ITU Workshop on Digital Financial Services and Financial Inclusion 14 December 2015 Geneva, Switzerland MIF – Competition and regulation in light of recent developments Maria Chiara Malaguti, Professor of International Law, Catholic University (Milan-Rome)

What policy response to the trade-off between cooperation and competition? Increasing awareness of the role of cooperation and competition in the overall efficiency of the (retail) payment system, yet widely diverging opinions on how to address their shortcomings The lack of an overarching objective means that there is a greater need to reconcile multiple public-policy goals Oversight of central banks and cooperation with other authorities

Two sided markets Supply and demand on one side are determined by supply and demand on the other side Trying to bring both sides “on board” by appropriate charging of each side Different charging models might be used for the two sides

The antitrust approach at its onset USA NaBanco (1986) applies rule of reason: – Indispensable to recover costs by issuing banks – Essential to creating a card system – Negligible impact on competition because relevant market include all payment instruments US vs VISA USA (2003): – Separated market for credit cards – Rule of reason depends on actual market conditions: today far from NaBanco EU VISA II (2002) grants exemption: – Market is considered at both sides (issuing and acquiring) – Efficiency gains compared to bilateral agreements due to lower negotiation and transaction costs – Network externalities – Issuing costs methodology – In substance: it might depend on level of MIF Mastercard (2007) does not: – Market considered only at acquiring side: no proof of efficiency gains – Card schees can also work without MIF – Not all customers benefit from MIF – Negative effects on merchants [2009 Mastercard offers commitments] From VISA II to Mastercard: from restriction by effect to restriction by object?

Further at EU level Mastercard appeals to the General Court (2012) but this confirms the Commission’s decision: – There are other default settlement mechanisms less restrictive (prohibition on “ex post pricing”) – MIF set a de facto floor for the merchant service charge reducing their possibility to negotiate a price below certain thresholds Second degree confirms first degree (September 11, 2014) – Lack of “objective necessity”: no application of “ancillary restrictions” – “Benefits to the customer” means “benefits to the merchants”. No matter if these can be compensated by benefits to cardholders

Latest EU developments as for competition: VISA Following the expiry of an exemption decision in December 2007 and the adoption of the MasterCard Decision, the Commission opened a new antitrust investigation against VISA. In response to the Commission's objections, VISA offered commitments to reduce the maximum weighted average MIF for consumer debit cards, for cross-border transactions and national transactions in those EEA countries where it was setting the MIF directly, to 0.20%. (2010) In July 2012 the Commission sent Visa a supplementary statement of objections Visa Europe's offered new commitments (2014) – As regards 'cross-border acquiring': to allow acquirers from 1 January 2015 to apply a reduced cross-border inter-bank fee (0.3% for credit and 0.2% for debit transactions) for cross-border clients. Visa Europe also agreed to apply the same fees (0.3% for credit and 0.2% for debit transactions) to transactions carried out with merchants located within the EEA with Visa consumer and debit cards issued in non-EEA countries belonging to the Visa Europe territory. – As regards inter-bank fees: Visa Europe agrees to cap its credit card MIFs at 0.3% for all consumer credit card transactions in the EEA where Visa Europe sets the rate. This concerns cross-border fees (where a card issued in one EEA country is used in another one) and domestic fees in currently ten Member States, and represents a reduction of about 40-60%. – As regards transparency: to simplify its inter-bank fee structure and make the invoicing of card acceptance services more transparent to merchants.

Latest EU developments as for competition: MasterCard Commission’s Statement of Objections against MasterCard (9 July 2015): Interchange fees still vary considerably from a Member State to another. MasterCard's rules would prevent retailers in a high-interchange fee country from benefitting from lower interchange fees offered by an acquiring bank located in another Member State (so called "cross- border acquiring"). The Commission is concerned that MasterCard's rules on cross- border acquiring limit banks' possibilities to compete cross-border on price for services to receive card payments and so restrict competition in breach of EU antitrust rules, leading to higher prices for retailers and consumers alike.

The EU regulatory approach Regulation 2015/751 on interchange fees for card-based payment transactions – IF for consumer debit card transactions: 0,2% – IF for consumer credit card transactions: 0,3% – Co-badging – Unblending – “honour all cards” rule – Steering rules

Regulatory approaches outside the EU AUSTRALIA RBA imposed – caps on MIF – Prohibition of no surcharge and honor all cards rules This did not apply to three- party systems but the use of such cards did not raise, at the opposite it lowered because of competition from four-party cards (probably because of prohibition of no surcharge rule) USA Durbin Amendment to the Dodd-Frank Act: new Section 920 to the EFTA on reasonable fees and rules for payment card transactions – Although the other rules are applied by the BCFP, section 920 is applied by the Fed – Fed’s powers are framed within a statutory act and under clear policy lines – Reasonable fees: aligned to costs

Some key issues Shortfalls of the antitrust approach? – As for economic parameters Limits of the market definition according to competition standards Constraints imposed by market structure (for instance, capability to switch from operator to operator) A “static” analysis of market conditions – The quasi-regulatory role of antitrust authorities Advocating a role for the regulator? A perspective analysis of the market structure An holistic view of payment instruments and infrastructures Other policy issues at stake such as efficiency, financial stability and customers’ protection

The issue is not weather regulators should directly address competition Competition versus competitiveness Oversight as a tool implying different levels of monitoring and different roles by various stakeholders Central Banks to balance and combine positions of other authorities, each in charge of its own sector/objectives?