Interchange Fees: Round 3

Published: 12/12/2017

In a recent judgment of the Commercial Court, Phillips J has ruled that the interchange fees charged to merchants when customers pay by cards issued under a scheme run by Visa are not anti-competitive and therefore not in breach of Article 101 of the Treaty on the Functioning of the European Union 2012/C 326/01 (“TFEU”).


The judgment is heavily dependent on a finding of fact that alternative “bilateral” interchange fees would not be negotiated between market participants and accordingly there is no more - no less competition between participants as a result of the default fees set by Visa as adopted by those participants.  The judge concluded that the issue which in fact the claimants disputed appeared to concern not the existence of a price fixing agreement, but actually the level at which the price is fixed.

This is the third case in the past 18 months where the  issue of interchange fees has been examined, the first two cases having resulted in opposing conclusions.


The case concerns the Multilateral Interchange Fees (“MIFs”) which are charged and ultimately paid by a Merchant where their goods or services are bought by a consumer using a credit or debit card issued by a bank or financial institution within the relevant scheme (an “Issuer”).  In this case the Merchant who was the lead claimant was Sainsburys and the relevant scheme was the Visa scheme.

MIFs are charges payable by the bank/financial institution which processes the sale concluded by the Merchant (“Acquirer”) to the Issuer (who then arranges for the payment to be transferred from the cardholder’s account to settle the transaction).  The MIF is passed on its entirety by the Acquirer to the Merchant.

Visa sets a default level of MIFs, but each Acquirer and Issuer is permitted to agree a Bilateral Interchange Fee (“BIF”) between themselves which would be payable in respect of transactions involving those particular entities.  BIFs are almost unknown in the UK market and therefore all Acquirers and Issuers use the default MIFs set by Visa.

Sainsbury’s contended that the MIFs had the effect of restricting competition and infringed Article 101(1) TFEU.  Visa denied this, and claimed that even if they did restrict competition within the meaning of Article 101(1), they could rely on the defence that such restriction is an “ancillary restraint” which is “objectively necessary” for what is otherwise accepted to be the beneficial effect of the Visa payments scheme.  Alternatively, Visa claimed it could rely on the exemption provisions in Article 101(3).

Previous judgments

This case was the third in a line of cases in which parallel allegations had been made against MasterCard as were brought against Visa in this case.

  1. In the first case (led again by Sainsburys) the CAT in a judgment handed down on 14 July 2016 found in favour of Sainsburys concluding that MasterCard’s MIFs had been anti-competitive in breach of Article 101(1) (the “CAT Judgment”).
  2. A second group of retailers (led by Asda) had made parallel allegations against MasterCard in proceedings brought in the Commercial Court.  On that occasion, in a judgment handed down in January 2017, Popplewell J found in favour of MasterCard (the “Popplewell Judgment”).

Although both judgments have been appealed and are listed to be heard in April 2018, Phillips J had the unenviable task of charting a course between the two opposing judicial conclusions.

Did the MIFs infringe Article 101(1) TFEU?

The primary issues which the court considered included the following points:

