Competition and Efficient Usage of Payment Cards 2006

395 Pages·2007·2.76 MB·English

Competition and Efficient Usage of
Payment Cards
2006
Unclassified DAF/COMP(2006)32

Organisation de CoopØration et de DØveloppement Economiques
Organisation for Economic Co-operation and Development 04-Oct-2007
___________________________________________________________________________________________
English, French
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
COMPETITION COMMITTEE
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COMPETITION AND EFFICIENT USAGE OF PAYMENT CARDS

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DAF/COMP(2006)32
FOREWORD

This document comprises proceedings in the original languages of a Roundtable on
Competition and Efficiency Usage of Payment Cards, held by the Competition Committee in June 2006.

It is published under the responsibility of the Secretary General of the OECD to bring
information on this topic to the attention of a wider audience.

This compilation is one of a series of publications entitled "Competition Policy Roundtables".

PR(cid:201)FACE
Ce document rassemble la documentation dans la langue d’origine dans laquelle elle a ØtØ
soumise, relative (cid:224) une table ronde sur la concurrence et utilisation efficiente des cartes de paiement, qui
s’est tenue en juin 2006 dans le cadre du ComitØ de la concurrence.

Il est publiØ sous la responsabilitØ du SecrØtaire gØnØral de l’OCDE, afin de porter (cid:224) la
connaissance d’un large public les ØlØments d’information qui ont ØtØ rØunis (cid:224) cette occasion.

Cette compilation fait partie de la sØrie intitulØe "Les tables rondes sur la politique de la
concurrence".

Visit our Internet Site -- Consultez notre site Internet

http://www.oecd.org/competition
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DAF/COMP(2006)32
OTHER TITLES

