The Commissioners have concluded that VISA and MasterCard have abused their dominance by setting a high interchange fee (at 1%) charged between banks for debit/credit card payments. The interchange fee can constitute up to 79% of the cost incurred by banks for supplying merchants(retailers) with facilities for accepting card payments. At 1%, the interchange fee is restricting competition among banks/financial institutions by preventing some of them, especially smaller ones, from providing merchants with card acceptance facilities at lower prices. To remedy the situation, the Commission has ordered VISA and MasterCard to limit their interchange fee to a maximum of 0.5% for debit/credit card transactions.
The Competition Commission’s investigation follows a complaint into fees charged to merchants for accepting debit/credit card payments.
The Competition Commission received a complaint alleging that the commission charged by banks to merchants when accepting payment by cards was too high. This led to the investigation on the interchange fee set by VISA and MasterCard for debit/credit card transactions in Mauritius.
VISA and MasterCard, as card-network operators, provide theirrespective networksto banks. This enables banks to issue debit and credit cards to consumers and provide facilities to merchants for accepting payments by cards. For every debit/credit card payment that a merchant accepts, the latter must pay a commission (known as the merchant service commission) to his bank. This commission comprises different elements, of which the major one is the interchange fee. In fact, the interchange fee can account for up to 79% of the merchant service commission. When a consumer makes a payment by card to a merchant, the merchant’s bank (known as the acquiring bank) pays the interchange fee to the consumer’s bank (known as the issuing bank). The level of commission charged to the merchant is largely determined by the interchange fee, that is, the higher the interchange fee, the higher the merchant service commission.
The investigation found that VISA and MasterCard set interchange fees between issuing and acquiring banks through agreements.
The investigation found that the level of interchange fee is set by VISA and MasterCard through agreements that they respectively sign with the banksfor using their networks. VISA and MasterCard have set the interchange fee for local debit/credit card transactions at around 1%, and merchants were in turn paying up to 3% as merchant commission to their banks. There are 13 banking/non-banking financial institutions which issue VISA and MasterCard cards but only 4 of them provide facilities to merchants for accepting payments by cards.
The Commission reviewed VISA’s and MasterCard’s agreements since the 1% interchange fee level prevented smaller banks/financial institutions from offering lower commission rates to merchants.
The interchange fee is usually set at a level that encourages (issuing) banks to issue debit/credit cards to consumers and (acquiring) banks to supply merchants with card-acceptance facilities. Of the four acquiring institutions in Mauritius, The Mauritius Commercial Bank Ltd (MCB) and SBM (Mauritius) Ltd (SBM) are the largest players in terms of both the number of cards issued and merchants. Most of the transactions that merchants acquire are made on the cards issued by these two banks. As a result, these banks retain most of the interchange fees from the merchant service commission.
By contrast, the two smaller acquiring institutions (CIM Finance Ltd and Barclays Bank Mauritius Ltd) are mostly paying out, from their merchant service commission, interchange fees to MCB and SBM. To these acquirers, a 1% interchange fee level represents an important business cost for providing card facilities to merchants and restricts their ability to offer competitive commission rates to merchants. With the exception for the petrol and government segment, where both VISA and MasterCard have set a lower interchange fee of 0.5%-0.6%, the smaller acquiring institutions are constrained in setting the commission rates below 1.0%. The current interchange fee level of 1% set by VISA and MasterCard inflates the costs of smaller acquiring institutions for providing card acceptance facilities and thus limits their ability to compete effectively by offering lower merchant service commission.
Merchants on their parts are left with a limited choice of banks providing them with card-acceptance facilities and are in a weaker position to bargain for lower commission rates. The higher costs for accepting debit/credit cards by some merchants could be reflected in the final prices to consumers. Another consequence of a high interchange fee is that many merchants do not provide card-acceptance facilities to consumers and some card-accepting merchants are reluctant to accept debit/credit cards; depriving consumers of the convenience of using their debit/credits as payment means.
The Commissioners have concluded that the current interchange fees restricted competition among banks and ordered a reduction in the interchange fee level.
After reviewing the Report of investigation and hearing parties, the Commissioners have found the competition concerns, as identified in the investigation, to be verified. In their decision, the Commissioners have concluded that the interchange fee of 1% set by VISA and MasterCard restricts competition in the acquiring market. While reaching their decision, the Commissioners have also considered local market conditions in which banks operate. Given existing market features, the current interchange fee was found to inflate the cost of smaller acquirers and to limit their ability to better compete with MCB and SBM by offering merchant service commission rates. In addition to raising existing banks’ costs of offering card-facilities to merchants, interchange fees also raised the costs of potential entrants and may thus discourage local banks from offering competing services to merchants.
In order to address the competition concerns, VISA and MasterCard have been ordered to limit their interchange fee level for debit/credit card transactions to a maximum of 0.5%. VISA and MasterCard have been given six (6) months, starting from the date the Commissioners’ Decision is notified to them, to implement the Commission’s directions. The 0.5% maximum rate takes into consideration the positive effects resulting from VISA’s and MasterCard’s introduction of a 0.5% interchange fee for debit/credit card payments at petrol stations. At this level, the smaller acquirers were able to offer lower commission rates (0.87%) to petrol stations than those offered by MCB and SBM.
Mr Deshmuk Kowlessur, the Executive Director of the Competition Commission, said:
“The decision of the Commission requiring VISA and MasterCard to limit the interchange fees to a maximum of 0.5% is likely to reshape the competition landscape in the local payment card market. The reduction of the interchange fees will open-up the market for existing and potential banking and other financial institutions to offer acquiring services to merchants. At the same time, the two dominant banks will have to compete more rigorously. A new dynamism in the local payment card market is likely to encourage existing competitors and new entrants to offer innovative services.
The resulting lower merchant service commission will encourage card-acceptance by merchants and thus offer card users the convenience, security and lower costs of settling their transactions. It can also be expected that consumers can benefit from lower prices of goods and services, as merchants’ cost of transaction will be reduced with lower merchant service commission. At the end, the reduction in the interchange fee will bring more competition in the payment card market and positively impact on trade, commerce and economic development.
I am pleased that the determination of the Commission in this matter support the findings of the investigation. The reduction will intensify the rivalry among the various players in the local payment cards markets for the greater benefit of cardholders, merchants, banks and the economy at large.
The parties have exercised their right of appeal and the Commission will put up its case to the Supreme Court for the latter to decide on the matter.”
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