Competition Law and Payment Service Market Competition

1. Introduction

The payment service market includes the systems, institutions, platforms and technologies through which individuals and businesses make or receive payments. It encompasses:

credit and debit card networks;

payment gateways and payment processors;

acquiring and issuing banks;

digital wallets;

instant-payment systems;

mobile-payment applications;

payment aggregators;

merchant-acquiring services;

ATM networks;

account-to-account payment infrastructure; and

emerging fintech and embedded-payment services.

Competition law is particularly important in payment markets because they are often multi-sided markets. A payment network simultaneously connects consumers, merchants, issuing banks and acquiring banks. A rule imposed on one side can therefore affect competition on another.

The central competition concerns include interchange fees, network rules, exclusivity, access restrictions, interoperability, tying and bundling, refusal to provide access, platform dominance, discriminatory treatment, interoperability barriers and mergers between payment infrastructures.

The importance of these issues is illustrated by the extensive litigation concerning Visa and Mastercard interchange fees. The UK Competition Appeal Tribunal's recent proceedings concern claims by more than 2,000 merchants and the compatibility of multilateral interchange fees with Article 101 TFEU. (Competition Appeal Tribunal)

2. Relevant Competition-Law Framework

A. Agreements restricting competition

Payment networks frequently establish common rules governing:

transaction fees;

merchant acceptance;

routing;

settlement;

technical standards;

access to the network;

interchange;

cross-border payments.

Where competing banks or institutions participate in a common payment system, collective rules can potentially constitute agreements or decisions restricting competition.

Under Article 101 TFEU, Section 1 of the Competition Act 1998, and comparable provisions in other jurisdictions, the principal question is whether the arrangement has the object or effect of restricting competition.

A payment-network rule can therefore attract scrutiny even though it is technically necessary for the functioning of the payment system.

3. Interchange Fees

One of the most important competition issues is the multilateral interchange fee (MIF).

In a four-party card system:

Cardholder → Issuing Bank → Card Scheme → Acquiring Bank → Merchant

When a consumer pays a merchant using a card, the merchant's acquiring bank generally pays an interchange fee to the cardholder's issuing bank.

The economic concern is that competing issuing and acquiring banks may not independently negotiate the relevant fee. Instead, a common network rule determines the fee.

This can potentially create a price floor for merchant-acquiring services.

The European Commission's MasterCard investigation concluded that the relevant MIF arrangements restricted competition because the interchange fee increased the base on which acquiring banks charged merchants. (Competition Policy)

4. Case Law

1. Commission v MasterCard — Case C-382/12 P

This is one of the leading authorities concerning payment-card competition.

The European Commission had found that MasterCard's intra-EEA interchange fees infringed Article 101 TFEU.

The central issue was whether the MIF system restricted competition between acquiring banks.

The Court of Justice upheld the Commission's fundamental competition-law analysis.

Principle

A payment-system arrangement cannot escape Article 101 merely because it facilitates the functioning of a payment network.

The relevant question is whether the arrangement restricts competition and, if so, whether the requirements for exemption under Article 101(3) are established.

Importance

The case demonstrates that:

Payment infrastructure is not immune from competition law merely because common rules are technically necessary for operating the network.

The Commission's original decision concerned the MIF's effect in creating a minimum economic burden for merchants accepting MasterCard cards. (Competition Policy)

2. MasterCard Inc v Merricks — Case C-614/20

This case concerned collective damages litigation arising from MasterCard's interchange-fee arrangements.

The Court of Justice addressed the requirements for certification of collective proceedings and clarified the treatment of competition-law damages claims arising from payment-card arrangements.

Principle

Competition infringements involving payment systems can generate widespread economic effects across large numbers of merchants and consumers.

Importance

The case illustrates that competition problems in payment markets can extend beyond regulatory enforcement into private damages litigation.

It also demonstrates the significance of collective redress where a payment-network practice affects thousands or millions of market participants.

3. Sainsbury's Supermarkets Ltd v Mastercard Inc

This UK litigation concerned the compatibility of Mastercard's MIF arrangements with Article 101 TFEU.

