[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 31.1.2007

SEC(2007) 106

COMMISSION STAFF WORKING DOCUMENT Accompanying the

COMMUNICATION FROM THE COMMISSION Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report) {COM(2007) 33 final}

DG Competition Report on

Retail Banking Sector Inquiry

TABLE OF CONTENTS

Introduction 6

The importance of the retail banking sector in Europe 6

The Commission’s sector inquiry into retail banking 7

The methodology of the sector inquiry 7

Format of the report 8

Part A: Competition in the market for current accounts and related services 10

A.1. Market characteristics of retail banking in Europe 11

A.1.1. Supply side characteristics of retail banking markets 11

A.1.2. Demand side characteristics of retail banking markets 14

A.1.3. Differing distribution models for retail banking products 14

A.1.4. Regulation of retail banking 15

A.2. Market structures and financial performance in retail banking 18

A.2.1. Market concentration and integration in retail banking 18

A.2.2. Financial performance of the retail banking sector 22

A.3. Credit registers and banking competition 29

A.3.1. Economics of credit data markets and credit registers 29

A.3.2. Markets for credit information in the Member States 30

A.3.3. Potential competition issues 38

A.3.4. Conclusions 45

A.4. Cooperation 48

A.4.1. Scope of the inquiry's analysis of cooperation 48

A.4.2. Co-operative banks 49

A.4.3. Savings banks 52

A.4.4. Competition issues raised by cooperation among banks 55

A.4.5. Conclusions 59

A.5. Setting of policies and prices 61

A.5.1. Banks' practice of product tying 61

A.5.2. Setting of prices on current accounts 71

A.5.4. Conclusions 80

A.6. Customer choice and mobility 82

A.6.1. Relationship between customer mobility and competition 82

A.6.2. Switching costs in retail banking 84

A.6.3. The sector inquiry’s evidence on customer mobility in retail banking 89

A.6.4. Empirical relationship between customer mobility and market performance 94

