Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum by the British Retail Consortium (BRC)


  Thank you for allowing the British Retail Consortium to submit evidence at the eleventh hour. I am sorry we did not intercept your original e-mail.

  The British Retail Consortium made a major submission to the Cruickshank Review Committee and helped shape the final outcome.

  In particular we have concentrated on the money transmission and associated issues which primarily affect the retail trade.

  John Simpson, BRC Director of Financial Policy, will be pleased to give oral evidence together with a relevant retailer, who serves on the BRC Financial Services Committee, should the Committee find this helpful.

22 January 2001


  The British Retail Consortium (BRC) is pleased to present evidence to the Treasury Committee on Banking having made a major submission to the Cruickshank Review team.

  The BRC is the trade association of the retail industry representing more than 90 per cent of the total retail trade in the UK. BRC retail membership covers all sectors from the large multiples and department stores, though to the corner shop, from food and drink to furniture and DIY, from town centre to rural and mail order. Its members occupy in excess of 290,000 shops and provide employment for 2.9 million people.

  The BRC fully supports the recommendations of the Cruickshank Review on money transmissions and the setting up of an independent payments regulator.


  In particular the BRC wishes to draw attention to the section of the Cruickshank Review D3 regarding interchange fees—that is, the fees charged by a bank issuing a branded credit card/debit card ("the Issuer") to the bank acquiring transactions on the credit card/debit card from the retailers ("the Merchant Acquirer"), which is set by the card schemes—or rather, in practice, collectively by the banks forming part of the relevant payment scheme. A good description of the operation of such four party payment schemes is set out at paras D3.24 of the Cruickshank Report.

  While, technically, the collectively set interchange tariffs are expressed to be a fall back "default rate" if the individual banks are unable to agree fees bilaterally, the Cruickshank Report (para 3.102) estimated that over 90 per cent of transactions are, in fact, charged at the default rate.

  Retailers accepting credit cards and debit cards are directly affected by this collective price fixing as the interchange fees are simply passed on by the Merchant Acquirer to the retailer who is unable to influence their level. The cost to UK merchants of interchange fees is estimated to be £750 million per annum. As both the Issuing Banks and the Merchant Acquirer are members of the card scheme and many card scheme members act in both capacities, there is little incentive to negotiate interchange to competitive levels. Indeed, it encourages them to take monopoly profits. The BRC's members are, effectively, captive customers. The interchange fee paid to the issuer has always remained inviolable and there is currently little scope for negotiation of lower merchant charges. The interchange element is effectively set collectively, so will not be bargained away. Details of its make-up are still kept strictly secret from the ultimate payers. Merchant acquirers, safe in the knowledge that all of their competitors face the same collective rate—and that the retailer will be force to pay—have little incentive to query the fee or to negotiate a better deal bilaterally.

  The Cruickshank Review concluded "the Review's analysis of interchange arrangements for the three major card scheme operators leads to concerns that interchange fees for credit cards and the Visa debit card scheme are substantially higher than can be justified by legitimate cost recovery" (section 3.114).


  The effect of interchange fees is to completely distort the charges paid by retailers for payment cards, particularly credit cards against other tender types such as cash and cheques.

  In 1999 the BRC carried out a survey of members on the cost of accepting different tender types. It showed that the price paid by retailers with a turnover of £500 million or more per annum for credit cards was:

    (i)  six times that for a debit card; and

    (ii)  14 times that for a cheque.

  The prices charged by banks for clearing and settling the various payment methods ought to reflect the costs of providing them.

  Because they are cheaper to clear and settle electronic card payments ought to cost less than paper cheques. Differences in card types are irrelevant to the cost of clearing and settling a card payment. In a properly functioning market, card payments would be priced equally.

  If "all in" costs are taken including bank charges, the cost of bad debit and fraud, cash in transit costs and labour credit card costs per £1 of turnover are twice as expensive as accepting cash for retailers.

