Memorandum by the British Retail Consortium
COMPETITION IN UK BANKING
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
In particular we have concentrated on the money
transmission and associated issues which primarily affect the
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
feesthat 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
schemesor 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
rateand that the retailer will be force to payhave
little incentive to query the fee or to negotiate a better deal
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"
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.
BRC COMPLAINT TO
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
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
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