efficiency of the European cards market. […] Based on the [ECB’s] market consultation, it remains to be seen whether the objectives of the IFR have been successfully