A.6.5. Conclusions 98

Part B: Competition in the market for payment cards and payment systems 101

B.1 Introduction 102

B.1.1. Cashless payments in the EU 102

B.1.2. Creating a single market for payment services 104

B.1.3. Organisation of POS Card Payment Systems 105

B.1.4. Fees paid in a POS card payment system 107

B.1.5. The inquiry’s data and methodology on payment cards 107

B.2. Market concentration and integration 110

B.2.1. Concentration in acquiring and issuing markets 110

B.2.2. The relationship between market concentration and merchant fees 114

B.2.3. Integration of card Payment Systems 114

B.2.4. Competition issues 118

B.2.5. Conclusions 120

B.3. Cardholder fees 121

B.3.1. Credit cards 122

B.3.2. Debit cards 124

B.3.3. Correlation between cardholder and interchange fees 125

B.3.4. Conclusions 126

B.4. Merchant fees 128

B.4.1. MSCs for Visa and MasterCard credit cards 129

B.4.2. MSCs for debit cards 130

B.4.3. The effect of blending and surcharges on the setting of MSCs 132

B.4.4. Conclusions 134

B.5. Interchange Fees 136

B.5.1. Types of interchange fee applied in international networks 136

B.5.2. Credit card interchange fees in international networks 137

B.5.3. Debit card interchange fees 139

B.5.4. Industry and academic views on the role of interchange fees 142

B.5.5. Competition issues arising from interchange fees 143

B.5.6. Conclusions 144

B.6. Profitability of the payment cards industry 146

B.6.1. Methodology for the inquiry’s profitability analysis 146

B.6.2. The profitability of credit card business 147

B.6.3. Profitability of debit card business 152

B.6.4. Findings on profitability in the payment cards industry 155

B.6.5. Conclusions 157

B.7. Free funding periods for payment card transactions 159

B.7.1. Main parameters affecting funding periods for card transactions 159

B.7.2. Analysis of free funding period and net float per card brand 160

B.7.3. Analysis of free funding period and net float in the Member States 161

B.7.4. Conclusions 164

B.8. Membership and governance rules 165

B.8.1. Membership conditions in payment card networks 165

B.8.2. Network joining fees 167

B.8.3. Governance in Card Payment Systems 168

B.8.4. Conclusions 171

B.9. Cross-border Competition in Acquiring 172

B.9.1. Merchants acquired cross-border 172

B.9.2. Conclusions 174

B.10. Payment infrastructures 176

B.10.1. The typical operation of payment infrastructures 176

B.10.2. Methodology and scope of the inquiry into payment infrastructures 178

B.10.3. Main features of surveyed payment systems 180

B.10.4. Ownership and management of payment infrastructures 181

B.10.5. Access issues 181

B.10.6. Fees charged to users 182

B.10.7. Competition analysis 185

B.10.8. The European context: towards a Single Euro Payments Area 188

B.10.9. Conclusions 189

B.11. Multilaterally agreed interchange fees for ATMs and for non-card payments 191

B.11.1. Interchange fees for ATM withdrawals 191

B.11.2. Multilateral interchange fees for other non-card payments 192

B.11.3. Conclusions 195

Part C: Conclusions and possible next steps 197

C.1. Conclusions and possible next steps 198

C.1.1. Findings on retail banking market structure and performance 198

C.1.2. Findings and recommendations on current accounts and related services 199

C.1.3. Findings and recommendations on payment cards and payment systems 203

Glossary 209

Introduction

Competitive financial services markets that serve European consumers and businesses efficiently contribute to economic growth and, therefore, to the achievement of the Lisbon goals. Against this background the Commission in June 2005 decided to open sector inquiries into two important areas of the financial services sector: retail banking and business insurance.

The instrument of sector inquiries has its legal basis in Article 17 (1) of Regulation 1/2003, according to which the Commission may conduct an inquiry into a particular sector of the economy or into particular types of agreements across various sectors, where the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market. Sector inquiries represent an important element in the Commission’s modernised approach to competition policy which abolished the notification system and opted for a more pro-active antitrust practice.

In December 2005, following extensive consultation with stakeholders, the Commission set out its future strategy on financial services in the White Paper Financial services policy 2005-2010 [1]. The retail banking sector inquiry makes an important contribution to this strategy , which identified as priorities the extension of better regulation principles into all policy making and the strengthening of competition among providers, particularly in retail business.

To underpin the development of a single market for financial services and harness the full potential benefits of the Euro, the European banking industry is creating a Single Euro Payment Area (SEPA). The Commission as well as the European Central Bank strongly support[2] and are working closely with industry on the development of SEPA.

The importance of the retail banking sector in Europe

Despite growth and diversification in the financial services sector, retail banking – banking services to consumers and small firms – remains the most important sub-sector of banking, representing over 50% of total banking activity in Western Europe[3]. The Commission estimates that in 2004 retail banking activity in the European Union generated gross income of €250-275 billion, equivalent to approximately 2% of total EU GDP. As a whole the banking sector in the European Union directly provides over three million jobs.

In essence retail banks[4] provide three basic services to consumers and small businesses: saving; borrowing; and payment services. Retail banking is carried out by a wide range of providers. These range from small banks that supply only retail services to medium-sized or very large banks that may operate in a range of banking activities (e.g. private or corporate banking).

The European payment cards industry is large and provides the means for a significant part of retail sales in Europe. Total sales volumes with point-of-sale card transactions in the EU in 2005 were more than €1350 billion. It is estimated that businesses in the EU paid more than €2 billion in fees in 2005.

The SEPA project aims to create an integrated market for payment services which is subject to effective competition and where there will be no distinction between cross-border and national payments within the euro area. This should make cross-border payments as easy and affordable as domestic payments. Successful implementation of the SEPA project could save the EU economy between €50 and €100 billion per year.[5]

The Commission’s sector inquiry into retail banking

In its sector inquiry the Commission has examined two complementary aspects of retail banking: firstly, the markets for payment cards and payment systems; and secondly, the markets for current accounts and related services. The detailed analysis and findings from both parts of the inquiry are presented together in this technical annex. The key findings of the report and recommendations are contained in the Final Report of the sector inquiry, which the Commission presents as a Communication to the Council and the European Parliament.

