Significant changes in the payment market – Banks and payment card companies have reached a settlement with the Icelandic Competition Authority
- Arion banki, Íslandsbanki and Landsbankinn (‘the banks'), as well as Borgun and Valitor (‘the payment card companies') have each completed a separate settlement with the Icelandic Competition Authority (“ICA”) (Samkeppniseftirlitið). These settlements bring a closure to an extensive investigation into certain anti-competitive practices in the payment market.
- With the settlement, each of these undertakings admits that certain implementations in the payment market were not in accordance with Articles 10 and 12 of the Competition Act and Article 53 of the EEA Agreement.
- Moreover, the undertakings commit to implement comprehensive measures designed to reinforce competition. In addition, they agree to pay fines, totalling ISK 1,620 million.
The case began with a complaint from Kortaþjónustan ehf., a small company operating in the payment market, which was directed at card issuers (Arion banki, Íslandsbanki, Landsbankinn) and payment card companies (Borgun and Valitor). Kortaþjónustan claimed that these undertakings had violated the Competition Act by taking various actions that the company believed had hindered competition in the market. On 8 March 2013, the ICA published its initial findings (Statement of Objection) to the parties for the purpose of making it easier for them to use their right to object. Subsequently, each of the banks, Borgun and Valitor requested (separately) a negotiation for a settlement with the ICA, citing a provision of the Competition Act that gives the ICA the power to wind up cases with a settlement.
The settlements will lead to positive fundamental changes to various arrangements and business practices in the payment card market and will, in the opinion of ICA, lead to significant benefits for both consumers and the business sector. The changes involve i.a. the introduction of caps (maximum limits) on interchange fees. Interchange fees are payable to the banks (as the card issuers) for the services that the banks provide to vendors (such as shops) in connection with payment card use. Overall, the changes will lead to lower fees than currently apply. The changes will also lead to increased transparency in charges and are intended to lead to increased efficiency in this field. In addition, Valitor and Borgun will ensure clear separation between issuing services and acquiring services, as the integrated operation of both services has given rise to restrictions on competition in the payment market. Competitors in the retail banking market, moreover, will cease to share ownership of payment card companies, as this arrangement has not proved conducive to competition. Moroever, it will be ensured that Valitor and Borgun provide services to entities other than their owners on a non-discriminatory basis.
The above settlements will lead to changes to the framework of the financial market. However, each bank and payment card company has the responsibility and authority to make business decisions within that framework, on the basis of healthy competition.
Páll Gunnar Pálsson, Director of the ICA: “The ICA is very pleased that a conclusion has now been found in this extensive investigation. The reforms committed to in the settlements are an important step towards increased competition in the financial market, to the benefit of the economy. The measures, moreover, reflect emphases that the ICA has been building on in recent years.”
1. The conduct
The violations addressed in the settlements relate to certain implementation as regards the determination of interchange fees and the awarding of loyalty points, during 2007 to 2009, which contravened the Competition Act.
Acquirers receive a fee (frequently referred to as ‘merchant fee') from vendors with whom they have made a service contract. Acquirers then use the merchant fee income i.a. to pay the interchange fees to the banks. Thus, it could be said that the banks collect interchange fees indirectly, i.e. through the mediation of acquirers, from vendors. In addition, the banks collect fixed user fees directly from cardholders. The above arrangement is used because there is no direct contractual relationship between the banks and the vendors.
In the settlements between the ICA and Íslandsbanki, Arion banki and Landsbankinn, each of these banks admits that the arrangement used for determining the interchange fee, which was adopted by the banks' predecessors in their domestic operations and resumed by them after the fall of their predecessors, violated Article 10 of the Competition Act and Article 53 of the EEA Agreement. The interchange fee in question is the amount of the fee paid to the issuers of payment cards in connection with the use of payment cards (VISA, Electron, MasterCard and Maestro) in business transactions with Icelandic vendors. According to the settlement, Valitor (formerly VISA Ísland – Greiðslumiðlun hf.) on the one hand, and Borgun (formerly Kreditkort hf.) on the other, were given the authority to determine the interchange fees on behalf of the bank in question and this arrangement violated the provisions of Article 10 of the Competition Act and Article 53 of the EEA Agreement. In this context Valitor (formerly VISA Ísland – Greiðslumiðlun hf.) and Borgun (formerly Kreditkort hf.) are considered to have been associations of undertakings within the meaning of Article 12 of the Competition Act at the time when the violations in question took place.
