Select Committee on Treasury Minutes of Evidence


Letter from Mr Etienne Goosse, General Manager, Corporate Affairs, Europay International

CRUICKSHANK REPORT: MONEY TRANSMISSION

  Europay International SA (EPI) is pleased to submit written evidence to the Treasury Select Committee's Banking inquiry.

BACKGROUND TO EPI

  Information on the functioning and governance of the payment card schemes as operated by EPI in the United Kingdom follows.

  EPI, headquartered in Waterloo, Belgium, is a public limited liability company incorporated under Belgian law. The shareholders of EPI are predominantly joint companies owned by member banks throughout the European Region.

  EPI's strategic partner MasterCard International (MCI) is a US membership corporation incorporated under Delaware law. The members of MCI are banks or groups of banks situated throughout the world. MCI has a 12.247 per cent shareholding in EPI.

  EPI offers a wide range of payment producers and services across Europe, and through a long-standing strategic alliance with MCI, the rest of the world. EPI is responsible in Europe for the licensing of its own trademarks (including eurocheque and Eurocard), those trademarks owned by MCI (including MasterCard and Cirrus) and the Maestro trademark (owned jointly by EPI and MCI). EPI licenses the use of the EPI/MCI trademarks to approximately 9,000 member banks throughout Europe.

  MasterCard/Europay UK Ltd (MEPUK), which has also submitted evidence to the inquiry from the UK perspective, is an association of United Kingdom (UK) licensees of EPI and MIC. MEPUK has as its members and shareholders UK licensees of EPI and MCI trademarks having more than 90 per cent of the Eurocard/MasterCard issuing and acquiring UK domestic point of sale volumes. MEPUK is also a 15.285 per cent shareholder in EPI on behalf of its members.

HIERARCHY OF SCHEME RULES

  All participants in the Eurocard/MasterCard system are subject to a hierarchy of operating rules and regulations with respect to transactions relating to such matters as minimum standards applicable to merchant transactions, rules related to the use of the trademarks, chargebacks, etc.

  MIC is responsible for adopting and administering global product rules to ensure the security of the schemes it operated and interoperability across regions and to maintain the global integrity of the brands. The MCI Bylaws and Rules establish and explain the powers, rights, duties and responsibilities of MCI and its members in respect to membership and participation in the MasterCard system globally.

  EPI is responsible for adopting and administering within Europe the product rules to ensure the same objectives. EPI is also responsible for the marketing to banks of products using the scheme's trademarks and for the processing of transactions in Europe. The Eurocard Rule Book sets out the specific European rules governing the interchange regulations between the participants in the Eurocard/MasterCard system which differ from the standard MCI rules. These European specific rules are adopted by EPI, who are delegated to do so as the European licensing entity and these European rules are designed to accommodate the requirements of the European membership and to adapt the MCI rules to the European environment. These Rules do not affect other regions and must be consistent with MCI objectives established in the MCI Bylaws and Rules.

  The UK Domestic rules set out the operating regulations governing UK domestic transactions between participants in the Eurocard/MasterCard system which differ from the EPI Rules. Prior to 1 March 2000, the UK domestic Rules were developed and maintained by EPI in consultation with MEPUK. In February 1999, EPI adopted a rule which provides that rules applicable to all domestic transactions in a country may be agreed by a group of members representing at least 75 per cent of both the Eurocard/MasterCard issuing and acquiring domestic volumes in that country. As MEPUK satisfies this condition, the MEPUK Board elected at its December 1999 meeting to adopt the UK Domestic Rules with effect from 1 March 2000. The UK Domestic Rules which only apply to transactions with UK-issued cards undertaken in the UK, must be consistent with MCI and EPI Rules.

  In other words, the MCI Rules apply except to the extent varied by the EPI Rules which, in turn, may be varied by the UK Domestic Rules, in each case in accordance with the relevant delegated authority. This means that all three sets of rules have application to all UK licensees of MCI/EPI (regardless of whether they are members of MEPUK).

MONEY TRANSMISSION—PAYCOM

  We fully endorse the arguments put forward by MEPUK against the establishment of a UK licensing regime in the payment services industry. We would also like to express our concern that legislation to open up access to payment systems to competition from non-banks will be detrimental to the integrity of our brands and entail increased settlement risks for all participants in the scheme, and ultimately for the overall economy.

  Looking at it from an international perspective, we would like to raise the following points:

ABSENCE OF A NEED FOR ADDITIONAL REGULATION OF THE UK PAYMENT CARD INDUSTRY

  The UK payment card industry is widely considered to be among the most competitive and dynamic markets in Europe, having one of the highest numbers of competing issuers and acquirers of all European countries.

  Paragraph 175 of the European Commission's Statement of Objections against EPI of 6 May 1999 quotes the 1995 report of the UK-based Retail Banking Research Limited on Payment cards in Europe as follows: "The experience in the UK where, following the recommendations of the MMC in 1989 the existing monopoly of Barclays as a Visa acquirer and JCCC (Joint Credit Card Company) as a Eurocard acquirer was broken up and several other acquirers entered the market, has shown that an increase in competition on the acquiring market seriously decreases the level of merchant fees. Merchant commissions rapidly fell by about a third from 2.4 per cent to 1.6 per cent. All acquirers acquire both Visa and MasterCard transactions and the credit card sector in the UK is the most mature and the most competitive of the EU".