In line with their original objectives, the sector inquiries have identified competition concerns that may require investigation and remedy under the European competition rules. The Commission intends to provide a sound basis for a coherent approach to antitrust practice carried out by the National Competition Authorities (NCAs) and the Commission. Should there be evidence, after further investigation, that particular practices or arrangements violate EC or national competition law in an individual case, these practices or arrangements can be addressed by individual antitrust action.

In addition, the findings of the inquiry into retail banking, and in particular payment card systems, will provide valuable evidence to inform the future development of the SEPA project. In particular the enquiries aim to show how differing forms of organisation, structure and governance of payment systems in the EU can produce differing competitive outcomes. The evidence gathered for the enquiry suggests that the characteristics of some payment systems lead to significantly higher prices for firms and consumers in some Member States. As work continues to develop the appropriate principles and structures to support SEPA and its Payment Cards Framework (PCF), significant consideration should be given to the findings of the Commission’s retail banking enquiry.

The methodology of the sector inquiry

The core of the evidence base for the retail banking sector inquiry is provided by detailed pan-European market surveys of: (i) issuing and acquiring banks in the payment cards market; and (ii) banks providing retail banking services to consumers and small and medium enterprises (SMEs). Both of these market surveys were based on a large, statistically robust sample of around 250 banks, relating to their activities from 2000 onwards. The methodologies for the market surveys firstly on payment cards and payment systems and secondly on current accounts and related services, are described in detail in Chapter 3 of Interim Report I and Chapter 1 of Interim Report II of the sector inquiry.

Specifically in relation to payment systems, the Commission also conducted extensive market surveys of clearing and settlement (retail payment) systems and payment card networks throughout the EU25. The inquiries therefore provide a full and up-to-date overview of the structure of national and pan-European payment systems, and the potential competition issues arising from their operations.

In addition to the considerable evidence gathered on retail banking providers and payment systems, the Commission has examined the roles of several other important players in retail banking. Specifically in the course of the sector inquiry the Commission has gathered information from bank associations, banking regulators, national central banks and credit registers. The Commission looked into the practice of national competition authorities (NCAs) with the help of an inquiry organised by the NCAs. The Commission has also taken account of the views of consumers and small business through surveys of the relevant national associations and official sources such as the Eurobarometer surveys.

Finally, public discussion and consultation have played an important role in shaping the findings and recommendations of the retail banking sector inquiry. The first interim report of the inquiry, on payment cards and payments systems, was published in April 2006 and subject to a ten week public consultation. The second interim report, on current accounts and related services, was published in July 2006 and subject to a twelve week public consultation. A public hearing was held in July 2006 to present the preliminary findings of the inquiry and discuss them with market participants. These public consultation exercises produced extensive and valuable feedback for the Commission reflected in the Final Report of the sector inquiry. Non-confidential comments as well as a summary of the public feedback are published on DG COMP's website.[6]

Format of the report

The technical annex to the Final Report of the retail banking sector inquiry is structured as follows:

- Part A sets out the main findings and analysis concerning the market for current accounts and related services;

- Part B sets out the main findings and analysis concerning the market for payment cards and payment systems; and

- Part C summarises the inquiry's conclusions and possible next steps.

Part A: Competition in the market for current accounts and related services

A.1. Market characteristics of retail banking in Europe

This section of the report discusses the markets for current accounts and related services in the European Union; the bulk of core retail banking business. The central retail product of the current account is used as the starting point for the competition analysis here, and the scope is extended to consider other core retail banking products supplied to consumers and SMEs. These related products include credit products such as mortgages and loans to consumers and SMEs; and savings products such as deposit accounts.

The inquiry has found that the retail banking sector in the European Union remains largely fragmented along national lines and integration is far from complete. How far the economics of retail banking in the EU will lead to full integration remains an open question. There is evidence of integration and converging performance at the regional level, for example in the Benelux and Nordic countries. Overall, however, retail banking markets in the EU Member States display several common characteristics. This chapter surveys the principal characteristics of these banking markets, discussing:

- supply side characteristics of retail banking markets;

- demand side characteristics of retail banking markets;

- differing distribution models for retail banking products; and

- regulation of retail banking.

The following chapter summarises the sector inquiry’s findings on market structures and financial performance in retail banking.

