Contesting card payment fees

Credit card payments, both in store and online, impact heavily on a retailer’s profit margins. 

On 17 June this year, the Supreme Court handed down a landmark decision in a series of long-running cases brought by several retailers against Visa and Mastercard. These cases arose from the operation of their payment card schemes (Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC and others & Sainsbury’s Supermarkets Ltd and others v Mastercard Incorporated and others [2020] UKSC 24). 

The ruling may now prompt an upsurge of claims by retailers looking to recover significant overcharged sums from card companies.

Card scheme

The case against Visa and Mastercard concerned multilateral interchange fees (MIFs). MIFs govern payments between banks for the processing of debit and credit card transactions. MIFs are charged by the bank that issues the payment card to the consumer (the issuing bank) and are paid by the retailer’s bank (the acquiring bank). 

The scheme for MIFs is best explained by way of example:

Mr Smith is a customer who makes a purchase from ABC Stores. Mr Smith’s bank will deduct the transaction value from Mr Smith’s account and transfer it to ABC Stores’ bank, minus the MIF that applies to that transaction. 

ABC Stores’ bank will then transfer to ABC Stores the value of the transaction minus a merchant service charge (MSC) as agreed between ABC Stores and its bank. The MSC includes the whole amount of the relevant MIF.

The fact that the acquiring bank passes on the entirety of the MIF for a transaction to the retailers through the MSC gives rise to competition law issues. The negotiations between the retailer and its bank are generally limited to the amount charged by the bank in excess of the MIF. Retailers are, therefore, unable to negotiate the level of MIF, which typically accounts for 90 per cent of the MSC. 

The ruling

In July 2016, the Competition Appeal Tribunal (CAT) ordered Mastercard to pay Sainsbury’s £68.5m plus interest on the basis that the MIFs were an unlawful restriction on competition. 

Mastercard appealed the decision. However, in June 2020 the Supreme Court unanimously confirmed that the schemes operated by Mastercard and Visa were anti-competitive and in breach of the relevant provisions of the Treaty on the Functioning of the European Union (TFEU). 

The court concluded the following. The imposition of MIFs was a restriction on competition and a breach of article 101 of the TFEU. MIFs effectively set a minimum price floor for the MSC. The MIF element of the MSC was set by collective agreement and is non-negotiable. As a result, the card scheme restricted price competition. 

Robust and cogent empirical evidence is required for a payment scheme to qualify for an exemption (see article 101(3) of the TFEU). The Court of Appeal had correctly found that Mastercard and Visa’s payment scheme did not satisfy the conditions of the exemption. 

When determining whether a payment card scheme qualifies for the exemption, cardholder benefits cannot be taken into account as to whether consumers received a fair share of the benefits of the MIFs. The restrictive effects suffered by retailers in the card acquiring market cannot be compensated by the benefits enjoyed by consumers in the card issuing market.  

Let the claims begin?

We are not quite there yet. Although liability on behalf of Visa and Mastercard has been established, issues relating to quantum still need to be resolved. 

Visa and Mastercard have raised the defence of ‘pass on’ – that some or all of the loss suffered by the retailers was offset by any overcharge being passed on to the customer. In any claims brought against them, the burden will be on Visa and Mastercard to prove that a retailer has mitigated their loss such that retailers’ damages should be reduced.

The Supreme Court ruled that Visa and Mastercard do not need to show the exact amount of loss a retailer has mitigated in order to reduce any damages claim. The ‘broad axe’ principle will apply and the quantification of pass on does not need to be precise (where precision cannot be reasonably achieved). Furthermore, there will be a burden on retailers to show how their business has dealt with the recovery of MIFs.

The Supreme Court has sent the case back to the CAT for determination of the level of damages, based on, first, the loss suffered by the retailers; and second, the extent of mitigation achieved by the retailers in passing MIFs to their customers. Neither party can present a new case or adduce new evidence (that hearing will not take place until at least 2021). 

Where does that leave us?

This is a long awaited and welcome clarification by the Supreme Court. Undoubtedly, there will be numerous retailers that will seek compensation for the overcharging by card companies. Those retailers are entitled to be put in the position they would have been but for the overcharge of MIFs. 

Given the nature of MIFs, there are potential limitation issues, especially as the payment schemes are likely to have spanned several years. Clients in the retail industry should seek advice as soon as possible.

Caution is required about the value of claims because issues around the calculation of damages still need to be addressed. For that reason, the decision by the CAT on this issue will be crucial. How the individual retailer has dealt with the MIFs, particularly, whether the MIFs were passed on to customers in the retail price of the goods, will heavily impact on the overall recovery. It may still require significant and onerous work on behalf of the retailers to avoid double recovery. 

The amounts at stake, the potentially widespread nature of the claims, and the general financial pressures on the retail industry
mean that this is an issue that is unlikely
to go away. Absent Mastercard and Visa establishing some form of redress scheme, there is the scope for further hard-fought litigation in the future. 

Nevertheless, this is progress for retailers. The CAT’s decision on quantum is eagerly awaited by retailers and lawyers alike.  

Emily Mitcheson is a senior associate at Russell-Cooke LLP Russell-cooke.co.uk