  This is confirmed by the attached Table which was appended to the above-mentioned Statement of Objections. As you can see from the Table, merchant fees in the UK are among the lowest of all EU countries. On the issuing side, low-interest and no-fee credit cards are making inroads in competition with existing cards. These recently introduced new products are forcing a rethink among the established players.

  EPI therefore fails to see the basis for introducing additional regulation given that competitive market forces fully play in the UK card payments market. A country comparison in terms of new market entry, cardholder and merchant fees provides strong support for this.

POTENTIAL UNWORKABILITY OF A UK-BASED LICENSING REGIME

  We question the workability of a UK licensing regime in view of the above described structure and hierarchy between inter-regional, intra-regional and domestic operating rules. The scheme rules enable member banks located outside the UK to issue cards and acquire transactions in the UK without any physical presence in the UK. For example, the acquisition of UK based internet merchants by acquirers located outside of the UK would not necessarily be caught by the establishment of a UK licensing regime. In view of the increasing globalisation of the industry through the offering of products and services (including payment solutions) over the Internet, any kind of imposed licensing regime at a national level would fall short of control of these new distribution channels and only serve to overburden the UK industry in unnecessary and unwarranted regulation. This could lead to UK members being at a disadvantage to other members.

INCREASED SETTLEMENT RISKS WHEN OPENING UP CARD ISSUANCE AND MERCHANT ACQUISITION TO NON-BANKS

  The Treasury has expressed concerns about EPIs membership criteria as far as the ability is concerned to become a card issuer and merchant acquirer. EPI's eligibility rules are essentially based on the definition of a credit institution as stipulated in Article 1 of the First EU Banking Directive. EPI's eligibility rules allow all credit institutions or entities for 90 per cent owned and controlled by credit institutions established in Europe to become issuers and acquirers. For the purpose of this rule, credit institutions are defined as businesses that receive deposits or other repayable funds from the public, and/or grant credits form their own account. Applicants must in addition be duly authorised and regulated as credit institutions by the competent authorities in the country where they are established. EPIs eligibility rules are also consistent with MCI's eligibility rules.

  The above eligibility criteria are the best guarantee for protecting the scheme from members' failure to meet their payment obligations to other members or to merchants. Strict compliance is essential to maintain brand integrity and to secure cardholders', merchants' and members' confidence in the financial stability of the payment scheme.

  At scheme level, MasterCard guarantees all Eurocard-MasterCard card transactions between principal licensees throughout the world, including Europe. Europay guarantees debit card transactions effected by European cardholders involving principal licensees and governed by international rules (both intra-regional and inter-regional). In both instances, member banks, as the ultimate owners of Europay and MasterCard, underwrite the risk.

  The inability of an issuing or acquiring member to meet its settlement obligations may pose systemic and liquidity risks to the whole scheme, jeopardise its stability and seriously damage the reputation of the brands in that market and even have an impact on the overall economy. An acquirer's insolvency will usually result in merchants not receiving funds due and the scheme having to fund chargebacks from issuers. In the case of an issuer's failure, they will not be able to settle with the scheme for transactions undertaken by cards they have issued. It may be necessary to terminate the issuer's programme causing the cardholders to be unable to use their cards.

  Therefore, in the context of new licence applications, every applicant is examined by Europay's Settlement Risk Unit in order to assess the potential risk of the new member to the scheme. The assessment is based on areas such as risk, country, member, product, brand and clearing and settlement.

  If the UK authorities would force EPI to licence non-banks as card issuers and merchant acquirers, we would need to revisit our settlement risk policy in respect of such members as we would no longer be able to rely on the capital adequacy and own funds requirements imposed by the European banking Directives and supervision by the appropriate banking supervisors. Also, the provision of the guarantees from MCI and EPI in respect of settlement between UK members would inevitably have to be reconsidered.

CONSISTENCY WITH EXPECTED RULINGS FROM COMPETENT DOMESTIC AND INTERNATIONAL AUTHORITIES

  EPI has made a series of notifications to the European Commission pursuant to Articles 81 and 82 of the EC Treaty relating to the EPI and MCI rules. In the US, the Department of Justice (DOJ) has initiated a lawsuit against both MCI and Visa. MEPUK made an application on 1 March 2000 to the Office of Fair Trading (OFT) for an exemption from Chapter I of the Competition Act 1998 in respect of the UK Domestic Rules, and its Memorandum and Articles of Association.

  We are concerned that as the European Commission, the DOJ and the OFT are expected to clarify shortly the application of competition rules to card payment systems, there is a consequent risk of inconsistency in terms of approaches between the UK government and the competent anti-trust authorities.

