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Friday, December 28, 2007

European Union Price Fixing

It is understandable that many retailers do not like paying interchange fees when customers use credit or debit cards. In fact, there are lots of costs to complain about during the average business day. But that does not mean government intervention is the answer.

Interchange fees are charged for processing credit card (or debit card) transactions, including credit approvals and fund transfers. The fees tend to run, on average, less than 2% of transactions, and vary based on the industry, business, type of card, etc.

Some retailers have pushed for government to step in – either through the courts or through regulation – and rollback these fees. They seem to think that the government can intervene with a form of price controls, and make some costs of business simply disappear without any consequences.

That, of course, is silly. Nonetheless, the European Union has attempted just such a thing with antitrust regulators telling MasterCard to drop one of its fees. There, of course, are costs involved. A December 19 Bloomberg News report noted the following:

“MasterCard Inc.'s 40-year-old transaction fee paid by retailers was declared illegal by European Union regulators, who gave the company six months to devise a new system that doesn't harm consumers.

“MasterCard must revise the way it calculates the fee so that it ``contributes to technical and economic progress'' or face a daily penalty of as much as 3.5 percent of sales, the European Commission said in a statement. MasterCard said the ruling applies to about 5 percent of its transactions.

“Merchants argue that interchange fees -- paid between banks on each card transaction -- inflate prices for shoppers by as much as 13.5 billion euros ($19.4 billion) a year, according to the European Retail Round Table, a lobby group for 14 retailers. Australia's cap on the fees raised costs for cardholders and may do the same in Europe, said Craig Maurer, an analyst at Calyon Securities in New York.

“‘The consumer will be the ultimate loser, victim of a well- intentioned government acting on behalf of merchants, whose true motivation is improved margins, not consumer protection,'’ Maurer, who rates the company ‘buy,’ said today in a report…

“‘This decision fails to take adequate account of the benefits that retailers receive from the worldwide card payment system,’ said Edward Yingling, chief executive officer of the American Bankers Association, in a statement. ‘By accepting cards for payment, retailers get faster, guaranteed payments, enhanced security and protection against fraud.’”

There are always costs involved when government intervenes. But there certainly is no reason for government to intervene in this case, as the payments market offers a variety of options – from cash to checks to a mind-boggling array of credit cards.

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