Competition Authority decision of 15 December 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/123/92E ‑ The Eurocheque Committee.

Decision No. 448.

Introduction

1.	Arrangements relating to the Eurocheque scheme involving the four associated banks, collectively known as the Eurocheque Committee (the Committee), were notified to the Competition Authority on 25 September, 1992.  The notification requested a certificate under Section 4(4), or in the event of a refusal by the Authority to grant a certificate, a licence under Section 4(2) of the Competition Act. Notice of intention to take a favourable decision was published on 10 November 1995 and no submissions were received. The Ministers for Finance and Enterprise and Employment were invited to make submissions pursuant to Section 4 (5).

The Facts

(a) The Subject of the Notification

2.	The notification concerns the Rules of the Republic of Ireland Eurocheque Community which consists of the Eurocheque Committee and Eurocheque Ireland Ltd.  The Eurocheque system is a personal payment system specifically designed for cross-border use.  The `Republic of Ireland Eurocheque Community' participates, along with the `Eurocheque Community' in 18 other states, in the Eurocheque system.

(b) The Parties

3.	The Eurocheque Committee consists of Allied Irish Banks plc, The Governor and Company of the Bank of Ireland, National Irish Bank Ltd. and Ulster Bank Ltd., collectively known as the associated banks. The Committee administers the Eurocheque scheme within the State. The members are clearing banks which provide a broad range of retail and wholesale banking services and were traditionally responsible for the money transmission system.  AIB and the Bank of Ireland, are Irish owned institutions.  Ulster Bank is a subsidiary of the UK National Westminster Bank group and National Irish Bank is a subsidiary of the National Australia Bank group.  The Ulster Bank and National Irish Bank are much smaller in terms of size than Bank of Ireland and AIB.  Eurocheque Ireland Ltd is a holding company for shares held by the Irish banks in Eurocheque International S.C. (now Europay International S.A.) and a subsidiary company established to invest in a data communications network, and is the governing body for Eurocheque matters in Ireland.

(c) The Product and the Market

4. The agreement is in respect of the operation of the Eurocheque system in Ireland.  The Eurocheque system is a personal payment system specifically designed for cross-border use.  Participating banks in various European states provide their personal customers with a cheque guarantee card in a common format together with cheques, again in a common format.  These cheques can then be used to make payments and obtain cash up to a set maximum limit in local currency in any state in which the local banks are participants.  The Eurocheque card guarantees payment by the banks in respect of such cheques thus ensuring their widespread acceptability.  Irish banks supply their domestic customers with Eurocheques and guarantee cards for use abroad and accept payments made by overseas visitors using Eurocheques and cards issued by banks in other participating countries.  Eurocheques are drawn on the customer's own current account.

5.  Alternative means exist for making payments when abroad.  Consumers can choose to use cash, credit cards or travellers' cheques.  The latter may be issued by banks or by companies specialising in the provision of foreign currency, e.g. Thomas Cook.  Most consumers would prefer not to carry large amounts of cash when abroad given the risks involved in having it lost or stolen.  Eurocheques, credit cards and travellers' cheques offer greater convenience and security while providing consumers with the added benefit that they can generally be replaced fairly quickly in the event that they are lost or stolen.  Thus these would appear to be relatively close substitutes at least for payments up to the amount of the Eurocheque card guarantee limit.  These are also part of the relevant market.  Eurocheque cards, like credit cards can also be used to withdraw money from bank ATM machines in various European countries.  

6.	Some information on the use of Eurocheques is given below.  The number of guarantee cards issued by Irish banks to consumers in 1994 was 119,000.  The total value of Eurocheques written by Irish consumers was £47m.  According to the CSO expenditure abroad by Irish residents amounted to £835m, although this includes fares paid to foreign carriers.  Visits to Britain and Continental Europe accounted for 93% of all overseas visits by residents.  There were 929,000 credit cards issued in Ireland in 1994.

Table 1:  Eurocheque Statistics
Year	No. of Cards ('000)	No. of Cheques ('000)	Value of Cheques (£m)	
1991	128	522	62	
1992	133	469	43	
1993	123	511	51	
1994	119	434	47	
    	       Source:  Irish Bankers' Federation.

