MasterCard CEO Hits Back at European Interchange Pressure

MasterCard is cooperating with a European investigation into its fees, though it is questionable that this process will have a widespread effect on interchange, according to MasterCard CEO Ajay Banga.

"Europe an interesting marketplace for us but it's a complicated market to navigate," said Banga during today's earnings call. Banga, who is also MasterCard's president, was answering a question; he did not address the European interchange investigation during his prepared remarks.

The European Commission claims MasterCard is breaking the European Union's single market competition rules by not allowing banks to offer lower interchange rates to retailers based in other countries with higher local interchange fees, a process known as "cross-border acquiring." The commission also contends MasterCard's inter-regional interchange fees—or fees charged for transactions of outside issuers—are too high, claiming MasterCard's fees are up to 500% higher than similar fees for locally issued cards.

The second "inter-regional" use case is less than 1% of MasterCard's total volume, though it's still an important issue, Banga said.

"I don't know how long this will take to come through to any sensible resolution," he said, questioning whether European regulators should get involved in setting rates that outside banks collect when a consumer from the EU transacts within the EU. "There are very different ticket sizes and implications than European consumers transacting in the EU, so we'll see where that goes," Banga said.

Banga also suggested a heavy regulatory move on cross-border acquiring interchange could result in acquirers moving to a low-cost location.

"What would that mean for the banks and for the acquirers in other European countries? I don't know where that is going to go. In the actual putting out of the rule, a couple of these proposals got dropped because different European countries found them less than palatable, so we'll see," said Banga, adding that it's still "early days."

The investigation is opening the market for local rivals to compete on cost, and if MasterCard is found to be in violation of EU rules, it could be fined up to 10% of its annual sales in the region. MasterCard executives did not comment on a possible settlement during the company's earnings call. Banga did not answer a question about the market-wide impact of a similar case in the U.S. involving Amex and steering.

Banga also addressed security, contending MasterCard's varied security measures are expanding and stopping attacks.

"We are significantly investing in cybersecurity technology to offer greater protection to cardholders, merchants and issuing banks," Banga said, calling out the company's proactive fraud engine, tokenization and biometric technology. "There is no silver bullet, but if you take a sensible multilayered approach, we can reduce that risk."

MasterCard's SafetyNet program stopped several attacks recently, Banga said. SafetyNet uses MasterCard's global network and global monitoring to spot potential attacks before the bank or processor is aware.

"We don’t just detect threats but act on them in real time," Banga said, adding SafetyNet has been deployed at more than 80% of MasterCard's issuers.

MasterCard is expanding tokenization, a process of replacing a static account number with a secure value called a token, to its co-brand partners such as Kohl's and JCPenney, Banga said. MasterCard will additionally demonstrate its "selfie" mobile security technology during its next investor event in September.

Security is a critically important topic for the card networks because they need to reassure cardholders about the safety of the payment rails now that data breaches are making headlines on a weekly basis, said Julie Conroy, a research director at Aite Group.

The networks are challenged by the need to meet the expectations of merchants and issuers, two different sets of stakeholders with often diverging goals and objectives, she said.

"Security via services like tokenization is one area where both of these groups can align, even though merchants have disagreed or distrusted the network-led approach here," Conroy said. "But with more than 20% of e-commerce now tokenized, it's obviously having an impact."

MasterCard also expects to be ready to handle domestic transactions in China by the end of 2016, Banga said, adding the network is reviewing new guidelines from the Chinese government and is seeking more information on domestic switching rules.

The Chinese government is loosening restrictions on outside payment companies, though it will be a challenge for non-Chinese companies to build a successful payments business.

"We're working on all fronts so we can take advantage of this opportunity as we get further clarity," Banga said.

For the quarter ending June 30, net income fell 1.1% to $921 million, or $0.81 per share; from $931 million, or $0.80 per share, a year earlier. Adjusted earnings were $0.85 per share, matching the estimate of 32 analysts surveyed by Bloomberg. Lower gas prices in the U.S. and a strong dollar were providing headwinds, the card network said.

"Our fundamentals are strong," Banga said. "We have double-digit volume and transaction growth."