MasterCard Inc. and the banks that use its card payment system have had a big court defeat, in a ruling that confirms the company overcharged for cross-border transactions in Europe.
The decision from the EU’s second highest court is an important victory for the European Commission, which found in 2007 that the card payment group restricted competition and inflated for prices for retailers and consumers.
This closely watched appeal relates to so-called “interchange fees” on cross-border card payments, which a consumer’s bank levies on a merchant’s bank for retail sales transactions.
Most consumers are unaware of the charges, which provide an multibillion-euro revenue stream for card-issuing banks. Consumer groups denounce the fees as “profiteering”.
After the Brussels decision, MasterCard significantly cut its interchange fee rate on an “interim” basis, without accepting wrongdoing.
Its appeal - backed by Royal Bank of Scotland, HSBC and Lloyds Banking Group and Banco Santander - became a landmark case on the enforcement of competition law on card payments, challenging fundamental principles behind the commission decision.
The ruling on Thursday dismissed the MasterCard legal action and upheld that interchange charges hampered competition, giving a boost to advocates of tougher action to keep domestic card fees in check.
MasterCard is likely to appeal to the ruling, which it said would ultimately make payments more expensive for consumers.
Javier Perez, president of MasterCard Europe, said: “MasterCard balances the interests of both consumers and retailers, so that each party pays its fair share of the costs for the benefits it receives. Today’s ruling, if it stands, would upset that sharing and tip the balance decidedly against consumers.”
In its case, MasterCard failed to convince the court that the interchange fees were an “objective necessity” that was essential to making the card system viable.
The judges found that if the fees were not collected, it was “unlikely” that a significant portion of banks would stop using MasterCard or reduce benefits to cardholders.
As these charges are not fundamental to offering the service, the court endorsed the conclusion that merchants would be able to “exert more competitive pressure on the amount of the costs they are charged for the use of payment cards”.
The judges also dismissed arguments claiming that the payment system contributed to “technical and economic progress”.
Instead the judges ruled that the method of setting the fees “tended to overestimate the costs by the financial institutions” and “inadequately” assessed the benefits merchants derived from that form of payment.
The court threw out MasterCard’s claim that changes to the company’s legal structure in 2006 - so that it was no longer owned by its bank customers and became a stock market-quoted company - meant financial institutions no longer helped to set the interchange fee.
Christian Verschueren of EuroCommerce, a merchant association involved in the case, said: “We are delighted with this decision, which wholly vindicates retail’s 10-year campaign against these anti-competitive fees.
“We now call on the commission to follow this up with radical and decisive regulatory solutions to make payments in Europe truly competitive.”
Monique Goyens, head of the European Consumer Organization, said the decision marked a “major victory” and called on regulators to “put a final, legal stop to such unfair and regrettably common profiteering”.
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