JFTC market study report on credit card transactions suggests standard interchange fee rates be disclosed

On April 8, 2022, the Japan Fair Trade Commission ("JFTC") published the Market Survey Report on Credit Card Transactions ("Report").¹ The JFTC conducted a survey on credit card transactions in order to ascertain disclosure of standard interchange fee rates and to determine whether there are any competition policy issues in the credit card market.

In recent years, the majority of cashless payments in Japan have been made by credit card, and credit card payments are on the rise. The Government of Japan has had a policy of further increasing the ratio of cashless payments. Previously, the JFTC conducted a market survey and issued the report on credit card transactions in March 2019.²

Further, the "Growth Strategy Action Plan," a cabinet decision made on June 18, 2021, indicates that one of the challenges to expanding cashless payments in Japan is the high credit card merchant fees (i.e., fees paid to an acquirer by a merchant). It states that interchange fees (i.e., fees paid by merchant's settlement company to credit card holder's settlement company) account for approximately 70 percent of merchant fees. In light of these points, it was decided that the JFTC conduct a market survey.

In addition, "The Urgent Proposal – 'New Capitalism' for the Future and its Launch," proposed by the Kishida Administration on November 8, 2021 ("Proposal")³ suggested the JFTC conduct a survey that would include the issue of disclosure of standard interchange fee rates, and publish the survey result by the end of FY2021 (i.e., March 2022). Accordingly, the JFTC started a survey from July 2021 and published the Report on April 8, 2022.

There are two types of international brands⁴: those that do not issue cards or manage merchants themselves ("Category I") and those that issue cards and manage merchants themselves ("Category II").

According to the JFTC's survey, Category I international brands set "standard interchange fee rates." Interchange fees are issuer fees (i.e., fees paid to an issuer by an acquirer) that are incurred on Category I interchange transactions (i.e., transactions where an issuer and an acquirer are different credit card companies). The standard interchange fee rate is a default rate that is applied when an issuer or an acquirer does not individually set an interchange fee rate. Under a license agreement, it is possible to determine an interchange fee between the Category I international brand and a credit card company on an individual basis rather than applying a standard rate, but in reality this has not been done. In practice, a standard interchange fee rate is applied for all credit card companies.

On the other hand, Category II international brands decide an issuer fee rate with each individual issuer. Therefore, the issuer fee rate may vary for each individual issuer.

The Report provides JFTC's views on the Anti-Monopoly Act ("AMA") and competition policy with regard to (i) disclosure of standard interchange fee rates and promotion of competition in the merchant management market, (ii) the non-surcharge clause and no-cash discount clause, (iii) the non-steering clause, (iv) the unilateral revision of contract, and (v) the cost burden associated with mandatory installation of contactless payment methods and compatible terminals, in addition to its overview of the competitive environment in the credit card market. Below are the main views presented in the Report:

Disclosure of standard interchange fee rates and promotion of competition in the merchant management market

According to the JFTC's survey, none of the standard interchange fee rates are disclosed in Japan. In more than 60 countries, standard interchange fee rates for one or more of the Category I international brands are disclosed. Standard interchange fee rates are disclosed in some countries, such as the United States, where there are no regulations requiring disclosure. On the other hand, the JFTC didn't find any country where an issuer rate for a Category II international brand is disclosed, including in Japan.

The Report indicates that disclosure of standard interchange fee rates for Category I international brands is expected to facilitate (a) merchant fee negotiations between merchants and acquirers and (b) competition among acquirers in the merchant management market for credit cards as well as non-credit card payment methods. Therefore, the JFTC recommends that standard interchange fee rates be disclosed.

The survey results show that the merchant fees for Category II are higher than those for Category I. One of the reasons for this could be that there may be no or less competition among acquirers for attracting merchants in Category II transactions. The Report indicates that it would be desirable for Category II international brands to inform their franchisees (i.e., credit card companies that have a franchise agreement with a Category II international brand) that competition for attracting merchants is not restricted, and such competition should be vigorous to the extent possible.

Non-surcharge clause and no-cash discount clause

A "surcharge" is a charge by a merchant to a cardholder that is higher than the price of a product, such as a fee that is all or part of the merchant fee on the top of the product price. According to the survey, all of five international brands and approximately 88.3 percent of the credit card companies have a non-surcharge clause. 

"Cash discount" means that a merchant charging a customer who pays in cash a price that is lower than the price of the product charged to a credit card user, such as a fixed percentage or a fixed amount discounted from the price of the product charged to a credit card user. Three out of five international brands and approximately half of credit card companies have a no-cash discount clause.