(d) The Arrangements

7.	The notified arrangements involve the rules of the Republic of Ireland Eurocheque Community.  Member banks are required to accept and abide  by:

   (i) The Statutes of the Eurocheque Community;
  (ii) The Eurocheque System guidelines;
 (iii) The Eurocheque Encashment Regulations;
 (iv) The Eurocheque Package Deal Agreement; and 
  (v) The practices and requirements of the national clearing centre as laid down from time to 	time.

8.	The Statutes of the Eurocheque Community and the Eurocheque System guidelines have been replaced by the Eurocheque Operational Rules.  Rule 1.2 provides that there should be a maximum guaranteed amount to be agreed from time to time between the organisations concerned and the Eurocheque Assembly.  Rule 4.1 provides that the Assembly establishes the maximum level of interbank remuneration which may be charged by Eurocheque encashing offices.  The rules also set out regulations for the production of Eurocheque instruments, which provide that inter alia the various stages of production may only be entrusted to firms which have officially signed for acceptance the guidelines for the production of the uniform Eurocheque, the uniform Eurocheque card and for the finishing of both the uniform Eurocheque and Eurocheque guarantee card.  The rules also state that:
`In view of the high quality  and security requirements, the production......may only be entrusted to firms which possess the necessary technical skills, special machinery and effective security and control arrangements as a result of experience with the production of security documents.'

9.	The Encashment Regulations set out standard procedures to be observed when cashing a Eurocheque.  Para 7 provides that Eurocheques must be paid out to the customer in full, without deduction of a commission.  The Eurocheque Package Deal sets out conditions regarding commissions, value dates and the centralised clearing of uniform Eurocheques made out in local currency and their acceptance in the non-banking sector.  It provides that the non-banking sector must be officially opened for the acceptance of uniform Eurocheques and informed of the guarantee conditions.  The commissions charged in respect of Eurocheques are as follows: for small value  cheques up to a threshold of ECU 70 (IR£56) the commission is ECU 1.1 (90p). A maximum commission of 1.6% of the cheque amount is to be charged on all Eurocheques issued in local currency with a maximum commission of ECU 4.8 (IR£4). This commission is not to be deducted by banks at the time of encashment or by retailers upon acceptance of a cheque.  Instead it is paid only at the time of reimbursement.  The Commission is paid by the issuing bank to the encashing bank and is then charged by the issuing banks to their customers.  There is an agreed maximum set for the value of the Eurocheque  guarantee.  This is currently ECU 170 (IR£140). Non-guaranteed Eurocheques may be issued for higher amounts up to a maximum limit of ECU 1,000 (IR£800). 

10.	The Republic of Ireland Rules provide for the allocation of the costs of the system between the member banks.  New entrants are required to pay an entry fee equal to 5% of developments costs of the system up to the date of entry.  Membership of the Eurocheque System in Ireland is open to all credit institutions licensed and regulated by the Central Bank of Ireland, which are authorised by it to provide money transmission services.  A prospective new member must submit confirmation that it has Central Bank approval to provide such services and that it has arranged acceptable facilities for clearing and settlement of customers' cheques.  New members are also expected to achieve a minimum of 5,000 cards within a reasonable time.  

(e) Submissions of the Parties

11.	In support of its request for a certificate the Committee stated that the arrangements were not anti-competitive as they concerned the provision of services for use by customers outside the State.  They also stated that the terms under which members provided the service to their customers was discretionary and that there was therefore a competitive element which was left open to individual members.  Membership was stated to be voluntary and to be open to relevant institutions.  At the time of application, all institutions within the State which provided current account services for personal customers were said to be participants except for the TSB Bank and ACC Bank.  TSB Bank was stated to have decided not to participate, while ACC Bank had not applied.

12.	The Committee argued, in support of its request for a licence, that the arrangements facilitated payments for goods and services internationally in the currency of the country where the goods or services were purchased.  Cardholders benefited from the widespread acceptance of their Eurocheques in approximately 40 countries, and by being able to withdraw currency from ATMs abroad.  Presently the system provides consumers with access to approximately 100,000 ATMs in about 23 countries.  The system was also stated to facilitate payments by visitors to Ireland and thus encouraged tourism.  The rules and conditions which applied to each of the parties were stated to be the minimum necessary to ensure the reliable and economic functioning of a very complex arrangement involving so many different banking and retail markets.

(f) Other information.

