EU gives MasterCard six months to cut fee

BRUSSELS (Reuters) - MasterCard (MA.N) has six months to change its fee structure for international card transactions or face daily fines, according to an EU ruling that retailers said would save consumers billions of euros a year.

The European Union's executive European Commission said that for 15 years MasterCard's multilateral interchange fee (MIF) on cross-border payment card transactions using MasterCard and Maestro cards violated EU rules on fair competition.

"Multilateral interchange fee agreements such as MasterCard's inflate the cost of card acceptance by retailers," EU Competition Commissioner Neelie Kroes said in a statement on Wednesday.

"Consumers foot the bill, as they risk paying twice for payment cards: once through annual fees to their bank and a second time through inflated retail prices paid not only by card users but also by customers paying cash," Kroes said.

MasterCard said it would appeal the decision to European Union courts and had "strong grounds" to challenge the decision.

The company said its decision to appeal was "based on its firm conviction that market forces, not regulation, should drive key decisions such as the setting of interchange fees".

EuroCommerce, which complained to Brussels about MasterCard's fees, said consumers will enjoy lower prices.

"At this stage it only applies to cross border payments but there is little doubt every consumer in every country will demand their governments institute the same steps in weeks," EuroCommerce President Feargal Quinn told Reuters.

The lobby group estimates that 10 billion euros ($14.4 billion) in MasterCard fees should be saved by consumers annually.

The ruling will also apply to domestic credit card transactions within eight EU states -- Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxembourg, Malta and Greece -- as they peg their rates to that set internationally by MasterCard.

It will also affect how national watchdogs elsewhere in the EU, such as in Britain, view domestic card fees.

"Tesco pays about 100 million pounds in fees to the banks for processing credit and debit cards -- that's 100 million that we haven't been able to invest in price, range or service for our customers," Terry Leahy, chief executive of the UK grocer, said in a statement.

Retailers expect the ruling also to affect MasterCard's archrival Visa Europe.

The ruling may create some uncertainty over the launch of the single euro payments area in January as banks wanted legal clarity over fees before deciding whether to launch rival international card schemes.

PENALTY THREATENED

The Commission said interchange fees were "not illegal as such" but gave MasterCard six months to comply with the executive's order to withdraw the charges.

"If MasterCard fails to comply, the Commission may impose daily penalty payments of 3.5 percent of its daily global turnover in the preceding business year," the Commission said.

Kroes cited Australia as a jurisdiction that successfully limited charge card fees.

MasterCard President Javier Perez said in a statement that the decision "ignored the experience in Australia where regulators forced down interchange fees, resulting in higher cardholder charges".

But a Commission spokesman said a report by the Reserve Bank of Australia, the nation's central bank, had found competition appeared to have improved and prices had gone down.

About 45 percent of all payment cards in the EU and nearby states such as Norway either bear a MasterCard or a Maestro logo, the Commission said.

Shops and other providers pay fees to their banks for each MasterCard purchase. The U.S. card firm sets many fees, which together average around 1 percent of the purchase price.

The seller's bank then pays the "interchange" fee to the cardholder's bank.

Visa Europe has a multi-year exemption from EU competition rules in return for capping its interchange fee at 0.7 percent.

"The exemption, however, expires on 31 December 2007 and Visa will from that moment on be responsible to ensure that its system is in full compliance with EU competition rules," the Commission said.

Visa said the ruling "does not legally apply to Visa Europe's interchange ... We will continue the dialogue we are having with the Commission on how our rates are set in future."

But Kroes said a new case on Visa may be opened next year and she will also rule on MasterCard's commercial card fees soon, saying they were a "burden".

MasterCard has said it should keep the principle of setting its own fees and that the EU executive had no power to cap them.

International transactions account for 3 percent of card usage but this is expected to grow.

(Additional reporting by David Lawsky, editing by Elizabeth Fullerton/Richard Hubbard)