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Prohibited Agreement in Banking Sector



On 3 March 2011 the Competition Council (CC) decided that 22 Latvian commercial banks have infringed Article 11 Part 1.1 of the Competition Law by participating in the Multilateral agreement on the interchange fee for cash withdrawals at ATM, cash withdrawals at branches, balance inquiries at ATM and the multilateral interchange fee (MIF) on card payments at POS, incl. internet-based POS. The CC concluded that the Multilateral agreement has restricted competition in Latvian cards market. The Multilateral agreement was in effect from end 2002 until beginning 2011. The CC has imposed fines to the banks in the total amount of 5.5 million lats (7.8 million euro).

The Relevant markets were defined as markets for issuing of payment cards, for acquiring card payment services (POS, Internet) and market for ATM services (cash withdrawals, balance inquiries at ATM) in Latvia.

Conclusions:

The CC has declined banks' arguments that MIF was necessary in order to ensure cards payment system and to promote the use of card payments. The CC concluded that MIF was not necessary for the cards market promotion. During the investigation of the case the CC repeatedly asked banks to provide evidence that the benefits of the Multilateral agreement counterbalanced restrictions to the competition. Nevertheless the banks had not provided such evidence. Instead –banks explained the necessity of cards payments that was not questioned by the CC, therefore banks failed to justify the necessity to keep the fixed MIF for such a long time.

The CC has mentioned the following main arguments regarding fixing of the MIF:

  • MIF has actually fixed the minimum merchant service charge (MSC) set by the acquiring banks to merchants, thus restricting the acquiring banks capabilities to set lower MSC than MIF, i.e. to set the service price based on free competition;
  • Acquiring banks (competitors) were aware that merchants - clients of other acquiring banks would pay the same MSC level because the MIF was the base for the MSC minimum amount. Therefore the risk of losing customer (merchant) was low because the banks did not reduce MSC lower than MIF (except for some insignificant exceptions). As the result a common understanding was reached between the acquiring banks regarding the lowest MSC level, thus restricting competition among the acquiring banks;
  • Neither merchants, nor consumers had an ability to impact MIF;
  • MIF has affected all card payments – directly interbank card payments and indirectly on-us card payments;
  • MIF was the issuing banks' income, unrelated to their actual costs. Due to the fact that historically all acquiring banks happen to be issuing banks as well, issuing banks were interested to agree on a high MIF. Therefore CC concluded that banks had motivation to get financial gain out of MIF.

The CC also investigated the part of the Multilateral agreement which set fixed interchange fee for cash withdrawals at other banks' ATM, other banks' branches and balance inquiries at ATM. The CC concluded that Multilateral agreement had a direct impact on the charge which banks applied to their customers (cardholders) for these services. The impact of this agreement was severe at the beginning of the assessment period (2002). Banks have provided information that markup for the interchange fee for cash withdrawals in ATMs was in the level of 253% or 289% depending on the fee applied.

Within a due time banks have concluded bilateral agreements which have left positive impact on the market because the banks have reduced or even removed the charge applied to their customers for such services.

The CC has mentioned the following main arguments regarding the interchange fee (on services at ATM):

  • The interchange fee for cash withdrawals at ATM has been established at a level substantially higher than the service costs as well as by taking into account VISA and MasterCard's fees without proper justification;
  • The interchange fee has established a minimum charge of issuing banks applied to their customers (cardholders). Empirical evidence confirmed that issuing banks' charges were not set lower than the interchange fee;
  • Banks have agreed on a lower interchange fee in cases of bilateral agreements:
  1. interchange fee was lower in the bilateral agreements than in the Multilateral agreement;
  2. the interchange fees established by bilateral agreements were lower not only for banks which has ATMs at their possession, but also for those banks which do not have ATMs;
  3. the banks have amended the bilateral agreements to reduce the interchange fee for cash withdrawals at ATM;
  4. the issuing banks have applied lower charges to their customers (cardholders) for cash withdrawal at those banks' ATM with whom they have bilateral agreement in comparison to charges for cash withdrawals at those banks' ATM with whom they only have a Multilateral agreement.

The CC concluded that the Multilateral agreement on MIF and interchange fee for cash withdrawals at other bank's ATM, in other bank's branches and balance inquiry at ATM has to be considered as an agreement between competitors that by object and effect hampers, restricts and distorts competition in the relevant markets, by excluding the most important tool for competition, i.e. competition with price.