  One example would be the Treasury's stated intention to open up access to payment schemes to non-banks. EPI's eligibility rules have been notified to the European Commission and have not been determined as giving rise to competition law concerns. There would be potential effects on intra-community trade if the UK would force EPI to change its eligibility rules for the UK. The membership rules are not a UK only issue as discussed above (in terms of settlement risk and brand integrity) but have a community dimension. Changes mandated by the UK authorities would adversely increase the risks for non-UK member banks, if no action is taken to address the issue.

OVERALL EFFICIENCY OF PAYMENT CARDS

  In its Communication on retail payments in the internal market (Com(2000) 36 final) published in January of this year, the European Commission has analysed the efficiency of the various instruments for making small value retail cross-border payments. Compared to credit transfers used to transfer funds from the account of a sender to the account of a beneficiary, payment cards are a far more cost-effective means to transfer money, for both domestic and cross-border payments. The main reason identified for the high costs of making cross-border credit transfers (compared to domestic bank transfers) was the absence of an efficient cross-border transfer system linking the various domestic automated clearing houses.

  This is exactly the strength of the international payment card schemes as they have been successful in building an infrastructure linking member banks and affiliated merchants all around the world. The international payment card schemes, in working together with the banking community, have been highly successful in bringing secure, convenient, easy to sue and cost effective retail payment products to millions of cardholder and merchants all over the world.

  Major efforts and resources are now being invested in the new economy so as to play in the future an equally important role as provider of reliable payment products and services to the benefit of merchants and cardholders.

  I would welcome the opportunity to provide further oral evidence later this year to the Treasury Select Committee, if appropriate, on the way the international card schemes operate and interface with the UK banking community.

31 July 2000

Figure 23

MERCHANT ACQUIRING BY COUNTRY


Debit Eurocard/MasterCard Visa

AUSTRIA
Merchant Acquirer
Average MSC
Europay Austria
0.32%-0.85% + ATS 1.60 or
ATS 0.90 per transaction
Europay Austria
3%-4%
Visa Austria
3%-4%
BELGIUM
Merchant Acquirer
Average MSC
Banksys
BEF 4 per transaction
Bank Card Company
1.7%
Bank Card Company
1.9%
DENMARK
Merchant Acquirer
Average MSC
PBS
0
PBS
0.75%
PBS
0.75%
FINLAND
Merchant Acquirer
Average MSC
Banks
0
Luottokunta
1.15%-1.35%
Luottokunta
1.15%-1.35%
FRANCE
Merchant Acquirer
Average MSC
Banks
0.8%
Banks
0.8%
Banks
0.8%
GERMANY
Merchant Acquirer
Average MSC
Third Parties
0.03% + DEM 0.10 per transaction
GZS (and banks from 1999)
2.1%
B + S Card Services and banks
2%-4%
GREECE
Merchant Acquirer

Average MSC
Alpha Credit Bank, National Bank
of Greece and Commercial Bank
0 (provided an agreed number of
monthly transactions are made)
National Bank of Greece and
Commercial Bank
1.8%-7%
Banks

1.8%-7%
IRELAND
Merchant Acquirer
Average MSC
Banks Banks
1.4%-5%
Banks
1.4%-5%
ITALY
Merchant Acquirer

Average MSC
Banks

1.5%
SI (+ member banks), DB
(+ member banks)
SI: 2.6% + member bank fee
DB: 2.6% + member bank fee
SI (+ member banks), DB
(+ member banks), BNL, Setefi
SI: 2.6% + member bank fee
DB: 2.6% + member bank fee
NETHERLANDS
Merchant Acquirer
Average MSC
Interpay
NGL 0.15 per transaction
Interpay
1.25%-5% (average 2.7%)
VSB International
n.a.
NORWAY
Merchant Acquirer

Average MSC
Bank Axept

0%
Europay Norge
(foreign card transactions)
1.5%-3%
Banks, Visa Norge (paper based and
foreign card transactions)
0.85%—2.6%
PORTUGAL
Merchant Acquirer
Average MSC
Banks
1.3%
Unicre
1.4%-4.1%
Unicre
1.4%-4.1%
SPAIN
Merchant Acquirer
Average MSC
Commercial and savings banks Commercial and savings banks
0.25%-6%
Commercial and savings banks
0.25%-6%
SWEDEN
Merchant Acquirer
Average MSC
Banks
SEK 0-SEK 3
Banks
2%-2.5% and SEK 0-SEK 3
Banks
2%-2.5% and SEK 0-SEK 3
SWITZERLAND
Merchant Acquirer
Average MSC
Telekurs Europay Switzerland
2.5%-3%
UBS AG, Corner Bank
2.5%-3%
TURKEY
Merchant Acquirer
Average MSC
BKM, Banks BKM, Banks
7%-9%
BKM, Banks
7%-9%
UK
Merchant Acquirer
Average MSC
Banks
GBP 0.13 per transaction
Banks
1.4%
Banks
1.4%

KEY


MSC=Merchant Service Commission;
BNL=Banca Nazionale del Lavoro;
DB=Deutsche Bank;
SI=Servizi Interbancari.




 
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