A.1.1. Supply side characteristics of retail banking markets

Market structures differ considerably among Member States. This applies to the degree of market concentration as well as to the identity of leading players. Though concentration can be described as modest in most Member States, some countries such as Belgium, the Netherlands, Finland and Sweden have significantly higher concentration ratios. Retail banking in the Benelux and Nordic countries is also characterised by significantly more cross border activity and, consequently, a higher degree of market integration. Other countries such as Germany or Spain are dominated by savings or co-operative banks with a strong regional focus. Subsidiaries of foreign banks have a major market presence predominantly in the new Member States.

Fragmented market infrastructures

Some basic aspects of the infrastructure for European retail banking remain fragmented, which in turn entrenches the current fragmentation of product markets. Relevant aspects of market infrastructure are clearing and settlement (payment systems) and credit registers; and legal infrastructure such as tax policies, regulation and consumer protection regimes.

In relation to market infrastructure, firstly t he organisation and management of payment infrastructures varies significantly from country to country. Whereas payment systems are run by central banks on a non-profit basis in some Member States, others are operated by joint ventures of banks in various forms. Consequently, access conditions and fee structures differ considerably, and widespread entry barriers remain (discussed below in part B). However, the advent of SEPA should enable a fully integrated EU market for retail payment services. Secondly, there are major differences in the market structure and operation of credit registers across the EU (discussed below in chapter A.3). This fragmentation has consequences for the volume and type of customer data that is available to credit providers and for the ability of credit providers to access registers, especially in other Member States.

In relation to legal infrastructure, tax policies on company earnings, VAT treatment and capital gains vary between Member States. These varying tax regimes clearly influence the investment decisions of banks (for example on whether and how to enter new markets) and the consumption, saving and borrowing decisions of retail banking customers. Banking regulation is discussed below in more detail. It is worth noting here that while prudential rules have been largely harmonised at European level, significant differences remain in areas such as the ownership structures and the geographic scope of certain banks. Lastly, consumer protection rules for retail banking still vary considerably across the Member States, which raises the cost of entering new markets and maintains market fragmentation.

Traditionally high level of cooperation

Widespread cooperation between market participants is a common characteristic of retail banking markets. Banks co-operate in a variety of areas, including the interconnection and operation of payment systems; ownership or membership of credit registers; and the joint development/promotion of new products and services. As the inquiry shows, such co-operative activities of banks can provide a means for limiting competition. This can materialise in restricted access to networks and systems, discriminatory fee structures or in higher fees for consumers.

Multi-market contacts

Retail banks normally offer a wide range of products, so that the industry is not only characterised by networks and cooperation, but also by multi-market contacts of suppliers. Though some suppliers are specialised and only offer one product or a very limited range of products (e.g. mortgages or online current account services), the major players normally offer the full range of retail products. In theory multi-market contacts may induce collusion because retaliation against cheating firms can take place on all shared markets[7]. However, whether or not multi-market contacts may facilitate co-ordinated behaviour in retail banking markets can only be established on a case-by-case basis.

Varying degrees of price transparency

The literature on retail banking cites examples where prices for particular products are transparent and relatively easy to compare.[8] This typically applies to products such as deposits or mortgages, where the interest rate is a good proxy for the ‘price’ (though some significant charges or fees may apply to mortgages). However, there are several products where prices are clearly not very transparent; for example, current accounts. The effective price charged by banks for providing current accounts may be reflected in the interest rates and fees applied to the account, and also in the level of charges for payment services. Thus it may be hard for consumers and SMEs to assess the effective ‘price’ of a particular current account, and harder still to compare products across several suppliers with differentiated products.

Significant barriers to entry

Some characteristics of retail banking markets such as economies of scale, the importance of a local branch network, limited innovation and obstacles to customer mobility can function as entry barriers. Several comments submitted by banks in the context of the public consultation stated that entry mainly occurs by means of acquiring an existing customer base with a branch network and possibly an established brand.

