B.4. MERCHANT FEES
B.4.3. The effect of blending and surcharges on the setting of MSCs
• blended merchant service charges; and
• networks' ban on surcharge Blended merchant service charges
‘Blending’ generally refers to the situation where the same MSC rate is offered to merchants accepting cards issued in two or more different networks, irrespective of any differences in their level of interchange fees. The analysis of the replies from acquirers revealed that blending is a frequent phenomenon across the EU-25.
According to respondents, blending is common between MasterCard and Visa card products. In other words, blending occurs between networks with similar levels of interchange fees, and therefore with similar cost components for the MSC. Due to substantial differences in interchange fees, blending between MSC rates charged on debit and credit cards is less frequent.
The data analysis shows that nearly three quarters of Member States surveyed have some form of blending of MSC rates. Furthermore, one fifth (Belgium, Denmark, Hungary, Ireland, etc.) seem to have full blending in the market: all of the responding acquirers indicated that they blend MasterCard and Visa MSC rates to 100% of their client base.
Networks' ban on surcharge
A merchant can pass the cost of accepting cards as a method of payment to the customers either by charging a fee for the use of the card, surcharging, or by including the fees in the product/service prices but granting a discount to customers paying in cash, cash discounts. Most networks refer to a clause prohibiting such surcharges and/or cash discounts as a “no discrimination clause”, i.e. the merchants are prohibited from applying higher prices and/or less favourable conditions to card transactions than to cash transactions. Some networks also refer to the practice of charging different prices depending on the method of payment as “dual pricing”.
About half of the 25 addressees of the inquiry explicitly allow surcharging and/or discounts for cash, or claim not to have any rules regulating and/or limiting such practices. National payment networks with no rules on surcharging may nevertheless be bound by those of the international payment networks when co-branding their cards with international payment card functions.
For instance, the Switch/MasterCard network in the UK allows surcharging provided the charge is advertised to the cardholder in advance and bears a reasonable relationship to the retailer’s cost in accepting cards. Likewise, retailers in Finland may charge their customers a processing fee for the use of the national debit card, Pankkikortti. As from 1 January 2005, merchants accepting the cards of MasterCard in the European Economic Area have the option of surcharging. Two of the other international networks also permit surcharging. According to the membership rules of both the latter networks, however, merchants may not discriminate between cards of these networks and other cards.
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The remaining addressees of the inquiry explicitly prohibit or discourage surcharging and/or cash discounts. Although not party to the contracts between acquirers and retailers, most networks prohibiting surcharging and/or cash discounts in their network assume that a provision to this effect is included in these contracts. In Germany, the prohibition against surcharging stems from the framework agreement between issuers and merchants governing access to the electronic cash card system.
Possible sanctions for breach of the surcharge prohibition range from commercial pressure on the merchant to comply to pecuniary penalties and/or warnings with possible termination of contract. In Belgium, for instance, surcharging merchants are subject to higher merchant service charges under an oral agreement concluded in 1998 between Banksys, the banks and the Belgian Ministry of Economic Affairs. The rules of both one of the international payment schemes and one national scheme contain a “dispute resolution mechanism”, via which consumers can have their issuer seek, directly or via the networks, a refund of the value of the surcharge from the retail.
From a competition perspective, the surcharge prohibition restricts the freedom of merchants to pass on to cardholders the transaction costs of accepting payment cards. In its decision of 7 August 2001 (Commission’s Visa Decision)192, the Commission gave a “negative clearance” to the Visa surcharge prohibition (i.e. the ‘no discrimination rule’) on the grounds of lack of appreciable effects193. This conclusion was based on studies commissioned by the Commission on the effects of lifting the surcharge prohibition in Sweden and in the Netherlands. These studies found that relatively few merchants made use of their possibility to surcharge.
In some of the literature in this field, a surcharge prohibition has been considered necessary to prevents merchants from passing on the interchange fee to cardholders, thereby stimulating the diffusion of cards194. It has been argued that if the prohibition is lifted and merchants can price discriminate freely, the interchange fee will no longer influence the level of payment card usage195. Other authors have argued that there is less need to use the interchange fee for this purpose in mature systems196. Concerns have also been raised that if surcharges are allowed merchants may overcharge for the use of cards, which will be difficult for consumers to verify.
B.4.4. Conclusions
Small merchants on average pay 70% more for payment card acceptance than large merchants. In theory, this could be explained by the lower average costs of acquiring merchants with higher transaction volumes. However, a comparison of price differentials between large and small merchants in the international schemes (MC/Visa: 70%, Amex 50%, JCB 40%, Diners 35%) with those in domestic systems (7% on average) suggests that scale may not be the decisive factor. It could be that smaller merchants pay a premium for accepting MasterCard and Visa cards. If that were true, the differentiation of prices according to the size of the merchant could be a measure for the exercise of market power by banks within a given system.
Merchants paying the highest average rates for MasterCard and Visa card acceptance (florists, restaurants, professional services, car rental, hotels) are typically those active in the
192 OJ L 293-24 of 10-11-2001. 193Idem, paragraphs 11-12 and 54-58.
194 See e.g., J-C. Rochet and J. Tirole, “Cooperation among Competitors: Some Economics of Payment Card Associations”, RAND Journal of Economics, Vol. 33, No 4, Winter 2002, pp. 549-570 (p. 562).
195Idem, p. 566.
196 See e.g., Vickers, J., “Competition Policy and the Invisible Price: How to Set the Interchange Fee?”, 6 May
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T&E sector, where travellers expect to pay with cards, while merchants paying lower fees are typically to be found in segments with low profit margins.
Blending of merchant fees by acquirers can have direct implications for inter-network competition, as it removes an important parameter of price competition; differential MSC levels. The potential outcome of blending may be higher rates than the merchant needs to pay for acquiring services, since there is no pressure to drive down these charges through inter-network competition. Where the price difference charged in two networks is negligible, blending may be done on efficiency grounds (since it could reduce accounting and reporting requirements). However, blending would tend to nullify the effect of “multi-homing”, which, according to some claims in the academic literature, is an important countervailing force to the market power of card payment networks.
The ban on surcharging appears to restrict inter-network competition, notably by concealing the true cost of payment cards for consumers via cross-subsidisation, and may result in the use of non-optimal payment instruments. It has been suggested that the surcharging prohibition may constitute a barrier to entry for alternative non-cash payment instruments, such as mobile phones or e-money. Retailers surveyed in the inquiry were strongly in favour of the possibility to surcharge, since it would strengthen the incentive for consumers to use cheaper payment instruments.
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