Credit and debit cards such as Visa and MasterCard are racking up "abnormal" and "excessive" profits for banks, European Union antitrust chief Neelie Kroes said Wednesday.
"Paradise is over," she warned, telling the card industry to make changes or face antitrust investigations that could force them to reform their business or pay fines.
"The more the payment card industry does on its own initiative, the less they are likely to face action under antitrust rules," she said.
In its first report from a wide-ranging investigation into payment cards in Europe, the European Commission said customers are paying too much because the industry was still split along national lines and new card providers find it hard to set up shop. Credit cards are a "very profitable" business, it said.
Kroes said consumers would get a better deal if there was more competition among card providers and if banks started to offer cards to customers in different countries.
She said the industry should also rethink the way it sets prices. "Banks collectively set fees that tax businesses and ultimately all consumers for every card payment," she said. "As a consequence there is not enough market pressure on fees and retail prices are inflated due to card payments."
This increases retail prices by up to 2.5 percent, the commission said.
"MasterCard is studying this lengthy report and will be responding with comments within the commission's required deadline," according to a statement released by MasterCard, based in Purchase, N.Y. "MasterCard has always been committed to an open and competitive single market for card payments in Europe, which underpins the position of the European Commission."
The credit-card brand said it is working with the European banking community on the matter, and has already made a number of changes to its rules and practices to encourage greater competition.
Visa Europe said in a statement that it was committed to "the principles of a Single Euro Payment Area area" and that its interchange — the fees paid between banks during a transaction — has fallen since fallen since 2002.
"Existing differentials between member states reflect numerous factors including level of market maturity, market size, the nature of different products in different countries," among other things, the statement said. Visa said efforts by individual countries to intervene in setting interchange rates "runs counter to the drive towards a single market for card payments."
Visa said it needs to examine the report in more detail before commenting further.
A spokesman for New York-based Citigroup Inc., which owns Diner's Club, could not be immediately reached for comment.
Customers in some countries are paying 100 percent more for MasterCard and Visa than in other nations, regulators found. They can face an annual fee simply to have the card, a fee when the card is issued, a fee per transaction and even a fee to see how much they've spent.
Diners Club charges the highest annual fee, 57 euros ($69.11). MasterCard and Visa customers pay 24 euros ($29.10).
The differences were greater for businesses who hand out a small fee when they accept card payments, the report said. "The fees for businesses even vary by up to 500 percent across (the EU's 25 countries) for Visa and up to 650 percent for MasterCard," the Commission said.
Shops in Hungary, the Czech Republic and Portugal have to pay an average fee of between 2.5 percent and 3.1 percent of the total purchase to accept a MasterCard or Visa credit card — three or four times higher than in Sweden, Finland and Italy.
Florists, restaurants and car rental firms pay double the merchant fee charged to fuel companies and wholesale trade firms, the report said.
Small firms are hurt particularly hard by paying higher fees than larger businesses to accept international credit and debit cards. "These differences amount to more than 70 percent and do not seem to be justified by transaction costs," it said. The commission said the card payment industry had been able to make high profits over a long period of time and banks have been able to shut new rivals out of the sector. It said banks dealt jointly with retailers instead of competing directly for their business, giving retailers in eight countries just one choice of payment networks.
About 23 billion card payments are made annually in the EU with an overall value of 1.35 trillion euros ($1.63 trillion) from a combination of merchant fees, customer fees and handling charges paid between banks and card providers.
Debit cards — which levy lower fees — dominate the market. The commission said only 35 percent of all payment transactions were made by credit cards in the 15 counties that were EU members before 2004. That figure is an even lower 21 percent in the ten countries that joined the EU in 2004.