Card transaction fees: no small change

Article by Naomh Gibson

Business owners and merchants, whether of small, medium or large entities, will be aware of multilateral interchange fees (“MIF”). For the uninitiated, this is when the payment card industry requires a fee for the acceptance of card-based transactions. As per 2015 EU regulations, this could be as much as 0.2% of the transaction value for consumer debit card payments, including prepaid payment cards, or 0.3% of the transaction value for consumer credit card payments (not including American Express). 

When a cardholder pays in a store by card, their bank deducts the transaction value from their account and transfers it to the merchant’s bank minus the MIF. The merchant’s bank then transfers to the merchant the value of the transaction minus a merchant service charge (“MSC”) negotiated between the merchant and its bank. Merchants’ banks pass on all of the MIF to merchants through the MSC, with negotiation between merchants and their banks in respect of the MSC being limited to the amount charged by the bank in excess of the MIF. Merchants are therefore unable to negotiate with the banks on the level of the MIF, which typically accounts for some 90% of the MSC.

Until recently, it looked as though the only way to truly avoid MIFs was to operate a cash-only business, which is undesirable for many in our increasingly contactless world. However, on 17 June 2020, the Supreme Court unanimously upheld a ruling that MIFs charged by Visa and Mastercard unlawfully restricted competition. 

In Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC and others [2020] UKSC 24 (available here), it was confirmed that as per Article 101(1) TFEU, Visa and Mastercard had MIF agreements which adversely affect trade between member states, and which had the effect of restricting competition. The card companies’ main defence, namely that they had an exemption under Article 101(3) TFEU as their restrictive agreements still generated objective economic benefits that outweighed the negative effects of the restriction of competition, was roundly rejected. 

Confirming the previous Court of Appeal decision, it was held that the card companies failed to satisfy the Court to the necessary standard that consumers or merchants were receiving a fair share of the benefits generated by the MIFs. The judgment also helpfully set out requirements for any possible exemption. As at para. 116:

‘…Cogent empirical evidence is necessary in order to carry out the required evaluation of the claimed efficiencies and benefits. To the extent that objective efficiencies caused by a restriction cannot be established empirically, they cannot be balanced with the restrictive effects. As a result, although the standard of proof is a matter of domestic law, the nature of the evidence which will satisfy that standard must take account of the substantive requirements of article 101(3).’

As such, Visa and Mastercard were not able to argue simply that an issuing bank which receives a payment on each card transaction undertaken by its customers will probably invest more to encourage its customers to engage in a greater number of such card transactions than it would do if it did not receive any such payments.

Additionally, the judgment sets out the legal test for establishing whether an unlawful overcharge is passed on down a distribution chain, which may give rise to further claims. In this case, one of the claims raised by multiple retailers was that in so far as the unlawful overcharges have been passed on in their selling prices to their customers, they have suffered a loss of profit on the sales of the goods concerned through a reduced volume of sales. The Supreme Court agreed that the claimants were entitled to plead as the prima facie measure of their loss the pecuniary loss measured by the overcharge in the MSC. The claimants did not have to plead and prove that the breach of contract adversely affected their overall profitability.

As per paras. 182-189 of the judgment, there can be no presumption that unlawful charges have been passed on. Whether there has been a pass-on is a question of fact to be established on evidence adduced before the national court, based on whether an overcharge resulting from a breach of competition law has caused the claimant to suffer loss, or whether all or part of the overcharge has been passed on by the claimant to its customers or otherwise mitigated. However, where there was evidence that the claimants mitigated the overcharge by methods such as reducing its costs by negotiation with its many suppliers, and/or passing on the costs by increasing the prices which it charges its customers, the compensatory principle mandates the court to take account of their effect when assessing loss.

This is a landmark decision which provides guidance for hundreds of other business claimants also concerned about MIFs and competition restriction. If you believe your business may be affected by this decision or would like advice on managing risk during the COVID-19 pandemic, Halcyon Chambers has a dedicated Commercial and Chancery team which continues to take instructions, including for remote hearings. Please contact our clerks on 0121 237 6035 or for further information. Naomh is a first six pupil accepting instructions from July 2020 onwards.