1. CONFERENCE COMPETITION POLICY IN TWO-SIDED MARKETS University of Toulouse June 30 Dr Valérie RABASSA* EUROPEAN COMMISSION DG COMPETITION CHIEF ECONOMIST TEAM *The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission European Commission DG Competition Chief Economist Team

2. European Commission DG Competition Chief Economist Team Outline  Economics of the Payment Cards Industry  Some Preliminary Results of the Commission’s Sector Inquiry into Payment Cards  Brief Overview of the Cartes Bancaires, the VISA and the MasterCard problematic

3. Economics of the Payment Cards Industry European Commission DG Competition Chief Economist Team

4. Why are Card Payment Systems considered as Two-Sided Markets? Two distinct sides: acquiring and issuing sides  Matchmakers intermediate between the two sides  Chicken & egg issues  Every additional cardholder entering the network increases its value for merchants and vice versa  indirect network externalities  “Usage” externality  The volume of transactions and the profit depends not only on the level of prices but also on their decomposition or structure  The Coase theorem does not apply Why are Card Payment Systems considered as Two-Sided Markets?  Two distinct sides: acquiring and issuing sides  Matchmakers intermediate between the two sides  Chicken & egg issues  Every additional cardholder entering the network increases its value for merchants and vice versa  indirect network externalities  “Usage” externality  The volume of transactions and the profit depends not only on the level of prices but also on their decomposition or structure  The Coase theorem does not apply European Commission DG Competition Chief Economist Team

5. The Role of an ‘optimal’ Interchange Fee Should create sufficient incentive to take both acquirers and issuers on board in order to distribute efficiently the costs (for acquirers) and the revenues (for issuers) of the payment system  Should solve the chicken and egg issues by internalizing the externalities The Role of an ‘optimal’ Interchange Fee  Should create sufficient incentive to take both acquirers and issuers on board in order to distribute efficiently the costs (for acquirers) and the revenues (for issuers) of the payment system  Should solve the chicken and egg issues by internalizing the externalities European Commission DG Competition Chief Economist Team

6. Potential Anti-Competitive Conducts of Interchange Fee May restrict competition between banks Could be interpreted as a tool of splitting the rent between both sides of the market and therefore as an instrument of potential distortion of the cardholders and merchants price structure… in particular if no perfect pass-on Potential Anti-Competitive Conducts of Interchange Fee  May restrict competition between banks  Could be interpreted as a tool of splitting the rent between both sides of the market and therefore as an instrument of potential distortion of the cardholders and merchants price structure … in particular if no perfect pass-on European Commission DG Competition Chief Economist Team

7. * Available at http://europa.eu.int/comm/internal_market/finances/docs /white_paper/white_paper_en.pdf Preliminary Results of the Commission’s Sector Inquiry into Payment Cards * Available at http://europa.eu.int/comm/internal_market/finances/docs /white_paper/white_paper_en.pdf European Commission DG Competition Chief Economist Team

8. European Commission DG Competition Chief Economist Team  The Sector Inquiry has identified considerable structural, behavioural and technical barriers to competition in the industry  Analysis of the cardholders, merchants and interchange fees  Public consultation until 21 June 2006  Public Hearing on 17 July 2006  December 2007 Final Report

9. European Commission DG Competition Chief Economist Team  Structural barriers  Vertical integration  Joint ventures between acquirers  Technical barriers  Behavioral barriers  Agreement on preferential interchange fees  Bilateral clearing arrangements  Governance arrangements  Some memberships requirements Potential Barriers to competition

10. European Commission DG Competition Chief Economist Team Businesses in some countries pay a far higher merchant fee on average than others Merchant Fees

11. European Commission DG Competition Chief Economist Team Acquirers in some MS pay much higher interchange fees on average than in others Interchange Fees

12. European Commission DG Competition Chief Economist Team Cardholder Fees Cardholders in some MS pay much higher fees on average than in others

13. European Commission DG Competition Chief Economist Team Interchange Fees : empirical evidence  Positive relationship between the interchange fee and the merchant fee  Imperfect pass-on between the interchange fee and cardholder fee by the issuing banks

14. European Commission DG Competition Chief Economist Team Brief Overview of the Cartes Bancaires, the VISA and MasterCard problematic

15. European Commission DG Competition Chief Economist Team A specific issue relevant for competition within the MasterCard and Visa systems is the co-existence of bilaterally and multilaterally agreed interchange fees. The former are often referred to in the industry as “on-us” fees A specific issue for the Cartes Bancaires case is a membership fee called MERFA imposed by the GIE to be paid by new entrants

16. European Commission DG Competition Chief Economist Team The Flow of Interchange Fees Acquiring Bank Merchants MasterCard/VISA association Cardholders Issuing Bank MIF MSC

17. European Commission DG Competition Chief Economist Team The Flow of Interchange Fees CIP Acquiring Bank Merchants Cartes Bancaires Cardholders Issuing Bank CIR CIR MERFA ATM MSC

18. European Commission DG Competition Chief Economist Team Still pending cases…… sorry !