13.	The Eurocheque Package Deal Arrangements were notified to the EU Commission.  The Commission decided that the arrangements infringed Article 85(1) but granted them an exemption under Article 85(3).  Specifically the Commission decided that the setting of commission rates for the encashment of guaranteed cheques drawn on foreign banks and the setting of a uniform maximum for the guaranteed amount of cheques were anti-competitive.  

(g) Subsequent developments

14.	The Authority, pursuant to Section 4 (5) of the Competition Act, 1991, invited the Ministers for Finance and Enterprise and Employment to offer observations on the notified arrangements. The Minister for Finance welcomed the notification of the Committee's rules as improving the transparency of the money transmission system and providing an opportunity to establish the competitiveness of the system. The Minister was concerned that the Committee should seek to be as open and accessible as possible to institutions that might wish to provide Eurocheques.  With regard to the rules of operation of the Eurocheque Assembly Rules in the Republic of Ireland, he expressed the view that the thresholds applied for membership, the costs of membership and other provisions should not be prohibitive for institutions wishing to participate.

15.	The Minister for Enterprise and Employment referred the matter to the Director of Consumer Affairs for his comments. The Director stated that his main concern was the best interests of consumers. He maintained, with reference to the setting of a uniform maximum rate, that maximum rates, once set, tended to become the norm and therefore were not in the best interests of consumers. With reference to the Eurocheque Committee's claim that the terms under which they supply the service to their customers 'was discretionary', the Director assumed that this meant they would have some discretion not to charge the full rate of commission. He was of the opinion that it would be prudent to make a check at a future date on the number of times the option was exercised, to ensure that the statement was not meaningless. The Director wondered about the appropriateness of the entry requirements onto the Committee and he considered the 5% of development costs requirements for new entrants as a barrier to entry. While he accepted that new entrants should make a contribution to join the venture, he questioned if 5% was a realistic figure. He further maintained that the expectation of issuing 5,000 cards within a reasonable time (representing 4.2% of the total cards issued in 1994) was vague given the absence of a definition for 'reasonable time'.  The Minister for Enterprise and Employment supported the Director's views.

Assessment

(a) Section 4(1)

16.	Section 4(1) of the Competition Act states that `all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

(b) The Undertakings and the Agreement

17.	Section 3(1) of the Competition Act defines an undertaking as `a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.'  The parties to the present arrangement are the four associated banks.  All of them are corporate bodies engaged in the provision of banking services for gain and are therefore undertakings within the meaning of the Act.  The Rules of the Republic of Ireland Eurocheque Community constitute an agreement between undertakings.  As the Committee is an association of undertakings the rules also constitute a decision by an association of undertakings.

(c) Applicability of Section 4(1)

18.	The arrangements constitute an agreement between various banking institutions regarding the provision of a cheque card guarantee service for personal cheques for use abroad and for the acceptance by them of such cheques issued to their customers by foreign banks.  Such an arrangement is not anti-competitive per se.  The Authority does not believe that it would be practicable for each individual bank to provide such a service to its customers.  There would be widespread difficulties in having any such cheques issued by a single bank recognised and accepted in a such a wide range of other countries. Therefore this does not offend against Section 4 (1) of the Act.

19.	The Authority wishes to make it clear that it does not accept the argument advanced that the arrangements were not anti-competitive because they concerned the provision of services for use by customers outside the State.  The service is provided by the banks to domestic consumers and if there were an arrangement not to compete with one another in the provision of such services this would be contrary to Section 4(1), in the Authority's opinion.
  	
20.	The banks are required to abide by the rules of the Eurocheque system.  These rules provide that banks undertake to use only security producers and finishers licensed by the Eurocheque Assembly for the manufacture of their cheques and cards.  The Authority accepts that this rule is designed for security purposes.  There is no indication that any member has been restricted in its choice of manufacturer as a result of its operation.  Consequently it does not offend against section 4(1).  The Authority has previously decided that such arrangements were not anti-competitive in the context of a national cheque guarantee scheme.

21.	The Rules set an upper limit for the cheque guarantee.  Again the Authority does not believe that such a provision should be deemed anti-competitive.  The Authority believes that the widespread acceptance of Eurocheques in so many countries would not have been possible in the absence of a common limit for the cheque guarantee.  With such a large number of countries and banks involved a system where each bank set its own guarantee limit would prove extremely complex to payees and would reduce the incentive for them to accept such cheques.  The Authority has also previously accepted that the setting of a maxium upper limit for the cheque guarantee was not offensive in the case of a national cheque guarantee scheme.  In addition the development of the Eurocheque system has increased competition since the system provides consumers with an alternative to travellers cheques and credit cards.  The Authority does not believe that such a provision offends against section 4(1).