The UK Supreme Court considered:

whether MIFs restricted competition;

the acquiring-market counterfactual;

Article 101(3);

damages;

pass-on;

causation.

The Supreme Court's case concerned Mastercard and Visa payment schemes and their rules governing transactions between issuing banks and merchant-acquiring banks. (Supreme Court UK)

Principle

A competition analysis of payment systems requires consideration of the counterfactual competitive conditions that would exist without the challenged payment-network arrangement.

Importance

The case is particularly important for private enforcement because it connects:

competition infringement → merchant overcharge → causation → damages → pass-on.

4. Umbrella Interchange Fee Proceedings

The UK Competition Appeal Tribunal has developed extensive litigation concerning Visa and Mastercard interchange fees.

In Merchant Interchange Fee Umbrella Proceedings, the Tribunal's Trial 1 judgment found an infringement of Article 101(1) concerning the relevant interchange-fee arrangements. Trial 2 subsequently addressed issues concerning Article 101(3). (Competition Appeal Tribunal)

The litigation involves claims by more than 2,000 merchants.

Principle

The proceedings demonstrate that payment-network rules can be analysed as restrictions of competition in the merchant-acquiring market, even though the relevant fee is technically transferred between financial institutions.

Importance

This is significant because payment markets are interconnected:

issuer → card scheme → acquirer → merchant

A fee imposed between banks may ultimately affect the competitive price paid by merchants.

5. Visa & Mastercard v Umbrella Interchange Fee Claimants

The UK courts have also considered appeals arising from the interchange-fee litigation.

The Competition Appeal Tribunal found that Visa's Default Interchange Fee Rule infringed Article 101(1) TFEU in relation to specified transactions, treating the fee as effectively operating as a non-negotiable pricing floor within merchant service charges. Appeals concerning the litigation have continued. (Courts and Tribunals Judiciary)

Principle

A common payment-network fee may restrict competition where it prevents acquiring banks from competing independently on the price charged to merchants.

Importance

The case illustrates the distinction between:

a genuinely necessary technical payment rule; and

a rule that determines a significant component of the price paid by merchants.

6. United States v Visa U.S.A. Inc. / Mastercard-related payment-card litigation

US competition litigation has also examined payment-card network rules.

In the major Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, merchants challenged Visa and Mastercard practices concerning interchange fees and merchant-acquiring conditions.

The litigation involved allegations that network rules enabled supracompetitive interchange fees and restricted merchants' ability to obtain better competitive terms. The Second Circuit considered the settlement and related antitrust issues after extensive litigation. (Justia Law)

Principle

Payment-card networks can constitute relevant economic markets in which network rules may affect the bargaining position of merchants.

Importance

The American experience demonstrates the possibility of private antitrust enforcement alongside government competition enforcement.

7. MasterCard / VocaLink Merger Inquiry

The UK CMA examined Mastercard's acquisition of VocaLink, an important payment infrastructure provider.

The transaction was cleared at Phase I subject to undertakings in lieu of a Phase II reference. (GOV.UK)

Principle

Competition authorities must examine not only conduct within payment systems but also structural transactions involving payment infrastructure.

Importance

A payment-infrastructure acquisition may raise concerns concerning:

foreclosure;

access to essential infrastructure;

interoperability;

input foreclosure;

customer foreclosure;

data advantages;

vertical integration; and

increased network effects.

5. Market Definition in Payment Services

Payment markets can be defined narrowly or broadly depending on the competitive question.

Possible relevant markets include:

card issuing;

card acquiring;

merchant-acquiring services;

payment processing;

payment gateways;

digital wallets;

ATM services;

mobile payments;

instant account-to-account payments;

cross-border payment services.

A crucial question is whether different payment methods are substitutes.

For example:

Cash ≠ necessarily substitute for cards

Credit cards ≠ necessarily substitute for debit cards

Cards ≠ necessarily substitute for instant account-to-account payments

Payment gateway ≠ necessarily substitute for merchant acquiring

The answer depends on consumer behaviour, merchant behaviour, costs, transaction characteristics and the relevant geographic market.

