Consumer watchdog to look into Mastercard's 'anti-competitive' fees

A consumer watchdog yesterday began a new investigation into credit card organisation Mastercard over suspected "anti-competitive" behaviour that could mean millions of UK shoppers are being overcharged.

If the Office of Fair Trading finds against the organisation, it could levy a fine of up to £150m, 10% of Mastercard's worldwide turnover.

The new inquiry is the latest move in a long-running battle between the OFT, Mastercard and rival player Visa concerning the fees charged when consumers use their credit cards to buy goods.

In September, following a five-and-a-half-year investigation, the OFT said an agreement between Mastercard and Britain's big banks breached competition law.

It estimated that retailers had been overcharged by well over £100m a year for almost five years, and it was the public who picked up the tab through higher prices in shops.

When a credit card is used, a percentage of the purchase price is paid by the retailer, via its bank, to the card company. It is this "multilateral interchange fee" that is at the heart of the dispute.

While these costs are borne initially by retailers' banks, they are passed on to the retailers and in turn to the public through higher prices, thereby acting "like a tax on UK consumers", said the OFT at the time.

In late 2004 Mastercard introduced new arrangements for setting the fees, but the OFT said yesterday it suspected these also breached competition laws. "The OFT has reasonable grounds for suspecting that the new arrangements infringe Article 81 and/or the Chapter I prohibition of the Competition Act," said a spokesman.

More than 20 million Britons carry Mastercard plastic in their wallets and purses, and more than 700m purchases totalling more than £40bn are made in the UK using its cards each year.

Mastercard has argued that the fee covers funding of the interest-free credit period offered by many cards, but the watchdog has already ruled that this has nothing to do with the payment services provided to retailers. The OFT said last time that the inclusion of "extraneous costs" within the fee provided a large flow of revenue to card issuers, and the incentive to persuade customers to use Mastercard plastic, which distorted competition.

Yesterday the watchdog said it suspected the fees were still being used to recover extra costs.

Mastercard and the banks escaped fines following the last ruling because the way the law existed then meant they enjoyed statutory immunity from such penalties. But the law has now changed and the OFT has the power to impose a fine of up to 10% of its worldwide turnover.

Mastercard is appealing against the September ruling, and the final verdict that the competition appeal tribunal delivers is likely to have a major impact on the new probe that has been launched, said the OFT spokesman. As a result, the watchdog will not reach any decision on whether the organisation is guilty of infringing the Competition Act until after the appeal is over.

The OFT is also investigating a potentially anti-competitive agreement between Visa and the major banks.

John Bushby, Mastercard Europe's UK and Ireland general manager, said it had been expecting the announcement. "In line with its consistent practice, Mastercard will actively cooperate with the OFT and comply with its requests for information as it has consistently done so," he said.