Valitor implemented the issue of VISA credit cards based on agreements with each of the three banks. Loyalty points are any form of benefits awarded to cardholders based on the scope of spending with the cards at certain vendors. On the basis of these agreements, Valitor decided that the cardholders of VISA credit cards would only receive loyalty points based on card spending at vendors which had entered into a contract for acquiring services with Valitor.
In the settlements between the ICA and Íslandsbanki, Arion banki and Landsbankinn, each of these banks admits that the implementation of awarding loyalty points for the use of Icelandic VISA credit cards at Icelandic vendors, that was adopted during the time of the predecessors of the banks in their domestic operations and resumed by them after the fall of their predecessors, violated the provisions of the Competition Act. Each of the banks admits that as a result of its agreement with Valitor (formerly VISA Ísland – Greiðslumiðlun hf.), Valitor decided the business terms and conditions for awarding loyalty points for the use of VISA credit cards in transactions at Icelandic vendors. Thus, the banks admit that the implementation violated Article 10 of the Competition Act and Article 53 of the EEA Agreement.
In the settlement between ICA and Valitor, Valitor admits that with the agreements between VISA Ísland – Greiðslumiðlun hf. (now Valitor hf.) and each of the banks, i.e. Landsbanki Íslands (now Landsbankinn hf.), Kaupþing bank (now Arion banki hf.) and Glitnir (now Íslandsbanki hf.), VISA Ísland - Greiðslumiðlun hf. (now Valitor hf.) was given the authority to determine the interchange fees and loyalty points. This arrangement violated Article 12 of the Competition Act and Article 53 of the EEA Agreement.
In the settlement between ICA and Borgun, Borgun admits that with the agreements between Kreditkort hf. (now Borgun hf.) and each of the banks, i.e. Landsbanki Íslands (now Landsbankinn hf.), Kaupþing bank (now Arion banki hf.) and Glitnir (now Íslandsbanki hf.), Kreditkort (now Borgun) was given the authority to determine the interchange fees that Borgun paid to these issuers of payment cards in connection with the use of MasterCard, Maestro and Electron payment cards. According to the settlement, this arrangement violated the provisions of Article 12 of the Competition Act and Article 53 of the EEA Agreement. The violations of Borgun did not extend to loyalty points.
2. Actions to strengthen competition
The settlements stipulate a number of actions and changes in connection with operations and arrangements in the payment market. The main goal is to ensure equal competitive conditions in the field of acquiring services and in the field of card issuing services, reduce the risk of conflicts of interest in the operation of financial undertakings in the payment market, and generally to encourage more active competition in the fields of card issuing and acquiring services.
Changed ownership and prohibition on the co-ordination of business terms and conditions Valitor and Borgun have been owned by competitors in the financial market. Valitor has been owned by Arion banki and Landsbankinn, and Borgun has been owned by Íslandsbanki and Landsbankinn. This ownership has been unfortunate for competition. The settlements will permanently alter this arrangement; from now on, common ownership between two or more banks of either of these payment card undertakings will not be permitted. As has now been announced, Landsbankinn has already sold its shares in Valitor and Borgun.
In addition, the settlements establish restrictive conditions as regards the involvement of the owner in the operation of Valitor and Borgun when the owner is a commercial bank. Thus, if either Valitor or Borgun is owned by a bank, certain conditions will apply with respect to the owner in question. These conditions are intended to ensure that the services of Valitor and Borgun are offered to all card issuers (including all banks and savings banks) based on comparable business principles.
The above conditions, together with other conditions, are intended to reduce the commonality of interest between banks and acquirers and to ensure that any business agreements between the banks on the one hand, and the card companies (Valitor and Borgun) on the other, are only made on a normal business basis. By separating the ownership, the common interests of the three banks in the market for retail banking services is also reduced.
Prohibition on the co-ordination of business terms and conditions
The settlements clearly ban any direct or indirect co-ordination between banks and acquirers with respect to interchange fees and other fees and, moreover, prohibit any direct and indirect harmonisation of terms and conditions or business terms between the banks and acquirers with respect to cardholders.
Reduction of interchange fees
The settlements apply to activities relating to the brands of VISA and MasterCard, which are by far the most common payment card brands in Iceland. In light of the violations in question, steps to reduce interchange fees are considered necessary.