  1. Referring to a previous CJEU decision in respect of MasterCard’s MIFs in the EEA (the “CJEU Judgment”), the correct legal question in relation to establishing an infringement of Article 101(1) was whether the effect of the agreement in question reduced competition in the relevant market, not merely whether it resulted in higher prices.
  2. Phillips J adopted a counterfactual in which there were no MIFs, leaving the parties free to agree the payment of a BIF but not having one imposed in the absence of agreement. Secondly in that counterfactual situation, transactions would continue to be settled “at par” (i.e the cost of the underlying transaction) which would prevent Issuers from “holding up” transactions with Merchants unless, for example, the Merchant agreed to the Issuer paying a discounted price on to the Merchant (or the flip side of the Merchant paying a higher fee) to settle the transaction.  It was agreed that the practical effect of this was equivalent to setting the MIF at a rate of zero.
  3. The court concluded that there was no incentive on either the Issuer or the Acquirer to negotiate a change to the set MIF: the Acquirer had no incentive to pay a higher fee and the Issuer had no incentive to receive a lower fee. Neither party had incentive to enter into long negotiations with multiple counterparties in the hope of persuading one or more to agree a position which deviated from the default.
  4. The court agreed with Visa on the basis of the expert evidence before it, that in the counterfactual situation, Issuers and Acquirers would still not negotiate BIFs, but would proceed on the basis of the default provisions (i.e settlement at par with an implicit zero MIF) for the same reasons as apply where there is a positive MIF (see point 3 above).  The conclusion was influenced by the fact that in the real world scenario, it had been open to the participants to negotiate and agree different/lower fees, but no parties had moved away from the default and no BIFs had in fact resulted. This was in line with Popplewell J’s Judgment but was contrary to the CAT Judgment where it was found that Issuers and Acquirers would negotiate and agreed BIFs which would be lower than the MIFs then charged by MasterCard.  Accordingly, the CAT had found that MasterCard’s imposition of MIFs restricted competition so as to increase interchange fees above those which would be charged in the counterfactual market.
  5. Phillips J did consider the CJEU Judgment (where the MasterCard’s EEA MIFs were found to restrict competition) and distinguished that judgment on the basis of a factual finding that in the absence of MIFs, there would be a highly competitive process as Acquirers sought to negotiate (bilaterally) with Issuers for the lowest interchange fees under pressure from Merchants they wished to have as customers. The CJEU did not, however, find that MIFs are, as a matter of law, a restriction on competition. Oddly, none of the claimants in the current case relied on the Commission’s findings in that case that there would have been bilateral agreements in the absence of MIFs, but Phillips J noted that it would have made little difference in any event given the weight of uncontested evidence that there would have been no bilateral agreements in the UK no-MIF counterfactual.
  6. Phillips J concluded that in the counterfactual situation, there would be no change in the competitive forces which would lead to a different outcome.  In either case the market (in the UK at least) will not deviate from the default settlement rule set by (in this case) Visa notwithstanding that the market participants are free to do so. To the extent there is a competitive process, in either scenario such process drives the price to the default setting. The only difference would be in the level of the MIF (because the default would be set at zero rather than the default rate set by Visa).

The judge also considered whether the setting of a MIF infringed Article 101(1) because it acted as a “floor” for the overall “Merchant Service Charge” payable by the Merchants.  Diverging from Popplewell J’s Judgment, for a number of reasons Phillips J found that it did not act as a floor.  Primary among these reasons were that (a) the MIF equally created a “ceiling” as much as a “floor”, (b) the situation was exactly the same at any lower level of MIF, including a zero MIF, (c) it was wrong to treat the transaction price as a “natural” starting point so that a default set at that level does not involve anti-competitive process.

Other considerations

One of the judge’s concluding remarks concerned the fact that the MIF can (unlike the no-MIF counterfactual) be increased by Visa at will.  Indeed, due to the competition between Visa and MasterCard for Issuers, it can and does lead to an upward trend in the MIF (i.e. Issuers will promote the scheme to their customers which generates the greatest fees for them).  He noted that to the extent that an increase in the MIF results in a settlement level which was inefficient, it can be and is liable to regulation and might be considered to be an abuse of a dominant position.

Finally, the judge also considered whether the MIFs were “objectively necessary” for the payments scheme.  The judge noted that the test is a “strict one” and that the ancillary restriction “must be essential to the main operation, such that it would not survive without it” and referred to the case of Metropole Television (6) and others v Commission [2001] 5 CMLR 33.  Considering the evidence including that issuing banks and acquiring banks could cover their costs directly via their respective customer groups, the judge found that the MIFs were not essential and therefore would not be “objectively necessary” in the event that MIFs were considered to infringe Article 101(1).

Whilst not necessary given the court’s findings on Article 101(1), the court stated that it would give a second judgment on Article 101(3) since it was fully argued before it.


This is a well-reasoned judgment analyzing the requirements of Article 101(1) TFEU in a coherent manner.  Although it brings clarity to this area of law in some respects, whilst generating greater uncertainty in others.  The CAT Judgment and the Popplewell Judgment are due to be heard on appeal in April 2018 and it is suspected that this case may swiftly follow.


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