MasterCard ordered to dump rip-off intercharge fees

MasterCard has had its wrists slapped by the European Court and told to ditch its intercharge fees.

Anyone who uses a credit card for any length of time will discover that these 'flexible friends' come with a whole host of hidden fees.

For example, credit cards charge extra fees for overseas and non-sterling transactions, as well as offering inferior exchange rates. Likewise, cash withdrawals on credit cards come with sky-high fees and eye-watering rates of interest.

Yet another card rip-off

However, there's another kind of hidden fee that we end up footing the bill for, even though it doesn't directly affect us.

This is called an 'interchange fee' and it's a charge shared between banks for accepting card-based transactions. This fee is also known as a Merchant Service Charge (MSC) because -- surprise, surprise -- it's the fee retailers pay to have credit card payments processed.

In most cases, the bulk of this fee is taken by the customer's bank, known as the issuing bank. However, in some cases, the merchant's bank (known as the acquiring bank) will take some of this fee.

In effect, interchange fees are paid by merchants to card companies, so stores have to factor these fees into their prices. The big problem is that these charges are set by the card networks, namely, MasterCard, Visa and American Express.

Predictably, these card firms charge fees far in excess of what is needed to cover the underlying costs of these electronic, automated transactions. While huge supermarkets such as Tesco negotiate discounted interchange fees, charges are much higher for smaller retailers and, therefore, steal a slice of their profits. Even so, top retailers pay tens of millions of pounds a year in interchange fees.

[SPOTLIGHT]MasterCard, Visa and Amex make profits of billions of pounds each year from interchange fees. In turn, retailers pass on these charges to shoppers in the form of higher prices and we customers end up being fleeced!

MasterCard loses its appeal

Now for the good news: last week MasterCard appeal lost an appeal in the European General Court against a European Commission (EC) ban on its cross-border card fees.

In 2007, the European Commission ruled that the fees levied on British retailers for processing card payments from customers in other EU countries were unlawful and anti-competitive. MasterCard petitioned against this decision and, five years later, has lost that appeal.

In 2009, MasterCard halved its interchange fees, agreeing in a temporary settlement with the European Commission to charge 0.2% for debit cards and 0.3% for credit cards.

Following Thursday's ruling, trade body the British Retail Consortium (BRC) called this latest decision "historic and highly significant". The BRC argues that these fees are "much higher than the actual costs that card firms incur in processing transactions and so are an unjustifiable tax on retailers and consumers".

Confronting Visa and the UK's 'domestic card con'

This Court ruling against MasterCard is surely only the beginning of the EU's ongoing war on rip-off credit card fees.

MasterCard is the second-largest card network in the world, behind Visa, which will now come under the gaze of the Commission. At the same time, it seems certain that American Express -- which charges the highest merchant fees -- will also come under attack from the EC.

Meanwhile, here in the UK, the Office of Fair trading (OFT) is conducting an investigation into interchange fees for domestic (not cross-border) card transactions. It's estimated that these fees cost shoppers up to £1.5 billion a year, which is why the BRC has urged the OFT to take an equally tough line in tackling this UK-based card con.

What next?

MasterCard will appeal to the European Court of Justice (ECJ) against Europe's second-highest court's decision. However, this final appeal to the ECJ will be limited to points of law. As a result, the ECJ is highly unlikely to overturn this latest decision.

Looking ahead, it seems certain that the Commission will force MasterCard to reduce its fees again. Instead of charging 0.2% or 0.3% per card transaction, the card network may see these charges slashed to, say, 0.1% and 0.15% -- or even lower.

Of course, even if all three card networks have their interchange fees forcibly lowered by the EC, there is no guarantee that merchants will pass on these savings to consumers. However, I suspect that Britain's biggest retailers will cut their prices to reflect lower card fees, not least to bask in the brownie points that this public-relations exercise would win.

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