In accordance thereto, the settlements stipulate that the maximum interchange fee paid to issuers for the use of consumer payments cards may not be higher than 0.20% of the value of each transaction in the case of debit cards and not higher than 0.60% in the case of credit cards. These caps apply to transactions with Icelandic vendors when paid with VISA, Electron, MasterCard and Maestro consumer payment cards. The ICA has in this respect i.a. taken account of regulatory developments taking place in Europe in the area of competition enforcement in the payment market.
During the case period under investigation, interchange fees due to the use of debit cards were commonly about 0.35% of turnover but in the settlements they will be capped at 0.20% of turnover. Common interchange fees due to the use of credit cards were 0.75–0.80% of turnover during the period. These credit card interchange fees to Icelandic issuers are capped at 0.60% of turnover according to the settlements. The caps extend to all transactions in which case payment is made with consumer payment cards at Icelandic vendors, irrespective of whether payment is effected on-site, by standing order, over the Internet, by means of mobile phones or by any other contactless payment means. According to the settlements, these caps shall take effect on 1 May 2015, thus giving the parties some time to adapt.
The settlements between ICA and Valitor and Borgun contain provisions where these parties undertake to reduce their merchant fees in accordance with the reduction in interchange fees resulting from the above caps on interchange fees.
Streamlining and transparency
In the settlements with the banks it is stipulated that they must, as far as possible, streamline their operations relating to card issue and services to cardholders with the goal of providing as efficient services in this field as possible and to limit as much as possible increases in service fees collected from cardholders. In addition, the banks undertake to ensure that any changes to service fees or business terms will be stated in a transparent manner in the price lists and terms and conditions of the banks. Cardholders must be clearly notified of any such changes.
From the date of signing of each settlement and until six months have passed after the caps on interchange fees have taken effect based on the settlements, the banks commit to refrain from introducing new fees or increasing existing fees directed at cardholders, unless such increases can verifiably be traced to external conditions, such as price increases from suppliers or interest rate increases, and whose effect the banks cannot even out by streamlining their card operations. This obligation, however, does not restrict the authorisation of the banks to market new products or services for which a fee is collected.
Complete separation within the card companies
Valitor and Borgun hold key positions in the payment market in Iceland. This position is based on the fact that they are principal licence holders of the VISA and MasterCard brands in Iceland. In addition, these companies execute the actual issue of credit cards for all the banks and savings banks in Iceland and enjoy, moreover, a strong position as acquirers in Iceland. The settlements between the ICA and Borgun and ICA and Valitor stipulate a clear separation between acquiring services and card issue operations within these companies. According to the settlements, the companies are subject to detailed conditions that are intended to ensure such separation and to prevent the companies from being able to take advantage of their position in the field of card issue to create for themselves an unfair competitive advantage over their competitors in the field of acquiring services. Thus, it is ensured that Valitor, Borgun and their competitors in the field of acquiring services have equal opportunity to compete for business in the acquiring services market. The mode of the separation is conducive to enabling the undertakings to continue as before to take advantage of their economies of scale and continue to develop and build up their operations.
3. Penalties
Due to the said violations and for the purpose of creating preventive effects, the ICA has imposed fines on the undertakings amounting to a total of ISK 1,620m. The fine of Íslandsbanki amounts to ISK 380m, that of Arion banki amounts to ISK 450m, that of Landsbankinn amounts to ISK 450m, that of Valitor amounts to ISK 220m and that of Borgun amounts to ISK 120m.
Íslandsbanki was granted special terms when the fines were determined due to the fact that the bank was the first entity to reach a settlement agreement with the ICA. In general, it is considered important that undertakings which take the initiative to effect positive changes in the market and admit violations shall enjoy special terms and lower fines. This strong willingness to co-operate on the part of Íslandsbanki had extremely positive effects on the progress and results of the case.
In determining the fines, general account was taken of various mitigating circumstances, including the fact that all the above entities have agreed to comply with extensive instructions involving changes to arrangements in the market in question. Also taken into account was the parties' willingness to co-operate with the ICA, which has shortened its investigation and the procedure.
On the part of the undertakings, it is emphasised that nothing in the case indicates that their employees operated in bad faith as regards the legality of the agreements reached with acquirers. That no data or information has been found in the case that indicates otherwise.
4. Publication of the decision
The Icelandic Competition Authority intends to publish its decision in the case at the beginning of next year (2015), in which the case will be explained in greater detail.