6. Network Effects

Payment markets frequently exhibit powerful network effects.

A payment system becomes more valuable as:

more consumers use it;

more merchants accept it;

more banks participate;

more applications integrate with it.

This produces a reinforcing cycle:

More consumers → more merchants → more transactions → more banks → more consumers

Network effects can create significant entry barriers.

A new payment network may technically offer a superior product but still struggle because consumers will not join unless merchants accept it, while merchants will not accept it unless consumers use it.

Competition law therefore has to distinguish between:

legitimate economies of scale; and

strategic conduct designed to exclude rivals.

7. Interoperability

Interoperability is especially important in payment markets.

Competition can be weakened when a dominant payment provider prevents competing providers from connecting to its infrastructure.

Potential competition issues include:

denial of access;

discriminatory access;

unreasonable technical requirements;

excessive access fees;

delayed certification;

discriminatory APIs;

refusal to interoperate;

restrictions on payment routing.

A dominant payment platform may therefore have competition-law obligations that do not necessarily apply to smaller competitors.

8. Exclusivity

Payment providers may enter arrangements requiring merchants, banks or technology providers to use a particular payment network.

Competition authorities may examine whether exclusivity:

forecloses rival payment systems;

increases switching costs;

prevents multi-homing;

prevents merchants from routing transactions through cheaper networks;

protects an incumbent network from entry.

The competitive significance depends on market power, duration, coverage, alternatives and foreclosure effects.

9. Honour-All-Cards Rules

Card schemes may require merchants accepting one category of card to accept other categories.

For example, a merchant might be required to accept:

debit cards;

credit cards;

premium cards;

commercial cards.

Such rules can raise competition concerns because merchants may have limited ability to reject expensive payment instruments.

The competition analysis must consider whether the rule is genuinely necessary for the payment network or instead prevents merchants from exercising competitive pressure.

10. Merchant Steering

Merchants may attempt to encourage customers to use cheaper payment methods.

Examples include:

discounts for bank transfers;

discounts for cash;

warnings concerning expensive card payments;

directing consumers toward alternative payment applications.

Payment networks may impose anti-steering rules restricting such practices.

From a competition perspective, anti-steering provisions can be important because they may prevent merchants from passing competitive information to consumers.

If merchants cannot steer customers toward cheaper payment methods, the competitive pressure between payment systems can be weakened.

11. Payment Gateways and Vertical Integration

Modern payment markets increasingly involve vertically integrated firms.

A company may simultaneously operate:

a payment gateway;

payment processing;

merchant acquiring;

digital wallet;

authentication;

fraud detection;

payment infrastructure.

Vertical integration can create efficiencies but may also create foreclosure risks.

For example, a dominant payment gateway could theoretically:

favour its own acquiring service;

discriminate against rival acquirers;

bundle gateway access with acquiring;

restrict access to transaction data;

degrade interoperability.

These practices can potentially raise Article 102 TFEU, Chapter II Competition Act, or equivalent abuse-of-dominance concerns.

12. Tying and Bundling

Payment platforms can use their market position in one service to expand into another.

Examples include:

Payment gateway + acquiring

Wallet + payment processing

Operating system + mobile payment service

E-commerce marketplace + payment service

Banking platform + merchant payment service

Competition authorities should examine whether the tying firm has substantial market power and whether the arrangement forecloses competitors in the tied market.

13. Digital Wallet Competition

Digital wallets introduce another layer of competition.

A wallet provider may control:

the user interface;

payment credentials;

authentication;

NFC functionality;

tokenisation;

transaction data.

If access to a technically important feature is restricted, rival wallets may be unable to compete effectively.

This creates a potential interaction between competition law and digital-platform regulation.

14. Data and Payment Competition

Payment providers possess large amounts of commercially valuable data.

Examples include:

transaction histories;

merchant information;

consumer spending patterns;

payment frequency;

geographic information;

fraud patterns.