  Furthermore, in 1999 credit cards represented 17 per cent and debit cards 21 per cent of retail turnover and both are growing fast.


  In spring 2000 Mastercard/Europay UK Ltd applied to the Office of Fair Trading for its rules to be exempted under the 1998 Competition Act, which became law in March 2000.

  BRC opposes the granting of any exemption which would allow the same unjust pricing regime to continue and has made a formal complaint to the OFT. We currently await a response from the OFT.


  There is a parallel European action which BRC has supported strongly. EuroCommerce, the European trade association representing European retailers, has formally complained to the Commission about the Visa rules on interchange as well as those of other payment card schemes.

  In its latest interim ruling dated 16 October 2000, the Commission states that "the interchange fee for international operations amounts to a collective price agreement, which is restrictive to competition. In the Commission's view, Visa International has not so far put forward any convincing reasons showing that the interchange fee fulfils the cumulative conditions for an exemption under the EC antitrust rules, such as that it would be indispensable for the functioning of the Visa payment card scheme. As has also been pointed out by EuroCommerce, many other payment card schemes, such as ec-Karte in Germany, function without interchange fees".

  With the UK and EU Competition law coming into line, retailers hope that a pan-European decision can be made against interchange fees leaving retailers to pay the cost of settlement and clearance, which is far lower than current charges, particularly for credit cards.


  BRC is currently studying the Treasury consultation document issued on 20 December 2000 "Competition in Payments Systems".

  BRC welcomes the increased openness and transparency of banks as proposed in the document. However, the OFT's remit is to operate a legal framework designed to improve competition. Retailers are concerned that the current framework results in interchange not being set competitively.

  The OFT may require new powers to regulate charges, guarantee levels and authority to obtain information on costs. The BRC is not clear that the powers or modus operandi of the OFT are appropriate for a non-competitive environment such as money transmission.

  In short, BRC will be examining, with the Treasury, ways to ensure that a regulatory set up under auspices of the OFT, without a class licence, will have the necessary teeth to bring recalcitrant members of the banking industry to book.

  BRC is committed to working positively with the Treasury and the OFT to set up the best possible regulatory regime and is currently working on its response to the consultation document.

  BRC does not agree with the generally held view in the banking industry that a UK regulator would cause difficulties due to the global nature of card acceptance. Many countries within the EU and around the world have a great variety of regulatory regimes where the card schemes have to amend their rules to comply with local laws (eg Denmark where for debit cards, as there is a monopoly, Danish Competition authorities have refused to allow banks to charge fees to retailers to accept debit cards).

  In addition, regulatory authorities around the world are examining the anti-competitive nature of the interchange fee. For example, the Reserve Bank of Australia and Australian Competition and Consumer Commission have published a report on the Debit and Credit Card Schemes in Australia in October 2000 which states "the study has concluded that the interests of end-users of card payment services need to be more directly engaged in the pricing process and conditions of entry and card payment networking need to be more open than at present". It would follow that some additional form of regulation may result.


  Because of the nature of the card schemes, so far as the retailer is concerned there is little or no prospect of supply side substitution. While the consumer market has seen a plethora of new entrants to the card issuing market, all of these new entrants have entered as part of one of the existing franchises. The barriers to entry for a new card are extremely high. No new card scheme has successfully entered the UK market for many years because (as Cruickshank notes at D3.21) of "the difficulty in establishing a critical mass of both cardholders and merchants in the face of well established schemes". Any new card schemes entrant in the credit or debit card market is most unlikely to be a truly independent competitor of the existing suppliers. It would be dependent on the support of the UK banks, all of which are members of the existing schemes. Given the strength of the existing schemes, UK member banks have no incentive and plenty of disincentives to invest time and resources in supporting the establishment of a new entrant.