Prudential rules and supervision can be used to hinder entry, for instance, takeovers, mergers or entry by foreign banks.[9] In addition, regulation in some EU countries restricts entry, mergers or takeovers concerning certain types of credit institutions (e.g. savings banks). Other entry barriers result from market structures and the conduct of participants, particularly with respect to cooperation agreements and the functioning of networks such as payments systems or credit bureaus. In the context of networks natural, regulatory and behavioural barriers can be distinguished. Whereas natural barriers are the result of the ‘inherent’ economies of scale of networks such as payment systems, access to networks may be also rendered difficult by artificial barriers such as regulatory provisions or incumbents’ behaviour. Fee structures that disadvantage smaller banks or newcomers may be the result of natural or artificial barriers.

A.1.2. Demand side characteristics of retail banking markets

The demand side characteristics, of retail banking can result in less efficient market performance. Such inefficiencies arise from two principal factors: firstly, information asymmetry, where banking consumers lack full information, reduces the intensity of price competition; and secondly, high switching costs, where the level of informational and transactional costs of changing some banking products (notably current accounts), discourage consumers from leaving their current provider. The combination of these two factors tends to reduce the mobility of customers in the market for products such as current accounts. Levels of mobility may also be artificially reduced by some banks’ practices, such as the tying of retail banking products and the imposition of high exit fees (discussed in chapter A.5).

The inquiry’s data suggests that in the majority of Member States annual switching rates for current accounts are low and stable at 5 to 10 per cent per year.[10] This suggests that the overall effects of information asymmetry and switching costs (whether intrinsic or artificial) are fairly similar across the EU, notwithstanding some differences between Member States. This observed low level of customer mobility has important consequences for the operation of retail banking markets in the EU and the intensity of competition because it seems to render market entry difficult For example, it is a common industry view that, for full service retail banking, ‘greenfield’ entry into other Member State markets tends to be more risky and less successful than entry through merger and acquisition. Among other factors, low customer mobility appears to be one explanation. Since retail banking customers are relatively immobile it is difficult for a greenfield operation to win large numbers of customers through price competition and thus acquire significant scale in a commercially viable time-frame.

A.1.3. Differing distribution models for retail banking products

Distribution models for retail banking products vary to some degree across Member States. The branch network remains the primary channel, although is increasingly complemented or substituted by other channels including internet and telephone. Distribution models also vary according to the product or products being sold. Banks also increasingly enter specific product markets, such as credit cards and deposit accounts, particularly when going cross-border. This approach can eliminate the need for a branch network and enable all operations to be carried out via internet or phone, significantly reducing costs.

However, for ‘full service’[11] retail banking a branch network remains vital since customers typically want and need face-to-face contact with bank staff to discuss their finances. As banks confirmed in their responses to the sector inquiry, a widespread branch network remains a critical factor in expansion and accruing significant market share in full service retail banking.[12] Large domestic players have an inherent advantage over smaller players through their branch operations. This does not necessarily mean there are competition problems in the market. However it does mean that over the medium term, existing branch networks will help to set an upper-bound on the market share of smaller players.

A.1.4. Regulation of retail banking

There has been growing emphasis on strengthening competition in the retail banking sector. National competition authorities (NCAs) are becoming increasingly active in the retail banking sector, launching competition investigations. These investigations have in certain countries helped to develop a broad policy agenda for public authorities and the banking industry to take forward. In addition, special exclusions for the banking sector from full antitrust law have been removed in most Member States. A second important change at Member State level is the shift in institutional competence for national merger approval in banking. Scrutiny has generally moved from regulators and central banks to competition authorities.[13]

Alongside the increasing scope of antitrust enforcement over the banking sector in Europe, regulators at Member State and EU level increasingly encourage self-regulation to deliver efficient market outcomes. In its White Paper, Financial services policy 2005-2010 , the European Commission emphasised the use of efficient alternatives to legislation, including greater use of competition enforcement and more reliance on self-regulation, where appropriate and proportionate.

The literature increasingly shows that competition can not be viewed as in any way inconsistent with banking sector stability.[14] Against a background of increasing stability and more effective supervision[15] in the banking sector, the emphasis of policy in the European Union and other advanced economies is quite rightly on increasing competition. The Commission encourages Member State authorities to ensure that competition policy applies fully to the banking sector and to ensure that the policy environment is favourable to tough competition.

