Steven Glover

March 20th 2017 | CMS Payments Intelligence

In July 2016, Mastercard was ordered to pay Sainsbury's £69 million plus interest costs in compensation for setting anti-competitive multilateral interchange fees over a period of several years. Here, we look at the key points from this case and discuss the precedent set for other merchants. 

Written by Steven Glover


The Sainsbury's case came as a result of the European Commission's (EC) December 2007 ruling that multilateral interchange fees (MIFs) violate competition laws. This was appealed by MasterCard but, following the General Court's decision to reject in May 2012, 20 of the UK's largest merchants immediately launched proceedings against Visa and/or MasterCard. In July 2015, Tesco settled out of court for £39 million and on 14th July 2016, the UK's Competition Appeal Tribunal (CAT) released its judgement on the Sainsbury's case1 (see Fig. 1).

Sainsbury's case: at a glance

The CAT awarded Sainsbury's damages as follows : 

  • £102,7 million for credit card overcharges, reduced by £33 million due to excess interchange received by Sainsbury's Bank
  • £760,000 for debit card overcharges
  • Compound interest costs on 50% of the overcharge amount - 20% on cash balances and 30% on the cost of borrowing

The CAT rejected the Merchant Indifference Test (MIT) as a realistic interpretation of what would have happened under a bilateral interchange environment. Instead, the baseline used by the CAT was founded on what the CAT thought would have happened in a "counterfactual world" where interchange fees are bilaterally negotiated between merchants and issuers. The rates ultimately decided by the CAT were higher than the MIT rates: 0.5% for credit cards and 0.27% for debit cards. These rates are higher than the recently imposed regulation and, therefore, significantly higher than the fees Sainsbury's pays today. 


Did MasterCard appeal? 

MasterCard did seek permission to appeal the CAT's decision, but such permission was denied. However, MasterCard does have the right to go to the court of Appeal, and we understand that it will. Any appeal would likely delay the timescales for new merchants claims. 


Assessing the claim period


Claims can be made for six years of overcharging for transactions taking place in England, Wales and Northern Ireland, and five years for transactions taking place in Scotland. The claim may be time-sensitive because MIFs were regulated in December 2015, so claim values will be higher in eralier years and, therefore, every day a merchant waits to make a claim could diminish the potential recovery. 


Figure 1: A timeline of critical events

Date Event
Mar 1992 BRC submits interchange fee complaint to
the European Commission
Dec 2007 European Commission prohibits MasterCard’s
intra-EEA Multilateral Interchange Fee
Mar 2008 MasterCard lodges an appeal against the
European Commission’s decision
May 2012 The European General Court upholds the
European Commission’s decision regarding
MasterCard MIFs
Late May 2012 More than 20 UK merchants launch
proceedings against Visa and/or MasterCard
Sep 2014 European Court of Justice judgment confirms
that MasterCard’s inter-bank fees for crossborder
payment transactions in the European
Economic Area (EEA) restrict competition in the
internal market, in breach of EU competition rules
Jul 2015 Tesco announces that it has reached a
£39 million settlement with MasterCard
Dec 2015 Interchange Fee Regulation comes into
force with new interchange caps
Jul 2016 UK Competition Appeal Tribunal
directs MasterCard to pay Sainsbury’s
£69 million plus interest
Nov 2016 Tesco settles out of court with Visa for
undisclosed amount, other merchant
trials commenced
Jan 2017 Commercial Court issues judgment in
favour of MasterCard in Arcadia & Ors
vs. MasterCard

Are claims mage against Visa too?

Many of the UK retailers that entered the proceedings against Mastercard did so against Visa too. Visa's position is slightly different in that the EC's decision was made against MasterCard only, therefore there is no direct follow-on from an existing legal judgement. Additionnally, and importantly, its market share is far higher than MasterCard's in debit cards and lower in credit cards. However, the fundamental similarity is that Visa set MIFs in much the same way as MasterCard. Tesco decided to settle its Visa claim out fo court for an undisclosed sum on 14th November 2016.


Can claims cover transactions processed in other European countries too?

