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Explains credit card mutiFs
Card charges ("MIFs") are in the news following a recent ruling by the European Court of Justice on their illegality and related legal disputes by merchants against MasterCard and Visa. Whats a MIF? Whats a MIF? Interbank charges apply to every credit or debit card transactions. It is debited from a cardholder's issuing house and debited to a merchant's acquiring house.
Interbank charges may be either bilaterally (BIFs) or multilaterally (MIFs): A BIF is defined by arrangement between an issuer and an acquiring bank; a MIF may be: (b) in the absence of an arrangement issued by the 'platform'; e.g. MasterCard or Visa itself. This last class (known as "fallback MIFs") leads to controversies.
At the top you can see an example of the different transactions charges. In the event that the card holder makes a purchase: the acquirer will receive from his acquiring acquirer the sales proceeds less his acquisition charge. So if the card holder purchases something for 100, the issuing house charges 100 pounds from the card and makes, say, 98 pounds to the acquiring house; the other 2 pounds are the MIF.
For example, the acquiring bank keeps another 1 and £97 deposit at the dealer. Wholesale fees are 3, not 1. The level of the wholesale charge is largely dictated by the purchasing bank's need to meet the requirements of the ATM. 2 ) Why are MDIFs illegal and how do they damage merchants?
Platform-related fall-back-MIFs are considered illegal because of their anti-competitive effects.
Pressures on dealer rates exist as dealers can buy between acquiring bank. Callers did not dial the recipient's telephone number, so the ''termination rates'', the telephone equivalents of the MSFs, are hardly restricted. Returning to the card payment arena, there are other concerns: These platforms are increasing their marketshare by providing issuers with high quality MFIs, which then earn more revenue from the promotion of the platform's card.
Spending bankers therefore have little incentive to negotiate lower charges with acquirers. Many small merchants do not tolerate card payment due to high merchants' charges and thus suffer disadvantages in competition. AmEx charges are higher than MasterCard or Visa, partly to finance a handsome card holder reward program, and many small merchants will not do so.
The European Commission published a report in 2006 showing the high level of profitability achieved by issuers of Visa and MasterCardIFs. Visa and MasterCard issuance activities in 2004 resulted in a 65% gain to expense relationship. Neelie Kroes, EU Competition Commissioner at the time, said in 2007: "95% of cross-border card transactions in Europe are made by only two companies" - MasterCard and Visa.
Therefore, the functioning of the platform MIF throughout the European Economic Area (EEA) prevented the emergence of a single card payment market and limited the ability of merchant to profit from better pricing in other countries. Card issuers warrant the MIF to provide three services: the interest-free interval for the cardholder between purchasing and payment of their invoice; transactions charges; transactions charges; i.e. the issuing bank's handling charges.
In spite of these warrants, the centralisation of platforms' definition of a MIF has given cause for concerns to the Commission and the centralisation throughout the EEA has been examined for its anti-competitive effects, which culminated in the recent judgment of the CFI against MasterCard. This latest judgement should confirm a decision by the Commission in December 2007 finding that MasterCard's cross-border intra-EEA Visa Mutual Investment Facility (MIF) infringes anti-competitive arrangements under EU competition laws, which are now enshrined in Article 101 of the Treaty on the Functioning of the EU.
On the basis that MasterCard's MasterCard MFIs increased the costs of card merchant adoption without offsetting any compromising efficiencies that could warrant them, the Commission has exempted them under Art. 101(3) (what is now). The determination of the intra-CommunityIFs thus constitutes a merger agreement between an industry federation which has led to an important reduction in the level of effective competitive activity.
Specifically, MasterCard had not shown that fall-back MFIs are objective necessary for the operations of its payments system and therefore cannot be considered a valid 'additional constraint'. A lack of fall-backIFs could make card payments unfeasible if a card holder enters into a transaction whose acquiring bank has no arrangement with its issuing bank.
The Commission found, however, that interbank charges were not necessary at all. This system could operate on a simple pay basis: the acquiring bank by dealers. Had there been no MFI and the issuing bank instead been payed by the card holder, the cardholder's pay would have to be more than the merchant's fare, which would be atrocious for many people.
