This case began with a complaint from Kortþjónustan ehf., which was directed at payment card issuers (Arion Bank, Íslandsbanki, Landsbankinn) and acquirers (Borgun and Valitor). Kortaþjónustan believed that these parties had breached competition law through various actions which the company considered had hindered competition in the market. On 8 March 2013, the Competition Authority published its preliminary assessment to the parties in order to facilitate their exercise of the right to be heard. Subsequently, the banks, Borgun and Valitor, each requested that the provision in the Competition Act for settling cases by settlement be utilised.
These agreements lead to positive fundamental changes in the structure and operation of the payment card market and, in the opinion of the Competition Authority, will result in significant benefits for both consumers and businesses. The changes include, amongst other things, a cap being placed on the interchange fee, a fee paid to banks (as payment card issuers) for services that banks provide to merchants (including retailers) in connection with the use of payment cards. Overall, the changes will lead to a reduction from the current situation. The changes will also lead to increased transparency in charging and are intended to bring about greater efficiency in this area. Furthermore, Valitor and Borgun will separate their issuance and acquirer services, as the co-operation of these business areas has created barriers to competition for other players in the payment card market. Furthermore, the practice of competitors in the commercial banking market owning the same payment card company has been abandoned, as this arrangement has not proven successful from a competitive standpoint. At the same time, it is ensured that Valitor and Borgun provide services to parties other than their owners on an equal footing.
The above-mentioned agreements lead to changes in the framework of the financial market. However, it is the responsibility and prerogative of the respective banks and payment card companies to make business decisions within that framework, on the basis of healthy competition.
Páll Gunnar Pálsson, Director of the Competition Authority: „The Competition Authority welcomes the conclusion of this extensive investigation. The changes contained in the settlement are an important milestone in increasing competition in the financial market, for the benefit of society. The measures are also part of the focus the Competition Authority has been working towards in recent years.“
The breaches in question in the settlement relate to the practice of setting service fees and awarding loyalty points between 2007 and 2009, which contravened competition law.
Transaction processors are paid a fee by the merchants they have contracted with, and they use these revenues, amongst other things, to cover the interchange fee to the banks. Thus, it can be said that the banks indirectly collect fees from merchants, i.e. through the intermediation of transaction processors, while at the same time collecting fixed user fees directly from cardholders. This arrangement is used where there is no contractual relationship between the bank and the merchant in this respect.
The settlement between the Competition Authority and Íslandsbanki, Arion banki and Landsbankinn entails the respective bank acknowledging that the practice of determining service charges, which was initiated by its predecessor in its domestic operations and continued by the bank after its predecessor's collapse, contravened Article 10 of the Competition Act and Article 53 of the EEA Agreement. The relevant interchanges are the fees paid to payment card issuers in connection with the use of payment cards (VISA, Electron, MasterCard, and Maestro) in transactions with Icelandic merchants. According to the settlement, Valitor (formerly VISA Iceland – Greiðslumiðlun hf.) on the one hand and Borgun (formerly Kreditkort hf.) on the other, were entrusted with setting the said interchange fees on behalf of the respective banks, and that this practice contravened Article 10 of the Competition Act and Article 53 of the EEA Agreement. The basis for this is that Valitor (formerly VISA Ísland – Greiðslumiðlun hf.) and Borgun (formerly Kreditkort hf.) are considered to have been an association of undertakings within the meaning of Article 12 of the Competition Act at the time the infringement in question took place.
Valitor handled the processing for the issuance of VISA credit cards under agreements with the three banks. Reward points are benefits in some form for cardholders, which are based on the volume of transactions made with the cards at specific merchants. Based on these agreements, Valitor decided that VISA credit card holders would only earn reward points when transacting with those merchants who had an agreement with Valitor for transaction processing.