The Sainsbury's ruling is UK-specific but the EC's decision regarding the illegality of cross-border MIFs is EU-wide. Therefore, whilst the causality arguments will vary when this is considered in a case against domestic MIFs in each country, there is reason to believe that such claims can also be successful. The Sainsbury's judgment is an isolated case in the sense that the baselines and, subsequently, the level of compensation are specific. However, there is a similar opportunity across the EU and court cases are ongoing in other EU jursidictions. This is a situation we are monitoring with interest and we will communicate back to our clients with any developments. 


Who are the winners and losers?

Some merchants ans some sectors will stand to receive higher claims than others. Broadly speaking, merchants with particularly high and particularly low average transaction values stand to receive the highest rebates relative to their card volume. Meanwhile, merchants with high volumes of cross-border transactions and refunds are likely to have lower relative claim levels. 

We calculate that if the Sainsbury's baseline were applied across all UK merchants, the total reclaim amount for Visa and MasterCard credit cards could be in excess of £2 billion. The total amount of interchange paid by UK merchants since January 2011 is in excess of £10 billion. 


If a merchant's volume calculations are not robust and do not reflect a thorough understanding of the economics underpinning the baselines, the claim amount realised may be seriously reduced. Or worse, a claim may be unsuccessful. 


How do I calculate how much my claim is worth? 

The calculations are complex and are likely to be scrutinised by the card schemes. There are two areas that will be vulnerable:


Merchants will need to provide evidence of six years' worth of card volumes and interchange costs. However, this is very difficult. While most large merchants in the UK are currently charged using interchange pass-through pricing, this was not the case for most merchants in 2010, whent the claim period is likely to begin. Under a blended pricing structure, merchants do not have direct visibility of interchange costs and so an understanding of acquirer interchange codes and a knowledge of historic interchange fees are required. Most merchants simply do not possess this.

The situation is even more complicated for merchants that have changed acquirer in the past six years, as they will need to develop an understanding of two different interchange report formats. Additionally, in situations where key historic data is not available, merchants will need to estimate backdated volumes and card splits, which is incredibly difficult considering fundamental changes to the UK card base in the past six years. For example, issuance of MasterCard premium cards (World, World Signia/Elite and Rewards) - charging between 1.05% and 1.8% interchange fees - has increased substantially in recent years (see Fig. 2).

Additionally, UK domestic Maestro debit cards have been gradually replaced by Visa debit cards, and contactless volumes have soared. Any backdated volume estimates need to take into account these trends, and others. 


As we have mentioned, the CAT used a cost-plus model to arrive at its baselines of 0.5% for credit cards and 0.27% for debit cards. The credit card calculation was established from a MasterCard issuer cost survey from 2005n and a mark-up based on what they felt Sainsbury's would have negotiated with issuers.

It may be argued that this baseline is not a precedent for other cases because Sainsbury's would have superior negotiating power to almost all other UK merchants as a result of its size. Therefore, merchants that make claims need to be in a position to counteract these objections to ensure that their final settlement amount is not limited. 

If a merchant's volume calculations are not robust and do not reflect a thorough understanding of the economics underpinning the baselines, the claim amount realised may be seriously reduced? Or worse, the claim may be unsuccessful. 

Figure 2: Evolution of Visa and MasterCard Premium Cards since 2010

Visa and Mastercard premium cards since 2010


What do merchants need to do now? 

Merchants who are considering making a claim first need to decide whether the claim is worth pursuing by calculating an estimate for what level of recovery they might expect to receive. 


The Sainsbury's ruling has set a precedent that may open the floodgates for merchants across the UK to look at launching historic claims against both Visa and MasterCard.


Should merchants then wish to proceed with a claim, there are typically steps one can take to protect the liability period, either via a standstill agreement or a stay of proceedings, without the need to litigate immediately. 


The Sainsbury's ruling has set a precedent that may open the floodgates for merchants across the UK to look at launching historic claims against both Visa and MasterCard. The rewards are potentially huge, with a pot of several billion pounds available across the UK merchant community. However, this is not a straightforward process and those merchants which do pursue claims will need to ensure the right legal and economic strategy is employed, together with robust calculations of the fees paid.

Please note: As Payments Intelligence went to press, the groups of merchants including the Arcadia Group were informed by the Commercial Court that their case against MasterCard had been unsuccessful. CMSpi is currently reviewing the judgment and we will be publishing our thoughts in due course. For update on any future judgments, as well as news surrounding interchange, please see the CMSpi website or feel free to conctact us directly.
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