APPENDIX 7
Supplementary Note by Mastercard/Europay
UK Limited/Europay International SA
1. INTRODUCTION
On 16 January 2001, Mr Michael Hawkins, Chairman,
Mastercard/Europay UK Limited and Mr Etienne Goosse, Director
of Corporate Affairs, Europay International SA gave evidence to
the Treasury Committee (Questions 178-305).
The purpose of this brief submission which is
submitted jointly on behalf of MasterCard/Europay UK Limited and
Europay International SA is to clarify certain points arising
from the evidence submitted by the witnesses in response to questions
put to them by the Committee and to fulfil Mr Hawkins' undertaking
to inquire into certain allegations raised by the Consumers' Association
concerning the issuing of credit card statements by card issuing
banks and to revert to the Committee on the outcome of that inquiry.
2. THE PROPOSAL
BY THE
GOVERNMENT TO
GIVE REGULATORY
POWERS TO
THE OFFICE
OF FAIR
TRADING RATHER
THAN TO
ESTABLISH A
SEPARATE PAYCOM
REGULATOR
MasterCard/Europay UK Limited and Europay International
SA continue to maintain that additional regulation for the cards
industry is not necessary and could have an adverse impact on
the industry in the UK.
As stated in evidence, the credit card sector
is highly competitive with fierce and abundant competition between
card issuers and acquirers and also between payment scheme networks.
As a result of the intense competition, charges (interest rates,
annual fees) are already very transparent to consumers who increasingly
shop around for alternative providers at lower charges.
As well as being regulated by the Bank of England
and the FSA, the payment card industry is, of course, subject
to the normal UK and EC competition law requirements.
The current powers available to the competition
authorities and, in particular the Office of Fair Trading (OFT)
in the UK, are more than sufficient to address any potential competition
issues that may arise in the industry.
However, in the event that additional regulatory
powers were to be created, MasterCard/Europay UK Limited would
be in favour of the granting of those powers to the OFT rather
than to a separate PayCom regulator on the basis that the OFT
has considerable experience of applying competition rules and
already has knowledge of this industry sector.
We will of course be raising these issues with
HM Treasury in the context of responding to its Consultative Document.
3. INTERNATIONAL
COMPETITION
The payment schemes operated by Europay International
SA and MasterCard International Inc are global in nature, and
in order to maintain the integrity of the scheme, global acceptance
of the product, interoperability at the point of sale and the
restriction of fraud, it is essential that all participants are
subject to a minimum set of rules and operating procedures on
a global basis.
Additional rules and constraints on UK members
would mean that they would be at a disadvantage compared to non-UK
members who operate outside the jurisdiction of the proposed regulations.
Further, the possibility that additional rules could be introduced
by a sectoral regulator would lead to regulatory risk to existing
and potential players in the market.
The result would be to deter the entry of new
players into the market and reduce innovation within the industry.
Instead, new entrants could be influenced to locate themselves
outside the UK. Similarly, merchants may choose to work with non-UK
members or establish themselves outside the UK. Such additional
regulation may also hamper the ability of UK players from expanding
their global payment business.
4. RISK ISSUES
MasterCard/Europay UK Limited and Europay International
SA also have serious concerns about any proposals which would
alter the scheme rules with respect to eligibility of companies
to become acquirers. Under the existing international scheme rules,
all members, issuers and acquirers, must be regulated credit institutions—or
must be owned and controlled by such institutions. This requirement
provides a default due diligence benchmark to ensure the financial
suitability of scheme members.
When the Economic Secretary, Melanie Johnson,
met the Committee the Minister contended—in response to
questions from Mr Beard (numbers 503 and 504)—that opening
the system to non-banks would not cause problems, although she
recognised that the issue of systemic risk is a matter for the
Bank of England and the FSA.
In its publication "Oversight of Payments
Systems" (November 2000)[10]
the Bank of England deals with this issue and explicitly acknowledges
that payment systems, including credit card schemes, do expose
their members to credit exposures, and hence liquidity risks,
which could lead to systemic risk. The Bank of England concluded
that risks in payment systems need to be identified, measured,
monitored and controlled.
European International SA has concerns that
opening the system to non-banks would undermine the current level
of confidence enjoyed by all counter-parties to credit card transactions
(card holders, issuing banks, merchants and merchant acquirers
in both the domestic and international markets).
Also, as detailed in MasterCard/Europay UK Limited's
earlier submission, very substantial liabilities can derive from
acquirers' responsibility for the actions of their merchants.