There would be no need for taxpayers to split the costs of card operations. The MasterCard has filed an appellate complaint and was rejected by the European Court of Justice in 2012. As a result, MasterCard filed an appellate complaint with the European Court of Justice, which was rejected on the following points by judgement of 11 September 2014:
The MasterCard had claimed that it was not an affiliation after the IPO in May 2006. Therefore, the provisions of Art. 101, which deals with anti-competitive arrangements between companies, were not relevant to the obligation to impose a MIF. The MasterCard remained a business group. The Commission did not stop being one just because the determination of the MFIs was no longer under the supervision of the banking sector.
The MasterCard reasoned that the fall-back MFIs it had introduced in the lack of an arrangement were necessary for the workings of the regime and that the Court's test of objectivity had raised the benchmark too high. The conclusion was correct that the lack of a MIF could have a negative impact on the working of MasterCard's system, which does not mean that the MIF was necessary.
The judgement, however, only covers MasterCard's fall-back MiFAs for cross-border use. They do not cover nationally defined AIFs. It is unlikely that the judgement will have a direct effect on the size of the AIFs. The MasterCard had already committed itself to the Commission to establish the MIF at a compatible standard both with Visa's obligations (below) and with the proposal for an EU MIF ( below).
The UK Competition and Market Authority, following the ruling, said it was assessing the impact and expected to take a final ruling on MasterCard and Visa in the coming weeks. However, the Commission has not yet given a ruling on the issue. This ruling may be helpful to those litigating in the UK against MasterCard for compensation.
This not only provides for the ability to monitor cross-border operations, but also to support operations carried out on the base of domestic operations, some of which are still in progress, with the choice being "readable". The Commission in March 2008 opened a preliminary examination procedure against Visa Europe Limited, Visa Inc and Visa International Services Association ('VISA') for an alleged infringement of the current provision of Art. 101 in their intra-Community cross-border Member State AIFs.
VISA was exempted from this obligation by the end of 2007, following the expiration of a derogation that VISA was allowed - under today's provision of 101(3) - for its cross-border payment system. On 3 April 2009, the Commission sent a Statement of Objections to VISA in which it claimed that its fall-back MFIs were restrictive of interbank banking activity in breach of the provisions of Article 101 and did not fulfil the requirements for a derogation under paragraph 3 of Section 101.
VISA provided in 2010 and the Commission agreed that VISA would lower the maximal weight based mean MIF for debt card payment to 0.2% of the value of the transactions. This undertaking did not apply to credit card transactions. The Commission raised in July 2012 further concerns from VISA that, under VISA's cross-border purchasing regime, the MIF was used in the trader's own Member State even if the MIF was lower in the issuer's own Member State.
Consequently, cross-border distortions of trade remain restricted and segments of the markets and large differences in charges across the EEA are maintained. The Commission on 26 February 2014 agreed to further undertakings. Subtleties are included in 2(10) of the decision, but in essence the credit card credit card weighted mean MIF was restricted to 0.2% for direct debits and 0.3% for credit credits.
More than £1 billion in compensation can be claimed against MasterCard and Visa in the English court, including: Sainsbury's suit against MasterCard; "parallel actions" by Arcadia, BHS, Topshop, Asda, B&Q, Comet, Debenhams, Homebase, Argos, House of Fraser, Iceland, Next, New Look, HMV and Morrisons against, separate, MasterCard and Visa.
In February last year, the Court decided against MasterCard's application in Sainsbury's lawsuit to first conduct a mini-trial (a "preliminary hearing") on whether Sainsbury's was excluded from the lawsuit because Sainsbury's Bank itself implemented the AIF. In January 2015, a provisional hearings in the "parallel actions" against MasterCard are planned to determine whether the six-year statute of limitations only allows plaintiffs to assert 2006 claims.
In the USA, a collective lawsuit was filed against Visa and MasterCard on account of merchant breach. The European Parliament has adopted an EU directive setting an appropriate standard for internal and cross-border MiFIDs. It is currently being debated that maximum limits for maximum transactions are 0.3% of credit card transactions and 7 or 0.2% of card transactions (whichever is lower).
It would cover both cross-border and internal EU operations and would enter into effect one year after the entry into effect of the legislation. Lower charges over timeframes should lead to lower consumer-pricing.