Mastercard issuers 'taxed consumers

A charging structure on purchases made with a Mastercard credit or debit card kept the cost of processing payments unduly high and was like a tax on UK consumers, the Office of Fair Trading said today.

The OFT has been looking into an agreement between Mastercard issuers - most of the country's major banks - which set an interchange fee for the handling of card payments.

It found that the agreement restricted competition between the organisations collecting the payment from the card issuer and passing it on to the retailer.

This meant retailers have been paying more than necessary for the service, a cost that was eventually passed on to all customers.

The OFT also found that the interchange fee was being used by card issuers to generate extra money for services that were not part of the basic Mastercard function, such as the cost of offering loyalty schemes and interest-free periods to card customers.

This distorted competition between Mastercard and other payment methods such as debit cards, cheques and cash, which customers were not incentivised to use.

"The parties to this collective agreement set the interchange fee to derive revenues from retailers and their customers over and above the costs of providing the payment services," said the OFT's chairman, Sir John Vickers.

"This unduly high interchange fee was like a tax on UK consumers."

The agreement was effective between March 1 2000 and November 18 2004, and has since been replaced.

However the new charging structure is also set to come under the scrutiny of the OFT, which has concerns that the interchange fee is still being used to cover other costs. It has threatened to start a second investigation unless Mastercard addresses the concerns.

It is also looking into interchange fees agree by Visa card issuers.

Commenting on today's announcement, the National Consumer Council's competition expert, Alena Kozokova, said: "Card interchange fee agreements between banks are a tax on all consumers whether or not they use credit cards, because they push up shop prices as well as card charges.

'So, this is extremely welcome news for consumers, and the harbinger of a similar OFT crackdown on Visa's interchange fee arrangements.'

Mastercard said it strongly disagreed with the findings and planned to lodged an appeal.

John Bushby, general manager of Mastercard Northern Europe, said the fee was not a tax on consumers and dismissed the OFT's claims that customers were being disadvantaged.

"For the OFT to claim that the interchange fee agreement either reduced competition or disadvantaged consumers or retailers is simply wrong," he said.

"Consumers benefit from greater choice as more retailers accept credit cards, and retailers of all sizes benefit as card usage expands. As such, today's OFT ruling is bad news for both healthy competition and the economy." He added: "Cards are a more efficient, more secure and more convenient means of payment than cash for both consumers and retailers, something today's ruling fails to recognise."

And he said the ruling also failed to recognise that interchange fees had contributed to significant expansion in use of new technology and a considerably more sophisticated and secure means of payment.

There are 30 million Mastercard holders in the UK and during 2004, more than 700m purchases with a total value of £42.7bn were made.

Mastercard would not disclose what its average interchange fee in the UK was, but said it was around 1.1% when the OFT investigation started and was now less than 1%.

The average fee for transactions across Europe is 0.95%. If this charge was the same in the UK, then last year Mastercard would have generated around £406m.