SERIES ROUNDTABLES ON COMPETITION POLICY

1. Competition Policy and Environment OCDE/GD(96)22
2. Failing Firm Defence OCDE/GD(96)23
3. Competition Policy and Film Distribution OCDE/GD(96)60
4. Competition Policy and Efficiency Claims in Horizontal Agreements OCDE/GD(96)65
5. The Essential Facilities Concept OCDE/GD(96)113
6. Competition in Telecommunications OCDE/GD(96)114
7. The Reform of International Satellite Organisations OCDE/GD(96)123
8. Abuse of Dominance and Monopolisation OCDE/GD(96)131
9. Application of Competition Policy to High Tech Markets OCDE/GD(97)44
10. General Cartel Bans: Criteria for Exemption for Small and
Medium-sized Enterprises OCDE/GD(97)53
11. Competition Issues related to Sports OCDE/GD(97)128
12. Application of Competition Policy to the Electricity Sector OCDE/GD(97)132
13. Judicial Enforcement of Competition Law OCDE/GD(97)200
14. Resale Price Maintenance OCDE/GD(97)229
15. Railways: Structure, Regulation and Competition Policy DAFFE/CLP(98)1
16. Competition Policy and International Airport Services DAFFE/CLP(98)3
17. Enhancing the Role of Competition in the Regulation of Banks DAFFE/CLP(98)16
18. Competition Policy and Intellectual Property Rights DAFFE/CLP(98)18
19. Competition and Related Regulation Issues in the Insurance Industry DAFFE/CLP(98)20
20. Competition Policy and Procurement Markets DAFFE/CLP(99)3
21. Regulation and Competition Issues in Broadcasting in the light
of Convergence DAFFE/CLP(99)1
22. Relationship between Regulators and Competition Authorities DAFFE/CLP(99)8
23. Buying Power of Multiproduct Retailers DAFFE/CLP(99)21
24. Promoting Competition in Postal Services DAFFE/CLP(99)22
25. Oligopoly DAFFE/CLP(99)25
26. Airline Mergers and Alliances DAFFE/CLP(2000)1
27. Competition in Professional Services DAFFE/CLP(2000)2
28. Competition in Local Services DAFFE/CLP(2000)13
29. Mergers in Financial Services DAFFE/CLP(2000)17
30. Promoting Competition in the Natural Gas Industry DAFFE/CLP(2000)18
31. Competition Issues in Electronic Commerce DAFFE/CLP(2000)32
32. Competition and Regulation Issues in the Pharmaceutical Industry DAFFE/CLP(2000)29
33. Competition Issues in Joint Ventures DAFFE/CLP(2000)33
34. Competition Issues in Road Transport DAFFE/CLP(2001)10
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DAF/COMP(2006)32
35. Price Transparency DAFFE/CLP(2001)22
36. Competition Policy in Subsidies and State Aid DAFFE/CLP(2001)24
37. Portfolio Effects in Conglomerate Mergers DAFFE/COMP(2002)5
38. Competition and Regulation Issues in Telecommunications DAFFE/COMP(2002)6
39. Merger Review in Emerging High Innovation Markets DAFFE/COMP(2002)20
40. Loyalty and Fidelity Discounts and Rebates DAFFE/COMP(2002)21
41. Communication by Competition Authorities DAFFE/COMP(2003)4
42. Substantive Criteria used for the Assessment of Mergers DAFFE/COMP(2003)5
43. Competition Issues in the Electricity Sector DAFFE/COMP(2003)14
44. Media Mergers DAFFE/COMP(2003)16
45. Non Commercial Services Obligations and Liberalisation DAFFE/COMP(2004)19
46. Competition and Regulation in the Water Sector DAFFE/COMP(2004)20
47. Regulating Market Activities by Public Sector DAFFE/COMP(2004)36
48. Merger Remedies DAF/COMP(2004)21
49. Cartels: Sanctions against Individuals DAF/COMP(2004)39
50. Intellectual Property Rights DAF/COMP(2004)24
51. Predatory Foreclosure DAF/COMP(2005)14
52. Competition and Regulation in Agriculture:
Monopsony Buying and Joint Selling DAF/COMP(2005)44
53. Enhancing Beneficial Competition in the Health Professions DAF/COMP(2005)45
54. Evaluation of the Actions and Resources of Competition Authorities DAF/COMP(2005)30
55. Structural Reform in the Rail Industry DAF/COMP(2005)46
56. Competition on the Merits DAF/COMP(2005)27
57. Resale Below Cost Laws and Regulations DAF/COMP(2005)43
58. Barriers to Entry DAF/COMP(2005)42
59 Prosecuting Cartels without Direct Evidence of Agreement DAF/COMP/GF(2006)7
60. The Impact of Substitute Services on Regulation DAF/COMP(2006)18
61. Competition in the Provision of Hospital Services DAF/COMP(2006)20
62. Access to Key Transport Facilities DAF/COMP(2006)29
63. Environment Regulation and Competition DAF/COMP(2006)30
64. Concessions DAF/COMP/GF(2006)6
65. Remedies and Sanctions in Abuse of Dominance Cases DAF/COMP(2006)19
66. Competition in Bidding Markets DAF/COMP(2006)31
67. Competition and Efficient Usage of Payment Cards DAF/COMP(2006)32
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DAF/COMP(2006)32

TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................... 7
SYNTH¨SE ....................................................................................................................................... 13

BACKGROUND NOTE .................................................................................................................... 19
NOTE DE R(cid:201)F(cid:201)RENCE ................................................................................................................... 69

NATIONAL CONTRIBUTIONS
Australia ..................................................................................................................................... 127
Denmark ..................................................................................................................................... 143
Finland ........................................................................................................................................ 151
Germany ..................................................................................................................................... 155
Hungary ...................................................................................................................................... 161
Ireland ........................................................................................................................................ 165
Italy ........................................................................................................................................ 169
Korea ........................................................................................................................................ 175
Mexico ........................................................................................................................................ 181
Netherlands ................................................................................................................................. 201
Poland ........................................................................................................................................ 213
Sweden ....................................................................................................................................... 217
Switzerland ................................................................................................................................. 221
Turkey ........................................................................................................................................ 237
United Kingdom ......................................................................................................................... 243
United States ............................................................................................................................... 251
European Commission ............................................................................................................... 261

and

Chinese Taipei ............................................................................................................................ 269
Indonesia .................................................................................................................................... 273
Israel... ........................................................................................................................................ 283
Lithuania ..................................................................................................................................... 287
Russian Federation ..................................................................................................................... 293
South Africa ............................................................................................................................... 299

OTHER

BIAC(cid:133) ...................................................................................................................................... 305
Professor David S. Evans ........................................................................................................... 321