  The acceptance of the major cards is no longer a positive benefit to the retailer which may bring him incremental business, but a necessity to avoid a major loss of potential custom. "Once a payment scheme has reached critical mass, it becomes progressively more difficult for retailers not to accept that card scheme for fear of losing incremental business to competitors. From the Retailers' perspective, payment schemes are not good substitutes for each other, even when they offer customers very similar products (eg Visa Debit and Switch). This is because a specific card product may be the preferred method of payment for enough customers to make it very costly for a retailer to refuse to accept that card. Accepting all of the major card schemes is virtually a necessity for large sectors of UK retailing. Each of these schemes has the opportunity to exploit this position" (Cruickshank D3.22). With Marks & Spencer and John Lewis recently being forced by market pressure to accept the major cards no major British retailer now refuses to accept them. The Card Scheme regularly say that if retailers are unhappy with the level of interchange, they can exercise "buyer power" by refusing to accept the cards. This is increasingly impossible economically as demonstrated by the M&S and John Lewis decisions. The major card schemes have become, in some ways, virtually "essential facilities". If refusal were a real possibility, there would be evidence of retailers dropping a particular card in response to the unjustified charges. This has, indeed, occurred in the case of Amex (for example, Boots have dropped Amex). Moreover, no retailer (and, so far as the BRC is aware, no major merchant in any sector) has chosen to accept cards issued under one of the major credit or debit card schemes and not the other. Indeed, because the consumer is generally unaware that use of the card is anything but "free"—the full odium of any such withdrawal would fall on the retailer rather than the bank and have an adverse effect on this business even beyond the immediate loss of customer.


  The arguments against interchange fees are applicable to all sizes of merchant. BRC represents a large body of small retailers, through retail trade associations who are trade association members of BRC (eg National Federation of Retail Newsagents and the British Shops and Stores Association Ltd).

  Therefore, BRC has submitted to the Competition Commission on Banking Services to SMEs its OFT complaint against Mastercard/Europay UK Ltd as a major argument on excessive charges to SME retailers.

  In addition, an independent company of Bank Charge Auditors who act on behalf of retail SMEs is assembling evidence to submit to the Competition Commission on overcharging in retail and other SME sectors by high street banks.


  The pricing structure and lack of guarantees offered by the banking industry for non-face to face payment card transactions actually presents a deterrent to merchants entering new channel selling arenas.

  Currently, the interchange fee for products sold when the customer does not present a card in person to the retailer is 30 per cent higher than for face to face transactions. Furthermore, if the transaction is subsequently found to be fraudulent, the merchant takes a full recharge.

  To reduce fraud the banking industry, with retailers' support, is developing a more robust customer verification method for remote transactions involving using the address of the customer in addition to card data. However, only two out of the three major card schemes in the UK have signed up to operate the new system. Switch debit cards so far is only considering whether to participate. For many merchants the financial case to change their own IT systems, with only two out of three major schemes on board, is uneconomic. Furthermore, the banking industry, so far, has only agreed to consider changes to chargeback liabilities should fraud occur for those merchants who agree to use the new technology, six months after going live.

  This corresponds neither in letter nor spirit to the Government's intention of making the UK the e-commerce centre of the world.


  BRC produces a monthly Shop Price Index which gives an accurate picture of the inflation faced by shoppers on 200 of the most commonly bought items in shops. The December Index is attached as an Annex.

  As the Committee can see even with excessive charges for payment cards the fiercely competitive nature of UK retailing has resulted in falling prices with December prices 0.05 per cent lower than last year, 0.5 per cent lower than two years ago and 1.1 per cent lower than three years ago.

  Most retailers have tried to absorb at least part of the high bank charges they face. Therefore reduction of these fees will support retailers' efforts to maintain competitive prices and high service levels to the benefit of consumers.


  The BRC is engaged in a number of initiatives in the UK and Europe to reduce the unfair and unjustified charges by the banking industry, particularly for credit cards. BRC hopes in time these will lead to a more transparent and regulated regime in which charges are related to costs and therefore reduced. This in turn will help retailers to maintain competitive prices and high services levels for consumers.

  We invite the Committee to support these efforts.

22 January 2001

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