The settlement between the Competition Authority and Íslandsbanki, Arion banki and Landsbankinn also entails that the respective bank acknowledges that its practice in awarding reward points for the use of Icelandic VISA credit cards with Icelandic merchants, which began during the domestic operations of the predecessor of the relevant bank and continued in the operations of the relevant bank after the collapse of its predecessor, was in breach of competition law. The parties acknowledge that under the agreements between the relevant bank and Valitor (formerly VISA Ísland – Greiðslumiðlun hf.), Valitor determined the commercial terms and conditions for the awarding of reward points for the use of VISA credit cards with Icelandic merchants. They thus acknowledge that the practice contravened Article 10 of the Competition Act and Article 53 of the EEA Agreement.
The settlement of the Competition Authority with Valitor entails an acknowledgement that by the agreements between VISA Ísland – Greiðslumiðlun hf. (now Valitor hf.) on the one hand, and Landsbanki Íslands (now Landsbankinn hf.), with Kaupþing bank (now Arion banki hf.) and Glitnir (now Íslandsbanki hf.), VISA Ísland – Greiðslumiðlun hf. (now Valitor hf.) was entrusted with deciding the aforementioned transaction fees and reward points. This practice contravened Article 12 of the Competition Act and Article 53 of the EEA Agreement.
The settlement between the Competition Authority and Borgun acknowledges that through agreements between Kreditkort hf. (now Borgun hf.) on the one hand, and Landsbanki Íslands (now Landsbankinn hf.), Kaupþing banki (now Arion banki hf.) and Glitnir (now Íslandsbanki hf.), the said intermediaries were tasked with determining the aforementioned intermediary fees which Borgun paid to these payment card issuers in connection with the use of MasterCard, Maestro and Electron payment cards. According to the settlement, this practice contravened Article 12 of the Competition Act and Article 53 of the EEA Agreement. Borgun's infringement did not include loyalty points.
The settlements provide for various measures and changes concerning the operations and structure of the payment card market. The main purpose of this is to ensure a level playing field for competitors in the areas of transaction acquiring and payment card issuing, reduce the risk of conflicts of interest in the activities of financial institutions in the payment card market and otherwise promote more effective competition in the field of card issuance and acquirer services.
Valitor and Borgun have been owned by competitors in the financial market. Valitor is owned by Arion Bank and Landsbankinn, and Borgun by Íslandsbanki and Landsbankinn. This ownership has been undesirable from a competitive perspective. The settlement changes this permanently, and it will be forbidden for either of these payment card companies to be owned by two or more commercial banks. It is understood that Landsbankinn has already sold its stake in Valitor and Borgun.
The settlement also imposes restrictive conditions regarding an owner's involvement in the operations of Valitor or Borgun when the owner is a commercial bank. Thus, it is stipulated that if Valitor or Borgun, each individually, becomes the property of a single bank, certain conditions shall apply to the respective owner, intended to ensure commercial equality among card issuers (including all banks and savings banks) with regard to the services of Valitor and Borgun.
The above-mentioned conditions, together with other conditions, are intended to reduce the incentives for collusion in transactions between banks and payment acquirers and to promote the negotiation of agreements, between the banks on the one hand, and the card companies (Valitor and Borgun) on the other hand, takes place solely on general commercial terms. The separation of ownership also reduces the common interests of the three banks in the market for general commercial banking services.
The settlement explicitly prohibits direct and indirect coordination between banks and acquirers on fees and other charges, and also prohibits direct and indirect coordination of the terms or commercial conditions of banks and card companies towards cardholders.
The settlements concern activities related to the VISA and MasterCard brands, which are by far the most widespread payment card brands in Iceland. In light of the infringements in question, it is considered necessary to provide for a reduction in interchange fees.
In accordance with m.a. it is stipulated in the agreement that the maximum interchange fees paid to issuers for the use of consumer payment cards shall not be higher than 0.20% of the value of each transaction in the case of debit cards and not higher than 0.60% in the case of credit cards. These limits apply to transactions at Icelandic merchants when paying with VISA, Electron, MasterCard and Maestro payment cards. In reaching this settlement, regard has been had, amongst other things, to developments in European competition law concerning restrictive practices in the payment card market.