SUMMARY OF DISCUSSION ........................................................................................................ 329
COMPTE RENDU DE LA DISCUSSION ....................................................................................... 359
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EXECUTIVE SUMMARY
by the Secretariat
1. In light of the written submission, the background note and the oral discussion, the following
points emerge:
1. Non-cash payment systems serve a valuable role, enabling transactions to occur that otherwise
would not. However, free market competition between payment systems likely results in a
disproportionately high usage of high-cost payment systems. This market failure exists because
relative costs for different payment mechanisms are rarely reflected in consumer prices paid.
Retail payment systems exist to oil the wheels of commerce, ensuring that purchasers and
merchants can benefit from transactions with each other. If cash were the only payment system
available, many transactions that would be lost to the economy, simply as a result of the
constraint of purchasing only within the limit of cash in the wallet. Non-cash payment systems,
such as checks, debit cards and credit cards, have enabled a significantly larger number of
transactions to take place than otherwise would.
In any transaction using a payment system both the purchaser (in this case, a cardholder) and the
merchant are consuming the services of the payment system; that is, both purchaser and
merchant are consumers of payment systems. When comparing costs and benefits of payment
systems, the costs and benefits to the integrated purchaser-merchant consumer should be
considered.
In the past, governments have pursued a policy goal of minimizing the costs of transactions in
order to promote more retail trade and, potentially, out of the view that payment systems are an
intermediate product that enable transactions. This has led governments to play an active role in
the retail payments sector, by ensuring that stores of value, such as cash, were considered
reliable, trustworthy and easily identified as genuine.
In recent times, governments have typically held back from close oversight of new payment
systems, which has allowed privately provided systems to take risks, grow and innovate. But the
private systems have not been driven by a unique incentive to reduce transaction costs to the
integrated consumer. Systems that yield the lowest costs to the group of purchaser/merchants
may not be the ones that purchasers will choose to use. For example, if PIN-based debit cards are
the minimum cost electronic payment instrument to the integrated consumer, but non-PIN cards
offer purchasers a small financial incentive for each marginal use of the card, purchasers may
choose the non-PIN card despite it being much more expensive for the merchant and less secure.
That is, purchasers will not take into account the full costs of card use to the integrated payment
system (cid:147)consumer(cid:148). As a result, modest rewards to purchasers for use of a much higher total cost
payment system can lead purchasers to use the higher cost system much more frequently than
they would if the costs of different payment systems were always reflected in the retail prices of
goods.
The existence of price signals to the purchaser that are not reflective of costs to the integrated
purchaser-merchant consumer will distort card usage towards more expensive cards, creating a
misallocation of resources. This is a market failure. But it is important to note that not all market
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failures have good or obvious remedies. In the case of payment cards, it is not clear what
regulatory or legal interventions, if any, would best resolve the market failure.
2. Card issuers may have market power towards merchants, and this market power may exist even
for cards with small overall market shares.
Merchants often complain that they do not have a realistic ability to turn away cards, even if the
believe the merchant fees for using a card are unjustifiably high. While merchants do sometimes
choose to refuse cards, such refusals are relatively unusual in many merchant sectors, particularly
for commonly-used four-party payment systems. Three-party payment systems, such as
American Express and Diners Card, with relatively higher merchant fees are more commonly
turned away, supporting the view that there is a price elasticity of demand which constrains card
issuers in the merchant fees they can charge. Some observers argue that American Express has
reduced its merchant fees in response to merchant defections.
Nonetheless, it is likely that payment systems do have market power towards merchants, even if
a given payment system has a small share of transactions, as long as the systems have broad
acceptance.
In support of the point that card brands with small penetration can still have market power, note
that price discrimination exists both for cards with large market shares and for cards with small
market shares. Cards price discriminate between different types of merchants, with higher than
average charges for certain merchants with predominantly high margins (e.g., hotels and
restaurants) and lower than average charges for certain merchants with lower margins (e.g.,
supermarkets.) Some would interpret this price discrimination as an indication of market power.
3. Certain card network rules often have effects that maintain the market power of a card network
by limiting the ability of retailers to influence choice of payment mechanisms.
The fact that many consumers may have and seek to use a certain brand of card limits merchant
ability to reasonably refuse that card. If retailers accept the card, however, they are often bound
