Businesses regularly buy corporate travel through commercial cards, such as plastic corporate cards they give to their travelers or centralized payment tools like lodge and virtual cards. Law firm Harcus Parker is bringing a class action lawsuit against Mastercard and Visa in the UK. It alleges that the multilateral interchange fees imposed on airlines, hotels, travel management companies and other merchants which accept Visa and Mastercard commercial card payments are too high and are set anti-competitively.
Harcus Parker is inviting all travel and hospitality companies to join the class actions, working with Steve Allen, a former senior TMC executive who is director of the companies specially created to act as the proposed class representatives. Harcus Parker says that, if successful, “some of the larger claimants will have claims worth tens of millions of pounds or more.”
Advantage Travel Partnership, whose members include many UK-based TMCs, has pledged support for the lawsuit.
But what is the basis of the claims, why are they being made now, and would a victory be in the interests of travel buyers? The answer to that last question may go a long way to deciding whether the legal action will ultimately prove successful.
What is an interchange fee?
Up to 90 per cent of the merchant service charge that merchants incur for accepting a card transaction is comprised of an interchange fee – the fee that the merchant’s bank (the acquirer) must pay to the cardholder’s card provider (the issuer).
In 2015, a European Union regulation, which still applies in the UK, capped interchange fees on consumer card transactions at 0.3 per cent for credit cards and 0.2 per cent for debit cards. Commercial cards and inter-regional payments (a cardholder using a card outside their home country – also part of the same legal action) were not included in the regulation.
According to Harcus Parker, the average interchange fee on a Visa or Mastercard commercial card is 1.56 per cent.
What is the case against Visa and Mastercard?
Harcus Parker contends that interchange fees are “anti-competitive and unlawful” because they are set by Visa and Mastercard. “The illegal bit about all this… is that there is no shopping around because the [interchange fee] is not set by competition,” says Harcus Parker partner Jeremy Robinson.
“It is set by Mastercard or Visa and imposed on the banks as a condition of them joining the Mastercard or Visa schemes. It sets a high price floor that is levied on business just for the right to accept payment by card. Our primary case is that the correct level of interchange fee is zero.”
Two questions in competition law will need to be answered. The first is whether there is a restriction or distortion of competition. Recent investigations and legal actions both in the EU and the UK (most notably a case won in the Supreme Court by Sainsbury’s against Mastercard) have built a strong case that the answer is yes, certainly in relation to consumer cards, and now to a Similar test of the competitiveness of commercial card interchange fees.
Can the same anti-competition case be made about commercial cards?
The second competition law question, says Robinson, is whether any restriction on competition is “otherwise justified by, broadly speaking, a series of pro-consumer benefits? If not, it’s illegal.”
The Competition Appeal Tribunal, the UK’s specialist judicial body which would consider the case, could decide the interchange fee for commercial cards might be justified at a lower level, “in which case we haven’t succeeded in our primary case but we have nonetheless succeeded in providing that the interchange fee should be a good deal less than it is,” says Robinson.
That is why the success or failure of the action could hinge upon whether Visa and Mastercard can prove that card issuers’ commercial customers, and merchants themselves, need interchange fees to fund the benefits they receive from commercial cards.
Will the corporate travel sector be transformed if the class action is successful?
Yes, in the view of Patrick Diemer, senior advisor with Arthur D. Little and a former managing director of AirPlus International and, before that, a Visa executive. Quite a few corporate travel companies, he says, “have built their business models partially on commercial card interchange, for example the providers of corporate cards, expense management companies and online booking tools. All of these would become more expensive for corporate travel buyers if this interchange would be regulated downwards.
“Corporate travel buyers buy most of their travel with commercial credit cards. Booking engines pay their hotels and other suppliers with commercial credit cards. TMCs pay their suppliers, and so forth. [Usually] the cardholder pays nothing for the service and most of them even receive a kick-back on the volume they bring. This can be up to half or two-thirds of the interchange.
“Should commercial card interchange fees fall to consumer credit card levels, either by regulatory intervention or by a class action suit, the effects on these travel business models will be revolutionary,” says Diemer.
Robinson disagrees. “This has been argued at very great length in the supermarkets litigation and it was not found that the issuers needed an interchange fee above zero to run the scheme,” he says. “It’s only one part of a bank’s business.”
Cardholders often have to pay merchants a surcharge for using commercial cards to offset those cards’ higher interchange fees. If the class action were successful and merchants are compensated by Visa and Mastercard, would merchants refund surcharge revenues to cardholders?
Legally, there would be no requirement for merchants to share with surcharged customers any compensation they might receive. However, Robinson says, “I have no problem with [corporate clients] knocking on the door and having that commercial negotiation. That’s part of the rough and tumble of business. If that’s what happens, that will cause the industry to realign itself on more efficient grounds. If there’s a little bit of extra margin for the travel industry to share with their customers, then everybody’s happy but that’s not the legal case we’re bringing.”
Isn’t there a paradox here that the class action is going after what are known as four-party providers (Visa and Mastercard) when the overall fees charged by three-party card providers (such as American Express, Diners Club and UATP) are high frequency?
According to Robinson, three-party providers, because the payment flows are structured differently, cannot be considered anti-competitive. Nor can they be called to account for charging high fees because they do not abuse a dominant position.
Robinson says that if the class actions succeed and Visa/Mastercard cut their fees, then three-party providers will have to reduce their fees too or merchants will refuse to accept them. But the counter-argument (which four-party providers used when persuading the EU to exclude commercial cards from its 2015 regulation – although the EU never explained formally why it omitted commercial cards) is that this would leave three-party providers free to continue signing commercial customers with massive rebates that the four-party providers will not afford to match.
What do Visa and Mastercard say?
In answer to detailed questions from BTN EuropeMastercard issued this statement: “We firmly believe that businesses of all size gain real value from the acceptance of cards issued on our network, and we are committed to helping our retail partners grow their businesses and encourage the adoption of ever more convenient, safe and secure ways to pay and get paid.”
A statement provided by Visa was similarly non-specific: “Visa facilitates and protects millions of transactions every day. Our continuous investment in the resilience and accessibility of our innovative network enables businesses throughout the UK to buy and sell with confidence. We ensure businesses benefit from convenient, reliable and secure digital payments, helping to make commerce more inclusive and accessible for all.”
How long could this take?
According to Harcus Parker, if there is no settlement a trial “could be a few years away.”