Select Committee on Treasury Appendices to the Minutes of Evidence


Supplementary Note by Mastercard/Europay UK Limited/Europay International SA


  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.


  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.


  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.


  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.


  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.


  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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