During the relevant period, the typical interchange rate for debit cards was around 0.35%, but under the settlement it will be capped at 0.20% of turnover. Typical interchange fees for credit card use were between 0.75 and 0.80% of turnover. Under the settlement, these interchange fees for Icelandic issuers will be capped at 0.60% of turnover. The caps apply to all transactions with consumer payment cards at Icelandic merchants, regardless of whether payment is made at the point of sale, by mail order, via the internet, by mobile phone or by other contactless methods. According to the agreements, these limits will come into effect on 1 May 2015, thus giving the parties some time for adjustment.
The settlement agreements between the Competition Authority, Valitor and Borgun contain a provision whereby these parties commit to reducing their fees for merchants in line with the reduction in interchange fees resulting from the aforementioned cap on interchange fees.
The settlement with the banks stipulates that they shall, as far as possible, streamline their operations related to card issuance and cardholder services with the aim of providing the most cost-effective service in this area and to limit, as far as possible, increases in service charges for cardholders. Furthermore, the banks commit to ensuring that changes to service fees or terms and conditions are made transparent in their price lists and terms and conditions. Cardholders shall be informed of such changes in a clear manner.
From the signing of each settlement and until six months have passed from the reduction in interchange fees provided for by the settlements, the banks undertake not to introduce new charges or increase charges for cardholders, unless such increases cannot be offset by operational efficiencies and can be demonstrably attributed to external factors, such as increases from suppliers or interest rate rises. This commitment, however, does not limit the banks' ability to market new products or services for which a fee would be charged
Valitor and Borgun are in a key position in the domestic payment card market. This position is based, in part, on their status as the main licensees for the VISA and MasterCard brands in Iceland. These companies also handle the processing of credit cards for all banks and savings banks in Iceland and likewise enjoy a strong position in the field of transaction processing in Iceland. The settlement between the Competition Authority and Borgun and Valitor stipulates a clear separation between the transaction processing and card issuance activities of these companies. Under the settlement, the companies are subject to detailed conditions designed to ensure this separation, thereby preventing them from using their position in the card issuance business to create an unfair competitive advantage over their rivals in the field of transaction processing.in transaction processing. This ensures that Valitor, Borgun and their competitors in transaction processing have a level playing field to compete for business in the transaction processing market. In implementing the separation, care has been taken to ensure that the respective companies can still utilise their economies of scale and continue to develop and build their business.
Due to the aforementioned infringements and in order to create a deterrent effect, the Competition Authority has imposed fines on the companies totalling 1,620 million króna. The fine for Íslandsbanki amounts to 380 million krónur, for Arion banki 450 million krónur, for Landsbankinn 450 million krónur, for Valitor 220 million krónur and for Borgun 120 million krónur.
In determining the fines, Íslandsbanki was granted a special concession on the basis that it was the first party to reach a settlement with the Competition Authority. It is generally important that companies which take a special initiative to make positive changes in the market and to admit wrongdoing should receive a special reduction in fines. This strong willingness to cooperate on the part of Íslandsbanki had a very positive effect on the progress and outcome of the case.
In determining the fines, various mitigating factors were generally taken into account, including the fact that all of the aforementioned parties have agreed to comply with significant orders concerning changes to their structure in the relevant market, and also that m.a. regard was had to the good co-operation of all the parties concerned, which has shortened the investigation and proceedings of the competition authorities.
The companies emphasise that there is nothing in the case to suggest that their employees were in bad faith regarding the legality of the agreements made with the receiver. No evidence or information has emerged in the case to suggest the contrary.
The Competition Authority will publish a decision in the case at the beginning of next year, which will provide a more detailed account of the matter.
Updated: See the news report and the decision that was later issued.
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