Those members necessarily have to manage the risks that arise
from financial failure of these merchants—mainly claims
from cardholders who do not receive goods or services for which
they have paid, although fraud and operational failure can also
be involved. Where contracts are for future value and/or involve
deferred delivery, for example in the travel industry, the risks
will be more significant.
The financial requirements and the regulatory
regime applicable to authorised institutions in the UK and to
regulated financial institutions in the rest of the world ensure
that such institutions have a minimum level of financial strength
and are generally regulated to a high standard with strict capital
adequacy requirements.
Therefore members throughout the world can have
confidence that other members can cope with such liabilities.
This in turn provides a high level of confidence to both the cardholder
and the retailer irrespective of where each is located. The confidence
is the same for a UK domestic transaction as for one where a cardholder
is using their card for a purchase abroad.
If the UK authorities were to seek to enforce
a rule whereby acquirers would be entitled to enter the market
without first being an authorised institution, Europay International/MasterCard
International would need to establish a regime to replicate the
role of the regulator in assessing and monitoring such acquirers,
which would inevitably add substantial costs for UK members for
the operation of the scheme.
At present, all members of the Eurocard-MasterCard
scheme collectively guarantee to meet the obligations of a failed
member towards other members of the scheme. This guarantee is
predicated upon all members being regulated institutions with
active supervision of their activities. Members may not be so
willing to provide such a guarantee if new entrants are permitted
who are not so regulated and supervised.
In particular, if this fundamental requirement
was to be removed in the UK, the non-UK members of the scheme
might decide to withdraw this settlement guarantee for all UK
members, which would create uncertainty, undermine the trust inherent
in the scheme and at the least could force substantial liabilities
on to individual end users—ie cardholders and merchants.
In summary, admission of entities that are not
Authorised Institutions to this aspect of the payments industry
could expose the members of Europay International SA to significantly
higher risks. The members may as a result call for changes in
the liability cover, which they currently effectively grant to
each other, in order to protect their positions.
5. CONSUMERS
ASSOCIATION EVIDENCE
IN RELATION
TO CREDIT
CARD STATEMENTS
The Consumers' Association gave evidence to
the Committee alleging a "scam" by credit card issuers
of delaying the issue of credit card statements to cardholders
for between one and four days after the date of the statement,
and then sending them by second-class post. They point out that
in such circumstances, a statement could take up to six days to
reach its recipient with the effect that the cardholder is not
given sufficient time within which to pay the outstanding amount,
and thus involuntarily incurs interest charges.
As stated by Mr Hawkins at the hearing on 16
January 2001, we were not aware of any such practice being used
by our members.
MasterCard/Europay UK Limited has canvassed
its members, who confirmed Mr Hawkins' belief that cardholders
are never deliberately put into a position where they have to
pay interest on outstanding balances.
While we have been advised that there have been
circumstances where statements from certain issuers have not been
post-marked for up to four days after the statement date, in such
cases there was still ample time available for the cardholders
to make their payments, as the deadline for payment in such cases
was at least 21 days from the statement date.
Where a shorter payment period is specified,
we are advised by the card issuers that they ensure that the statements
are sent out promptly and/or first class post is used to ensure
that cardholders would still have adequate time to make their
payments.
Further, card issuers monitor the statementing
process and take action to rectify any problems that may arise—for
instance, an issuer may use first class post instead of second
class post to compensate for any delay in producing statements.
Further, Europay International SA would not
wish to see cardholders deliberately put into the position of
disadvantage alleged by the Consumers' Association by the practices
of a member, since it would reflect badly on the scheme and damage
the perception of trust created by the brands—which the
members collectively have spent considerable amounts of money
to promote.
MasterCard/Europay UK Limited has written to
the Consumers' Association [not printed] to ask them to
provide details of their evidence to support the allegations,
so that any instances of such practices may be brought to the
notice of the scheme which will investigate and take appropriate
action.
6. APACS MONEY
TRANSMISSION COSTS
For the sake of clarification, MasterCard/Europay
UK Limited would like to state in relation to Question 295 that
the costs of transaction clearing and settlement in the credit
card sector do not form part of the figure of £4.5 billion
for transmission costs referred to by APACS, which represent the
total cost of running the domestic payment clearings and cash
handling in the UK. The costs incurred by banks in the credit
card sector are entirely separate from those referred to by APACS.
21 February 2001
10 Paragraphs 13-17-Oversight of Payment Systems. Back
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