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Monday, 28 May 2012

Sailing The Wide EC?

Loyal readers will know that I usually picture the European Commission cooking breakfast.

But recently I've begun to conceive of the EC as lashed to the wheel of the good ship Eurozone amidst a howling gale and mountainous seas, courageously holding course for the mystical land known by some as the Single Market. I fancy that their struggle against all odds reveals something of the pioneering spirit that perhaps one might grudgingly admire, if only as an enthusiastic collector of red tape.

Anyhow, last week saw the publication of the EC's consumer agenda and a report on consumer policy.

Happy reading.

Sunday, 27 May 2012

Abandon Hope All Ye Who Enter The Financial Services Bill

The new financial regime is unsinkable
As a desperate alternative to the Eurovision Song Contest, last night I combed the latest version of the Financial Services Bill for a glimmer of evidence that the Government understands the extreme difficulty of innovating responsibly in a retail financial world dominated by a byzantine regulatory regime

Alas there's nothing much in the Bill except two new supervisory deckchairs from which the authorities can watch our major financial institutions power us inexorably into the icy depths. 

To be fair, the word "innovation" does appear once in this homage to complexity. But it is used in a way that could only be intended to evoke the maximum possible relief amongst those terrified of it. The financial authorities need only promote effective competition and innovation within the markets for regulated financial services. God forbid there should be a process for developing proportionate regulation of emerging business models, or that the authorities should provide guidance to those intent on delivering better outcomes for consumers than established firms or existing services. Here is the leading, bleeding, cutting edge of our giant financial regulatory regime:
"1E The competition objective

(1) The competition objective is: promoting effective competition in the interests of consumers in the markets for—
(a) regulated financial services, or
(b) services provided by a recognised investment exchange in carrying on regulated activities in respect of which it is by virtue of section 285(2) exempt from the general prohibition.

(2) The matters to which the FCA may have regard in considering the effectiveness of competition in the market for any services mentioned in subsection (1) include—
(a) the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices,
(b) the ease with which consumers who obtain those services can change the person from whom they obtain them,
(c) the ease with which new entrants can enter the market, and
(d) how far competition is encouraging innovation."

Saturday, 26 May 2012

Cardholders Don't Seem All That MIFfed... Yet.

At long last we have a judgment in the MasterCard interchange case. And if the strength of MasterCard and the UK banks' resistance is anything to go by, you might've thought the impact will be profound. But does the decision really threaten the reign of credit and debit cards as the dominant retail payment method in the UK?

In essence, the multilateral interchange fee (MIF) is a share of every credit or debit card transaction that is retained by the bank that issues the card. As previously explained, we all end up paying for MIF, because it's passed through in the charge to retailers for the ability to accept card payments (see here for how card acquiring works generally). 

The saga of complaint, denial and escalation over MIF seems even worse than the Great PPI Robbery, which definitely ended badly for the banks. The first complaints about the anti-competitive nature of MIF were made to the European Commission by trade bodies representing retailers in 1992 and 1997 respectively. To escape allegations that the banks had a common interest in maintaining the MIF, MasterCard's member banks went so far as to agree to float MasterCard Inc. as a separate company on the New York Stock Exchange in 2006. This did not convince the Commission. On 19 December 2007, it outlawed MIF. In response, MasterCard (tellingly 'supported' by former member banks as "interveners" in the proceedings) applied to the European Court of Justice to overturn that decision on 1 March 2008. It has taken over four years to get a judgment dismissing their application. Only a limited appeal on points of law is possible.

The Commission had decided in 2007 that the MIF set a floor below which merchant service fees would not fall, and so restricted price competition to the detriment of retailers. It considered that the absence of a MIF would also reveal any bilateral interchange fees agreed between specific issuers and acquirers, making the acquirers' service obviously more expensive, and exposing them to competition. The Commission rejected the idea that MIF paid for various 'efficiencies' that justified its anti-competitive effect. It also considered that the issuing banks had tried to justify the MIF by including costs that are also inherent in other forms of payment, such as the costs of maintaining a current account...