There is an important tension in the regulatory framework for retail banking. On the one hand, governments will wish to see strong competition driving an efficient, innovative banking sector to deliver value for consumers and businesses. On the other hand, regulation of the banking sector – especially pro-competitive regulation – requires expert sectoral knowledge. This knowledge is likely to be deepest with the banking regulator. Therefore an institutional framework is required which creates incentives for the competition authority and banking regulators to cooperate and for banking regulators to promote competition.

The sector inquiry's Interim Report II noted that while the scope of direct state intervention in the retail banking sector has narrowed, governments continue to intervene in the banking sector through other means. Member States have an obligation to abstain from measures that have the potential to distort competition in the common market and deprive Articles 81 and 82 EC of their effects by, for example requiring or reinforcing anticompetitive behaviour or by delegating regulatory powers (Article 3(1)(g) EC, Article 10(2) EC applied in conjunction with and Articles 81 EC or 82 EC). Similarly, in the case of public or privileged companies, the Commission has to ensure that Member States do not enact or maintain in force state measures that reinforce or lead these companies to engage in anticompetitive behaviour (Article 86(1) applied in conjunction with Articles 81 EC or 82 EC).

The Commission scrutinises advantages provided to certain financial institutions by means of State aid control in order to ensure a level playing field for all market participants and to enhance undistorted competition (Articles 87 to 89 EC). In particular, the Commission ensures that public and private institutions operate under similar conditions by removing unlimited state guarantees or fiscal advantages favouring particular banks; and by applying the so-called market economy investor test (MEIP). One of the most significant distortions results from tax preferences conferred on a limited number of banks for distributing savings products. From a competition viewpoint the Commission is particularly concerned about discriminatory fiscal privileges which favour specific banks.[16]

Finally, compared to other sectors in the EU the incidence of cross-border mergers and acquisitions (M&A) in banking remains fairly low. Empirical evidence suggests that on balance foreign bank entry tends to enhance consumer welfare. A range of policy measures could help provide a more supportive environment for cross-border M&A, including more streamlined and effective banking supervision, and the removal of obstacles to corporate expansion and reorganisation on a pan-European basis.

Structure of Part A of the technical annex

The analysis of markets for current accounts and related services is structured as follows:

- chapter 2 examines market structures and the financial performance of the European retail banking sector.

- chapter 3 discusses the competition issues in EU retail banking arising from credit registers;

- chapter 4 discusses cooperation among banking associations and special groups of banks;

- chapter 5 examines the setting of banks’ prices and policies, particularly for current accounts; and

- chapter 6 examines customer mobility and choice in retail banking.

A.2. Market structures and financial performance in retail banking

As discussed in the opening chapter, the retail banking sector is large and important for the long-term performance of the European economy. Based on the evidence of the market survey, the Commission estimates that retail banking generates gross income of between 250-275 € billion[17] in 2004; equivalent to around 2% of EU GDP. Of this total, the vast majority of activity is captured under the heading of ‘current accounts and related services’, the subject of this part of the technical annex.

This chapter is structured as follows:

- Section 1 examines market concentration and integration in retail banking; and

- Section 2 surveys the financial performance of the retail banking sector.

A.2.1. Market concentration and integration in retail banking

The Commission has estimated concentration ratios of European retail banking at national level.[18] The estimates were based on data given by roughly 250 retail banks in the EU25. This sample approach – despite high coverage rates with respect to individual responses and countries – implied that the calculated individual intra-sample shares of certain volume indicators such as retail income had to be extrapolated with the help of external data in order not to overestimate individual 'market shares' (for details see Interim Report II, chapter 2 and 4). The possibility of over- or underestimations, however, could not be fully excluded due to data limitations.

The Commission decided to publish its estimates despite such limitations because they help add to the limited stock of data on retail banking concentration in the EU. Most concentration measures are based on total bank assets (not on retail activity indicators) and individual credit institutions (not on group consolidated data). In view of respective remarks in the public consultation, it has to be repeated, however, that the inquiry's concentration data must be interpreted with care. They are estimates that serve illustration purposes. They do not replace a proper antitrust or merger case analysis including the required definition of relevant markets, a complete coverage of these markets and subsequent calculation of market shares.

