Bank fees have cost shoppers millions

Bank fees have cost shoppers millions

Britain's consumer watchdog ruled yesterday that UK shoppers have been unfairly "taxed" hundreds of millions of pounds because banks have been charging retailers excessively high fees.

Following a five-and-a-half-year investigation, the Office of Fair Trading said an agreement between Mastercard and Britain's major banks - concerning the fees charged when consumers used their credit cards to buy goods - breached competition law.

It estimates that retailers had been overcharged by well over £100m a year for almost five years, and it is the public who ultimately picked up the tab through higher prices in shops. These excessive fees acted "like a tax on UK consumers", said John Vickers, the OFT's chairman.

Mastercard and the banks have escaped fines because the inquiry was launched at the request of Mastercard, which had submitted its rules relating to the fees to the OFT.

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However, the OFT yesterday threatened to launch a second investigation into card usage fees and, if this found against the organisation, the watchdog could levy a fine of up to 10% of its worldwide turnover.

More than 20 million Britons carry Mastercard plastic in their wallets and purses and, last year alone, more than 700m purchases totalling almost £43bn were made in the UK using its cards.

The group said it would be appealing against the decision and warned that if the ruling were allowed to stand, it would mean higher fees and charges for cardholders and a reduction in card benefits. The OFT's inquiry relates to the period between March 2000 and November 2004, after which new arrangements for setting the fees were introduced.

When a credit card is used, a percentage of the purchase price is paid by the retailer, via its bank, to the card company. It is this "multilateral interchange fee" that is at the heart of the dispute. While these costs are borne initially by retailers' banks, they are passed on to the retailers and in turn to the public, including those not paying with plastic, through higher prices.

In 2000 the average fee charged by Mastercard members was around 1.1% of the value of the transaction, though the organisation said the typical fee was now under 1%.

The OFT said the collective agreement struck some years ago "had adverse affects on competition within the Mastercard scheme and also in relation to other payment systems". It removed incentives for the parties to enter into individual agreements on the cost.

Mastercard had argued that the fee covered funding of the interest-free credit period offered by many cards, but the watchdog said this had nothing to do with the payment services provided to retailers. The inclusion of "extraneous costs" within the fee "provided a large flow of revenue to card issuers and the incentive to induce customers to hold and use Mastercard cards", which distorted competition between MasterCard and other payment methods such as debit cards, said the OFT.

Last November the card group introduced new arrangements for setting the fees, but the OFT said it suspected these were still being used to recover extra costs. It warned that unless Mastercard addressed these concerns it would launch a fresh inquiry. It is also investigating an agreement between Visa member banks on interchange fees. Mastercard said it was "very disappointed" with the decision, which it described as "bad news for both healthy competition and the economy," and added that it would be appealing. John Bushby, the company's northern Europe general manager, said it was confident of overturning the ruling. The OFT's verdict was welcomed by the National Consumer Council.

Guardian Unlimited © Guardian Newspapers Limited 2005