Final European Commission verdict on competition in EU retail banking

On 31 January 2007, the European Commission gave its verdict that there are major competition barriers in retail banking in the EU. The Commission intends to tackle these barriers by using its competition enforcement powers, meaning opening separate investigations into particular cases.

The Commission has found that many EU Member States’ retail banking sectors are highly concentrated and may enable incumbent banks to restrict new entry and charge high fees. High and sustained profitability in the retail banking sector, particularly in card issuing, has also been noted as suggesting that banks in some Member States enjoy significant market power and could impose high fees on consumers.

While it has not indicated specific targets for investigation, the Commission has confirmed its areas of particular interest, in which enforcement action may be anticipated. These include:

• Payment card fees - both merchant fees and interchange fees have been found to vary widely across the EU. Such fragmented markets demonstrate low levels of competition at the EU level;
• Barriers and discriminatory rules in payment cards and payments systems markets - blending of merchant fees is particularly criticised as distorting price signals to retailers and discouraging price competition between networks;
• Some aspects of co-operation between banks;
• Product tying - this is widespread and the Commission has stated that when practised by banks holding a dominant position, this may infringe competition law;
• Use of some credit registers - these may be used to exclude new entrants to retail banking markets;

The Commission has also drawn attention to obstacles to customer switching. Its inquiry suggests that banks’ profit margins are lower where customers are more mobile.

Players in the retail banking sector should take note of the Commission’s concerns and consider the extent to which they may wish to review their business practices and models in the light of the Commission’s expressed views. The Commission specifically notes that some market participants have already offered voluntary reforms.