Data can create competitive advantages through:

better fraud detection;

credit scoring;

personalised offers;

merchant analytics;

risk assessment.

However, competition concerns may arise if a dominant payment provider uses data obtained from dependent businesses to disadvantage those businesses or their competitors.

15. Switching Costs and Multi-Homing

Payment markets often involve substantial switching costs.

Merchants may have to change:

terminals;

contracts;

APIs;

accounting systems;

payment gateways;

settlement accounts;

fraud-management systems.

Consumers may have to change:

wallets;

authentication methods;

stored payment credentials;

recurring-payment arrangements.

Where switching costs are high, incumbents may retain market power even when nominal alternatives exist.

Multi-homing can mitigate these effects because merchants and consumers can simultaneously use several payment systems.

16. Mergers and Concentration

Payment-market mergers require particularly careful analysis because the industry is characterised by:

network effects;

economies of scale;

data advantages;

interoperability;

vertical integration;

high fixed infrastructure costs.

A merger between a major payment network and a payment processor could create:

Input foreclosure

or

Customer foreclosure

or

Data foreclosure

or

Interoperability foreclosure.

The Mastercard/VocaLink transaction demonstrates how competition authorities may use structural remedies or undertakings to address concerns surrounding payment infrastructure. (GOV.UK)

17. Competition and Regulation

Payment markets are unusual because competition law operates alongside sector-specific regulation.

Relevant regulatory objectives can include:

financial stability;

consumer protection;

payment security;

anti-money laundering;

operational resilience;

interoperability;

financial inclusion.

A payment rule may therefore be legitimate from a regulatory perspective but still require separate competition-law analysis.

Conversely, competition law should not automatically invalidate a technical rule merely because it limits some form of competitive freedom.

The crucial question is whether the restriction is necessary, proportionate and competitively justified.

18. Remedies

Competition authorities can employ several remedies.

Structural remedies

divestiture;

separation of payment businesses;

limits on acquisitions.

Behavioural remedies

non-discriminatory access;

interoperability;

access obligations;

prohibition of exclusivity;

transparency requirements;

modification of network rules.

Financial remedies

administrative fines;

damages;

restitution;

compensation claims.

Regulatory remedies

interchange-fee caps;

access regulation;

routing requirements;

interoperability requirements.

The appropriate remedy depends upon whether the problem concerns market structure, conduct or infrastructure access.

19. Key Competition Issues in Payment Services

20. Overall Legal Analysis

The central competition-law problem in payment-service markets is that the same infrastructure that creates efficiency can also create market power.

Payment networks require common standards. They need rules concerning settlement, authentication, security, interoperability and transaction processing. These arrangements can produce enormous efficiencies.

However, common infrastructure can also facilitate:

collective price setting;

exclusionary network rules;

foreclosure;

discriminatory access;

excessive interchange fees;

tying;

restrictions on routing;

barriers to entry.

The leading interchange-fee litigation shows why payment markets receive sustained competition-law scrutiny. The European Commission's MasterCard case treated the MIF mechanism as capable of restricting acquiring-market competition, while subsequent UK litigation has examined similar issues through private damages proceedings. (Competition Policy)

Conclusion

Payment-service competition law is fundamentally concerned with preserving competitive access to payment infrastructure while allowing the technical cooperation necessary for a functioning payment system.

The most important legal questions are therefore:

Who controls the payment infrastructure?

Who determines the price of access?

Can rival payment providers interoperate?

Can merchants choose or steer between payment methods?

Are network rules objectively necessary?

Do payment rules create a price floor?

Does a dominant provider discriminate against rivals?

Can competitors access essential payment infrastructure?

Do mergers increase network or data-based market power?

Can efficiency justifications satisfy the applicable exemption requirements?

Taken together, the MasterCard interchange-fee decisions, Sainsbury's litigation, Umbrella Interchange Fee proceedings, US payment-card antitrust litigation, and MasterCard/VocaLink merger inquiry provide a useful framework for analysing modern payment-service competition.