The Court has now agreed with the Commission. Both believe that MasterCard and the card issuers make so much money out of their payment card businesses that the loss of the MIF won't significantly impact the scale of their activities, or their ability to drive cardholder demand. In particular, the Commission found that "issuing banks generated 90% of their revenues with income from cardholders (mainly [interest]) and only 10% from interchange fees." Debit card payments also drive cost savings for the banks by reducing the number of more expensive cash and cheque transactions they needed to handle. And a significant reduction in MIF in Australia did not have any of the effect the banks claimed an outright ban would have here. In fact, the Court found that to determine the level of MIF for credit and charge cards, MasterCard tries: 
" answer the question: “How high could [MIFs] go before we would start having either serious acceptance problems, where merchants would say: we don’t want this product anymore, or by merchants trying to discourage the use of the card either by surcharging or discounting for cash”’.
From the nature of this equation, the removal of MIF should mean lower costs to merchants, who can use these savings to invest in increased selection, to improve customer experience, to expand - or to simply survive in the current downturn. Those merchants who merely take the lower overhead as profit are clearly in a good position, and I guess there's a chance they may one day face their own competition investigation, but that's an entirely separate issue as I've pointed out before.

That's good news for consumers generally. But what of the impact in the market for new payment methods amongst cardholders themselves? What will prevent card issuers from reducing the value of loyalty schemes or otherwise charging cardholders more in interest and/or fees to make up for lost MIF income?

Interestingly, MasterCard and the banks said that removing MIF would mean "a move towards alternative products or services." But the Commission believes that consumers' strong preference for card payments means the pressure of other payment methods has been too weak to make any difference to the level of MIF (and therefore card issuing and acceptance). As mentioned, removing MIF should actually make card payments cheaper for merchants, so make them less inclined to explore alternatives. In those circumstances, a cardholder rebellion would seem difficult to achieve.

So while the ability to "extract rents" via the MIF has been curtailed, the dominance of cards as a payment method may be sustained. Indeed, card issuers may believe the strong consumer preference noted by the Commission allows them to compensate for the loss of MIF by raising interest rates and charges for cards. That would avoid the need to dip into interest income for the marketing budget to keep stoking demand in the midst of a downturn, pressure to repair bank balance sheets and Basel III capital constraints that attach higher risk-weightings to consumer lending. Such increases could happen soon. The Commission originally gave MasterCard 6 months to remove MIF and this timeline may be insisted upon. But card issuers might well try to raise interest rates and/or direct charges in advance of that date, pointing to the cost of systems changes to remove MIF as instructed.

Ironically, it would seem that we cardholders only have ourselves to blame for such a scenario.

It remains to be seen how high interest and charges on card payments will need to go before we'll rebel.

Image from GAO report on interchange.

Sunday, 13 May 2012

Churchill On Tradition And Innovation

Traditional doesn't mean 'good'
Last weekend, I visited Chartwell House, and one of the many things that caught my eye was a note in which Churchill seemed to consider tradition more important than progress. That surprised me, as I read it amongst plenty of evidence to the contrary, and the notion that he believed that has nagged at me ever since. 

Today, I looked in vain for the same quote on the web, but stumbled on two others from Sir Winston that suggest the note I saw was an aberration, or perhaps was meant in a different context:
"A love of tradition has never weakened a nation, indeed it has strengthened nations in their hour of peril; but the new view must come, the world must roll forward." 
"Without tradition, art is a flock of sheep without a shepherd. Without innovation, it is a corpse." 
We seem to equate the word "tradition" with benign customs, as seems implicit in the above quotations (although Churchill may have overstated this for rhetorical purposes). Others have not been so kind. At any rate, the ordinary meaning does not stretch that far: 
"1. the transmission of customs or beliefs from generation to generation, or the fact of being so passed on. > a long-established custom or belief passed on in this way." From the Latin 'tradere' which in turn is from trans 'across' + dare 'to give'.  Source: Oxford English Dictionary.

Image from

Tuesday, 1 May 2012

Crowdinvesting, JOBS and The AIFMD

Interesting to consider the extent to which the implementation of the Alternative Investment Fund Managers Directive provides an opportunity to introduce some certainty and proportionate regulation for direct finance platforms via the small firms registration option - perhaps along the lines suggested in the submission to the Breedon Taskforce and subject to criteria of the kind referred to in Title III to the JOBS Act designed to enable crowdinvesting.

Is it too much to expect Business Innovation and Skills and the Treasury to have already considered and discussed this?