The Report indicates that it may violate the AMA as a Trading on Restrictive Terms (Article 12 of the Designation of Unfair Trade Practices)⁵ when an international brand uniformly prohibits merchants from setting different rates for the same product for credit card users and cash users and when such conduct is likely to reduce competition attracting for customers among merchants. The same is true in the case where a credit card company (including an international brand as an acquirer) prohibits the practice.

Non-steering clause

"Steering" means that when a cardholder presents a valid credit card, a merchant asks or encourages the cardholder to use another payment method, such as another company's issued credit card or cash. According to the survey, three out of five international brands have a non-steering clause, and approximately 81.8 percent of credit card companies have a non-steering clause.

The Report recognizes that steering prohibitions by merchants of international brands and credit card companies have the effect of protecting cardholders' interests (ensuring acceptance of their preferred payment method.) However, there is a risk of violating the AMA as a Trading on Restrictive Terms⁶ when a leading international brand in the licensing market prohibits merchants from steering⁷ and such conduct would exclude other payment method providers. The same is true for prohibitions by leading credit card companies in the merchant management market.

Unilateral revision of contract

According to the survey, approximately 49.5 percent of credit card companies indicated that the international brands had made unilateral revisions to their contracts. Disadvantages to credit card companies from unilateral contract revisions include (i) an increase in the rate or amount of fees, (ii) an introduction of fees that did not exist when a contract was executed, and (iii) expenses and time required for system maintenance.

The Report mentions that two out of five international brands have a comprehensive consent clause in a license agreement with credit card companies. Three out of five (two of which have a comprehensive consent clause) have experienced revised contracts without obtaining individual consent from credit card companies.

The Report indicates that it would become an abuse of superior bargaining position⁸ when an international brand in a superior bargaining position disadvantages credit card companies by unilaterally revising its contract without fully considering the opinions of the credit card companies. According to the Report, whether an international brand is in a superior bargaining position to a credit card company cannot be judged in general because it differs depending on the individual transaction environment, but international brands with more than 20 percent market share are highly likely to be in a superior bargaining position.

It would be desirable from the viewpoint of preventing any violation of the AMA that international brands provide sufficient explanation of the reasons for revising contracts with evidence. In addition, it would be desirable to consider the opinions of credit card companies as much as possible when a credit card company provides comments regarding the revision of the contract.

Cost burden associated with mandatory installation of contactless payment methods and compatible terminals

Based on the survey, approximately 70.7 percent of credit card companies have received a notice from an international brand that they must or will be required to install contactless payment methods provided by the international brand, either directly or indirectly. Approximately 38.6 percent of credit card companies responded that they didn't think the increased costs of installing contactless payment methods were commensurate with the benefits to the credit card companies and will not be commensurate in the future either.

One of the five international brands requires credit companies to install contactless payment methods, and two international brands do not currently require it, but have plans to do so in the future. The remaining two international brands have no plans to do so.

An international brand that requests that credit card companies install a contactless payment method provided by the international brand or have merchants introduce a terminal corresponding to the contactless payment method itself would not always be an issue under the AMA. However, when an international brand in a superior bargaining position causes a disadvantage to credit card companies by, for example, making credit companies bear all of the costs incurred by the installation of a contactless payment method, it would constitute an abuse of superior bargaining position. As mentioned above, international brands with more than 20 percent market share are highly likely to be in a superior bargaining position.

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The JFTC will continue to closely monitor developments in the credit card market. Particularly after interchange standard rates are disclosed by Category I international brands, the JFTC will pay close attention to trends in issuer fee rates, and will take strict enforcement against any violation of the AMA when it is found.

_{1 The JFTC press release of April 8, 2022 is available in Japanese; the Report is available in Japanese; 18-page overview is available in Japanese; two-page summary is available in Japanese.
2 The JFTC press release of March 13, 2019, is available in English; the report is available in English; a summary of the report is available in English. 
3 Please see our previous Client Alert, "New Capitalism in the Kishida Administration and Competition Policy in Japan" (December 2021); the Proposal is available in Japanese.
4 An international brand is defined as an entity that provides brand rules, payment networks, etc., for internationally used credit cards. The Report refers to the "Guidelines for credit card merchant agreements" (July 3, 2017) prepared by the Ministry of Economy, Trade and Industry ("METI").
5 JFTC's English translation of the Designation of Unfair Trade Practices is available. 
6 Article 12 of the Designation of Unfair Trade Practices.
7 For example, an international brand prohibits merchants from offering cardholders the use of other payment methods that benefit both cardholder and merchants.
8 Article 2, Paragraph 9, Item 5 of the AMA.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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