1. Two-sided markets and competition policy Understanding interchange fees Sean Greenaway * IDEI conference, Toulouse 29 June 2006 * Case handler, DG Competition, European Commission. This presentation reflects only the views of its author.

2. Structure of Presentation Findings of the sector enquiry on payment cards : how to square them with theory? An interchange fee for direct debit : what’s going on?

3. The sector enquiry on payment cards Provides empirical evidence for low pass-through rates in issuingProvides empirical evidence for low pass-through rates in issuing Appears to undermine the defense of (observed) interchange fees based exclusively on usage externalitiesAppears to undermine the defense of (observed) interchange fees based exclusively on usage externalities Suggests models are needed which explicitly account for market structureSuggests models are needed which explicitly account for market structure –Incentives of banks as issuers and acquirers –Governance of the networks –Relationship with the broader banking market

4. Discussion of some findings Acquirers in some MS pay much higher IFs than in others Acquirers in some MS pay much higher IFs than in others => Size of country doesn’t appear to be relevant => Concentration of the banking sector doesn’t either => Less mature markets may show higher fees => Network ownership seems to be relevant Acquirers pay much higher IFs for credit than debit cards Acquirers pay much higher IFs for credit than debit cards => But no greater usage externality for credit Large merchants do have countervailing buyer power Large merchants do have countervailing buyer power => “Sectoral IFs” exist => Some merchants are acquired below cost Inelastic demand for the transaction leads to higher fees Inelastic demand for the transaction leads to higher fees => Presence of market power

5. The central conundrum Rents captured in acquiring are almost completely transferred to issuing, but not subsequently competed away –IF moves rents away from the more sheltered side of the market –Does not look like a Nash bargaining equilibrium

6. What to conclude ? Two-sidedness theory has taught us a lot about this and other markets However, we have neglected market structure Collusive strategies and the desire to maintain oligopoly may explain the findings This would merit further academic analysis

7. An interchange fee for direct debit? SEPA contextSEPA context « Business case » for PEDD?« Business case » for PEDD? EPC cannot imposeEPC cannot impose Requires universal reachability ?Requires universal reachability ? Misaligned investment incentives ?Misaligned investment incentives ? Can an IF solve the problem ?Can an IF solve the problem ? Banking community wants legal certainty, whilst many fear the IF will be a source of rents.Banking community wants legal certainty, whilst many fear the IF will be a source of rents.

8. Thoughts Most platform markets are not two-sided! Two groups of users with differing demand is NOT a sufficient condition.Most platform markets are not two-sided! Two groups of users with differing demand is NOT a sufficient condition. Can’t the parties reach an efficient solution bilaterally through side-transfers? (Coase theorem)Can’t the parties reach an efficient solution bilaterally through side-transfers? (Coase theorem) Probably yes, as concerns the usage externalityProbably yes, as concerns the usage externality Maybe not, as concerns the network externality BUT does there exist an interchange fee that « solves » the problem?Maybe not, as concerns the network externality BUT does there exist an interchange fee that « solves » the problem? –IF changes the investment decision for a marginal tranche of banks –What incentive is there for the utilities to use PEDD rather than national DD? –Asymptotically the IF does solve the problem BUT only if side- transfers are possible and both markets are competitive

9. Questions on an IF for PEDD How does it work at national level?How does it work at national level? It may be competitively neutral but since it is unlikely to be effective, why then does the banking community want it?It may be competitively neutral but since it is unlikely to be effective, why then does the banking community want it? If it won’t deliver a cost-effective PEDD, what would?If it won’t deliver a cost-effective PEDD, what would? Does it matter?Does it matter?