07 June 2022
The Australian Competition and Consumer Commission (ACCC) has recently instituted proceedings in the Federal Court against Mastercard Asia/Pacific Pte Ltd (Mastercard Singapore) and Mastercard Asia/Pacific (Australia) Pty Ltd (Mastercard Australia) (together Mastercard), claiming the financial services corporation engaged in anti-competitive conduct in the supply of debit card acceptance services.
The ACCC alleges that Mastercard Australia had, during the relevant period from November 2017 to November 2020, a substantial degree of market power in the market for the supply of credit card acceptance services in which Mastercard and Visa were by far the largest suppliers.
Specifically, the ACCC alleges that Mastercard engaged in conduct that had the purpose of substantially lessening competition in one of the following affected markets:
In both of these affected markets, Mastercard, Visa and eftpos were the only suppliers.
Relying on its enforcement power under section 46 of the Competition and Consumer Act 2010 (CCA), the ACCC alleges, in the relevant period, Mastercard engaged in conduct that had the purpose of substantially lessening competition in the supply of debit card acceptance services in the context of the Reserve Bank of Australia’s (RBA) least cost routing initiative (LCR).
In addition, the ACCC alleges that Mastercard Singapore engaged in:
The ACCC also alleges that Mastercard Australia aided, abetted, counselled or procured, induced or was knowingly concerned in, or party to, the above contraventions against Mastercard Singapore.
The ACCC asserts the conduct of Mastercard was intended to prevent or hinder competition in the affected markets because it involved the leveraging of power in the credit market to reduce or avoid competition in the supply of debit card acceptance services, and thereby caused harm.
In Australia, debit card payments may be processed by Visa Debit, Debit Mastercard or eftpos. When a consumer uses a debit or credit card to pay for goods or services, the merchant incurs fees as a result of accepting the payment. This fee will partly depend on which debit card network is used to process the transaction and the relevant ‘interchange rate’ set by the card scheme.
Most Australian debit cards are ‘dual-network’ cards, which means they may be processed using eftpos, or either of the Visa and Mastercard debit card networks – with eftpos often being the cheapest option.
In order to improve competition in the debit card market and reduce the costs associated with processing debit card payments for businesses, the RBA has supported the LCR initiative since 2017. This initiative allows businesses to choose which debit card network processes their contactless (i.e. ‘tap and go’) dual-network debit card payments.
The rationale for this is that reducing costs for businesses, including smaller merchants, enables them to offer their customers better prices. Therefore, ensuring the major card schemes (Mastercard, Visa and eftpos) compete vigorously is important for both businesses and their customers.
The ACCC has alleged that in response to the RBA’s LCR initiative, Mastercard entered into agreements with more than 20 major retail businesses, including supermarkets, fast food chains and clothing retailers.
The agreements gave these businesses discounted rates for Mastercard credit card transactions, provided they committed to processing all or most of their Mastercard debit card transactions through Mastercard rather than the eftpos network. This meant that these businesses would not process significant debit card volumes through the eftpos network even though eftpos was often the lowest cost provider.
On this basis, the ACCC is arguing that Mastercard has substantial power in the market for the supply of credit card acceptance services, and that a substantial purpose of Mastercard’s conduct was to hinder the competitive process by deterring businesses from using eftpos to process debit transactions. As a result, Mastercard’s alleged conduct meant that businesses did not receive the full benefit of the increased competition that was intended to flow from the LCR initiative.
This isn’t the first time the ACCC has pursued court action to address competition concerns over debit card payments. In March 2021, the ACCC accepted a court-enforceable undertaking from Visa in relation to concerns that Visa may have limited competition in relation to debit card acceptance through its dealings with large merchants.
As a result, Visa cannot offer strategic merchant rates for credit card payments to merchants on the condition that the merchant processes debit card payments through the Visa network. Visa must also allow merchants to decide which debit card network processes Visa-branded dual-network debit card payments, without increasing the processing cost as a consequence.
Additionally, the RBA recently conducted a Review of Retail Payments Regulation, which raised concerns about this potential ‘tying conduct’ by international card schemes. The RBA also observed a number of emerging challenges to the viability of LCR over the longer term, including a shift away from the use of physical cards at the point of sale to new ‘form factors’, such as mobile wallets, which is increasing the pool of transactions that cannot be routed. A number of small and medium-sized card issuers are also considering issuing single-network debit cards which prevent LCR. Despite this, the RBA outlined its expectation that LCR should be available for all ‘in-person’ and ‘online’ transactions by the end of 2022.
These proceedings come after the ACCC recently signalled its intention to focus on competition issues in the financial services sector as one of its compliance and enforcement policy and priorities for 2022-23. With Australian consumers increasingly using payment cards when buying goods or services, the regulator believes competition in the market is vital to both businesses and consumers.
In particular, the ACCC indicated that:
“…vigorous competition in payments services markets is critical if we are to get the full benefits of innovation and efficiency across the economy.
One of the core issues affecting competition in the payments markets is ‘least cost routing’ which enables businesses to choose which network will process their debit card transactions, and which now make up around 75 percent of all card payments in Australia.”
ACCC Chair Gina Cass-Gottlieb reiterated the regulator’s intention to focus on financial services enforcement and policy work over the next year. In a speech to the Australian Financial Review Banking Summit, just one day after instituting proceedings against Mastercard, she said:
“Payment systems, services and competitors are rapidly evolving.”
“We are committed to promoting and protecting competition in this important sector, particularly in the face of these rapid developments, and will take strong action to address any anti-competitive behaviour.”
In this same speech, Ms Cass-Gottlieb noted in respect of the Mastercard proceeding that “this enforcement action is but one aspect of the broader work we will be undertaking in accordance with our focus on compliance in the financial services sector.”
The ACCC has clearly put financial service providers on notice that it will not hesitate to take action in response to concerns about the misuse of market power in this important sector of Australia’s economy.
With these proceedings against Mastercard and the previous action against Visa, the regulator is prepared to put its money where its mouth is in pursuing anti-competitive conduct.
Our team can assist you in understanding the prohibitions against misuse of market power and other restrictive trade practices under Part IV of the CCA. In particular, we can assist in identifying the risks associated with firms with substantial market power in a market operating in another market, and consider whether such behaviour could be construed as leveraging market power that has a substantial lessening of competition purpose, effect or likely effect on that other market.
We can also assist you in managing the compliance risks associated with having substantial market power. If you have any questions, please contact us or send in your enquiry here.
Authors: Joanne Jary & Kayla Plunkett
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.