european commission dg competition chief economist team

CONFERENCECOMPETITION POLICY IN

TWO-SIDED MARKETS

University of Toulouse June 30

Dr Valérie RABASSA*EUROPEAN COMMISSION

DG COMPETITIONCHIEF ECONOMIST TEAM

*The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission

European CommissionEuropean Commission

DG CompetitionDG Competition

Chief EconomistChief Economist Team 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

Economics of the Payment Cards Industry




Why are Card Payment Systems Why are Card Payment Systems considered as Two-Sided Markets?considered as Two-Sided Markets?

Two distinct sides: acquiring and issuing sidesTwo distinct sides: acquiring and issuing sides

Matchmakers intermediate between the two sides Matchmakers intermediate between the two sides

Chicken & egg issues Chicken & egg issues

Every additional cardholder entering the network Every additional cardholder entering the network increases its value for merchants and increases its value for merchants and vice versavice versa indirect network externalities indirect network externalities

“Usage” externality “Usage” externality

The volume of transactions and the profit depends not The volume of transactions and the profit depends not only on the level of prices but also on their decomposition only on the level of prices but also on their decomposition or structureor structure

The The CoaseCoase theorem does not apply theorem does not apply




The Role of an ‘optimal’ The Role of an ‘optimal’ Interchange FeeInterchange Fee

Should create sufficient incentive to take both Should create sufficient incentive to take both acquirers and issuers on board in order to acquirers and issuers on board in order to distribute efficiently the costs (for acquirers) distribute efficiently the costs (for acquirers) and the revenues (for issuers) of the payment and the revenues (for issuers) of the payment systemsystem

Should solve the chicken and egg issues by Should solve the chicken and egg issues by internalizing the externalitiesinternalizing the externalities




Potential Anti-Competitive Potential Anti-Competitive ConductsConducts

of Interchange Feeof Interchange Fee

May restrict competition between banksMay restrict competition between banks

Could be interpreted as a tool of splitting the Could be interpreted as a tool of splitting the rent between both sides of the market and rent between both sides of the market and therefore as an instrument of potential therefore as an instrument of potential distortion of the cardholders and merchants distortion of the cardholders and merchants price structureprice structure … in particular if no perfect … in particular if no perfect pass-onpass-on




Preliminary Results of the Commission’s

Sector Inquiry into Payment Cards

** Available at Available at http://europa.eu.int/comm/internal_market/finances/http://europa.eu.int/comm/internal_market/finances/

docs/white_paper/white_paper_en.pdfdocs/white_paper/white_paper_en.pdf







The Sector Inquiry has identified The Sector Inquiry has identified considerable structural, behavioural considerable structural, behavioural and technical barriers to competition and technical barriers to competition in the industryin the industry

Analysis of the cardholders, Analysis of the cardholders, merchants and interchange feesmerchants and interchange fees

Public Public consultation until 21 June consultation until 21 June 20062006

Public Hearing on 17 July 2006Public Hearing on 17 July 2006

December 2007December 2007 Final Report Final Report




Structural barriersStructural barriers Vertical integrationVertical integration Joint ventures between acquirersJoint ventures between acquirers

Technical barriersTechnical barriers

Behavioral barriersBehavioral barriers Agreement on preferential interchange feesAgreement on preferential interchange fees Bilateral clearing arrangementsBilateral clearing arrangements Governance arrangementsGovernance arrangements Some memberships requirementsSome memberships requirements

Potential Barriers to competitionPotential Barriers to competition




Weighted Average MSC Rates Charged per Country for MasterCard and Visa Credit Cards, 2004, %

0

0,5

1

1,5

2

2,5

3

3,5

A B C D E F G H I J K L M NMember State

Wei

gh

ted

Ave

rag

e M

SC

, %

MasterCard

Visa

Businesses in some countries pay a far higher Businesses in some countries pay a far higher merchant fee on average than othersmerchant fee on average than others

Merchant FeesMerchant Fees




Weighted Average Domestic Interchange Fees Charged to Acquirers on MasterCard and Visa Credit Cards, %, 2004

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

A B C D E F G H I J K L M N O P R S T U V X Y

Member States

Do

mesti

c I

F,

%

MC

Visa

Acquirers in some MS pay much higher interchange Acquirers in some MS pay much higher interchange fees on average than in othersfees on average than in others

Interchange FeesInterchange Fees




Country-average fee per credit card, 2004

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

A B C D E F G H I J K L M N O P Q R S T U V W

Member States

EU

RO

MasterCard

Visa

Average fee =24 Euro

Cardholder FeesCardholder Fees

Cardholders in some MS pay much higher fees on Cardholders in some MS pay much higher fees on average than in othersaverage than in others




Interchange Fees : empirical Interchange Fees : empirical evidenceevidence

Positive relationship between the Positive relationship between the interchange fee and the merchant feeinterchange fee and the merchant fee

Imperfect pass-on between the interchange Imperfect pass-on between the interchange fee and cardholder fee by the issuing banksfee and cardholder fee by the issuing banks




Brief Overview of the Cartes Bancaires, the VISA and

MasterCard problematic




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




The Flow of Interchange FeesThe Flow of Interchange Fees

AcquirinAcquiring Bankg Bank

MerchantsMerchants

MasterCard/VISA association

CardholderCardholderss

Issuing Issuing BankBank

MIFMIF

MSMSCC




The Flow of Interchange FeesThe Flow of Interchange Fees

CIPCIP AcquirinAcquiring Bankg Bank

MerchantsMerchants

Cartes Bancaires

CardholderCardholderss

Issuing Issuing BankBank

CIRCIR

MERFAMERFA

ATMATMMSMSCC




Still pendingStill pending cases…… cases…… sorrysorry ! !

european commission dg competition chief economist team

Documents