22.	The Eurocheque rules also set rates of commission to be paid by the issuing banks to foreign banks for the cashing and handling of Eurocheques. The issuing bank then charges this commission to its customers for using Eurocheques.  In effect this involves setting minimum and maximum rates of commission which are ultimately charged to consumers.  The Authority believes that this amounts to a form of price-fixing.  Banks are prevented from charging less than the minimum rate of commission on transactions.  In addition the large numbers of banks involved in the Eurocheque arrangements internationally means that all Irish banks are in practice likely to charge the maximum rate of commission, since, in the absence of negotiating lower rates on an individual basis with a large number of overseas banks, this is the rate of commission which they are required to pay to such banks for the processing of Eurocheques.  In the Authority's view, price fixing clearly restricts competition and is contrary to Section 4(1).  

23.	The Authority does not believe that the requirement that new entrants should pay 5% of the development costs of the system constitutes a barrier to entry. Capital costs do not in themselves constitute a barrier to entry. Rather a barrier to entry is a capital cost which incumbent firms have not had to pay. By definition the development costs have been borne by existing members and the Authority does not consider that new entrants should be granted access free of charge. The requirement is to pay 5% of past development costs of the Irish Eurocheque system which includes the establishment of the national clearing centre and costs related to the development of retailer awareness. Similarly the Authority believes that the requirement that new members issue 5,000 cards within a reasonable time is not anti-competitive. The Authority considers that the requirement is designed to ensure efficient entry rather than create a barrier. This requirement does not offend against Section 4 (1).       

(d)   Applicability of Section 4(2)

24.	Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement which offends against Section 4(1) but which, `having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not ‑
(i)	impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;
(ii)	afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

25.	The Authority believes that the notified arrangements satisfy the requirements for a licence.  It believes that the arrangements have resulted in Eurocheques being widely recognised as an acceptable mechanism for consumers to make purchases when abroad.  The arrangements enable Irish banks to provide their customers with Eurocheques which are widely accepted in many European countries by virtue of the arrangements which guarantee that such cheques will be honoured provided the rules of the system are adhered to.  Customers can also use ATM machines which provide access to their bank accounts while abroad.  The arrangements also facilitate the acceptance by the banks' commercial customers of the Eurocheques of foreign visitors.  The arrangements therefore contribute to the improved provision of services.  Consumers benefit from the widespread acceptance of Eurocheques, the convenience and security which they offer and by being able to use their Eurocheque cards to withdraw local currency from ATMs in a large number of countries.  The Authority agrees with the EU Commission view that variations in commission rates would require a series of bilateral agreements on commission rates between the 15,000 banks which are parties to the scheme.  This would make any centralised clearing system impossible and so such a provision is indispensable. The arrangements do not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the services in question for a number of reasons.  Consumers have the option of using travellers cheques and credit cards.  The latter also provide access to ATM machines.  In addition the value of Eurocheques written is so small relative to total overseas expenditure by Irish residents that it is clear that Eurocheques themselves do not account for a substantial part of the relevant market  (see paras 5 and 6).  The Authority considers that the licence should operate for a period of 10 years. 

The Decision

26.	In the Authority's opinion the associated banks are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements constitute an agreement between undertakings.  The arrangements also constitute a decision by an association of undertakings.  The Authority believes that the Rules of the Republic of Ireland Uniform Eurocheque Community, (CA/123/92E), notified on 25 September 1992 under section 7, and as subsequently amended, offend against Section 4(1) of the Competition Act since they involve agreement on rates of commission charged by the banks in respect of Eurocheques.  The Authority believes that the arrangements satisfy the requirements for a licence as specified in Section 4(2).  It believes that a licence should therefore be granted for a period of 10 years, that is from 15 December 1995 to 14 December 2005.

The Licence

27.	The Competition Authority has granted the following licence:

The Competition Authority hereby grants a licence to the Rules of the Republic of Ireland Uniform Eurocheque Community, (CA/123/92E), notified on 25 September 1992 under section 7, and as subsequently amended in January 1994, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Competition Act, have been fulfilled.  The licence  applies from 15 December 1995 to 14 December 2005.

For the Competition Authority

Patrick Massey
Member
15 December 1995.