by rules from the card brand governing how the merchants must behave with respect to the card.
The precise nature of these rules differs across jurisdictions. At times, the full card rules were not
even told to merchants. However, some rules were well understood. In particular, certain rules
have the effect of limiting the retailer(cid:146)s ability to influence the choice of payment mechanism by
the customer. These rules can make merchants less sensitive to merchant fees, by making their
demand for card services more inelastic. The rules also limit the ability of merchants to negotiate
for lower rates. Certain of these rules appear to have largely anti-competitive effects.
Governments might consider whether such rules are consistent with desired policy goals and
either challenge them under competition laws or address them with legislation.
The three main rules of concern are the honour-all-cards rule, the no-steering rule and the no-
surcharge rule.
The honour-all-cards rule states that if a card brand is accepted, all cards issued under that brand
must be accepted. This rule was challenged in the United States by merchants opposed to linking
acceptance of major four-party credit cards to their sister debit cards. The four-party debit cards
had much higher charges than other debit cards (often more than 10 times as expensive), but
merchants were not permitted to refuse the debit cards unless they also refused the credit cards.
The (cid:147)all or nothing(cid:148) approach of the card companies tied a product that merchants felt they had
to accept (the credit card) with a new product the merchants did not want to accept (the four-
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party debit card). Ultimately, Visa and MasterCard settled the U.S. litigation by dropping their
honour-all-cards policy in the US, but it remained in effect elsewhere.
The no-steering rule means that merchants are not allowed to express their preference for certain
forms of payment over others. For example, the merchants cannot tell cardholders that, although
the merchant accepts a given credit card, they would prefer the cardholder to use a debit card or
pay by cash or check. If merchants have the ability to steer cardholders away from a given card,
that gives the merchant a direct way to respond to merchant fees that they consider unduly high.
The most direct form of steering would be in response to price signals. The no-surcharge and no-
discount rules prohibit merchants from establishing prices that are different depending on the
mode of payment. Discounts for cash payment have sometimes been offered, for example, as
well as surcharges for use of certain cards. Surcharges are not extremely common when they are
permitted (though certainly present), which has led the European Commission to suggest that no-
surcharge rules are innocuous. Such a conclusion is likely too hasty, however, as the ability of
merchants to surcharge changes the terms of negotiation with a card issuer over merchant fees,
making the merchant better able to avoid unduly high prices. When Australia recently allowed
surcharging, as a result of policy actions by the Reserve Bank of Australia, a small but
significant number of merchants did choose to surcharge for credit cards and terms of negotiation
changed.
4. Customers who purchase without cards are likely providing an implicit (cid:147)subsidy(cid:148) to card users;
Card users with low merchant fee cards (such as debit card users) are likely providing an
implicit (cid:147)subsidy(cid:148) to card users with high merchant fee cards (such as credit card users).
To the extent that retail prices are uniform for purchasers who use payment mechanisms with
different costs, the users of the high-cost payment mechanisms are likely receiving benefits akin
to a cross-subsidy from users of the low-costs payment systems. That is, the users of the high-
cost payment mechanisms would pay less than they would were they charged for the full cost of
using their payment system and the users of the low-cost payment mechanism would pay more
than they would in the absence of the high-cost payment mechanism.
This pattern of support may have perverse income distribution effects because the users of low-
cost payment systems are more likely to be low income than the users of high-cost payment
systems. As a result, the low-income purchasers will pay a higher retail price than they otherwise
would, while the high-income purchasers will pay a lower retail price than they otherwise would.
5. Regulation can have unintended effects not predicted by government policymakers. For example,
competition law enforcement focused on four-party payment systems is likely having an
unintended impact of moving systems towards a three-party structure, which may result in higher
merchant fees.
In a number of OECD countries, competition authorities or other competent authorities have
investigated or charged four-party payment systems with violations of the competition law or
with behaviour that is harmful to welfare. Such charges have typically not been directed to three-
party payment systems. Even where concerns have been expressed towards three-party systems,
as in the Reserve Bank of Australia(cid:146)s actions towards American Express, the agreement reached
with American Express has been different and from that with the four-party systems. In many
jurisdictions, this difference in treatment arises, at least in part, from the fact that underlying
four-party systems is a system of shareholding of banks, so that there has at least been the
appearance of collusive price setting, if not the practice. Another reason for the difference is that
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