The Commission used several indicators – total retail income, income on current accounts and number of current accounts – to estimate market concentration and to cross-check results (for details see chapter 4 of Interim Report II). In general, taking all three measurements into account the average CR3 ratio across all EU25 countries (weighted by Member State population) is around 50%. The ratios of the New Member States are a bit higher with CR3 ratios of about 55-60%. The most concentrated countries typically include – independent of the measure – Belgium, the Netherlands, Finland, Lithuania and Sweden. The least concentrated ones also tend to be the same independent of the measure and include Italy, Spain, Latvia and, in particular, Germany. CR5 ratios are, of course, higher but do not change the concentration patterns and country orders with the exception of countries such as the UK and France which tend to have average CR3 and high CR5s ratios.

Using gross retail banking income, the following combined market shares for the leading three (CR3) and five (CR 5) retail banks in the various Member States were estimated[19]. Figure 1 presents the concentration estimates.

Figure 1:

[pic]

* Descending order based on CR3.

These estimates support the hypothesis that European retail banking markets in general are moderately concentrated at national level. They also confirm the perception that Belgium and the Netherlands on the one hand and the Nordic countries on the other, have more concentrated retail markets than the European average, in particular when taking into account the CR3 measures.

Some countries, most prominently Germany, but also others such as Spain and Italy, have comparatively low CR3 and CR5s. One explanation for this phenomenon is that large parts of the national retail activities in these countries are covered by a high number of savings and co-operative banks that are legally independent entities (for details see chapter A.4.). In Germany, for instance, almost 500 savings banks cover up to 50% of some of the national retail activities. Consequently, even the leading banks in Germany are significantly below a 10% share of the national retail market.

As highlighted in Interim Report II, European retail markets remain extremely fragmented. With the exception of the Benelux and the Nordic countries, there are very few players that have a leading market share in two or more Member States. In general, the number of non-domestic banks among the leading banks in the Member States is limited. Figure 2 shows the balance between domestic and foreign banks in the top five banks in each Member States, measured by gross total retail income. The results show firstly that foreign banks tend to have much stronger market positions in the New Member States than in the EU15. For example, the inquiry's data suggests that in France, Italy, Spain, Sweden and the UK the top five banks by market share are all domestic. By contrast, in the Czech Republic and Slovakia the top five banks are under foreign control, as are four of the top five in Hungary and Poland.

Figure 2: Domestic and foreign[20] banks in the top five[21] banks per country, 2004

[pic]

In general, market structures and, in particular, concentration ratios do not present a uniform picture. Consequently, a differentiated analysis is required before any wider conclusions can be drawn from these concentration estimates.

A.2.2. Financial performance of the retail banking sector

This section examines the financial performance of the banking sector, specifically:

- gross income from retail banking;

- profitability and cost-income ratios in retail banking;

- determinants of profitability in retail banking; and

- long-term trends in banking sector profitability.

Interim Report II set out detailed calculations for the Member States on several aspects of their banking sector performance: overall volume of activity; gross income by product line; profitability and cost-income ratios. Readers should note that the detailed methodology for these calculations and related caveats are contained in chapter 5 Interim Report II; they are not repeated here. The data relate to retail banking services to consumers and SMEs[22], with the former group generating around 80% of total gross income. This section summarises the main findings of this examination and, where appropriate, draws conclusions on the differing models of retail banking and market structures in the Member States.

Gross income from retail banking

Table 3 below summarises the proportion of gross income from consumers that banks generate by product line. Based on a weighted mean of all Member States mortgages are clearly the major source of income, generating just over 30% of gross retail income from consumers. However in the New Member States this share is significantly lower. Current accounts generated more than 25% of gross income in the EU25, and more than one-third of income for banks in the New Member States. Across the EU25, savings accounts and consumer loans both generated between 17% and 18% of banks’ gross income, respectively, while credit cards generated over 7% of banks’ gross income from consumers.

Table 3: Gross income share by consumer product line, weighted average, 2004

NMS Average | 34.95% | 23.45% | 20.85% | 15.62% | 5.13% | 100% |

EU-25 Average | 27.87% | 17.16% | 17.66% | 30.06% | 7.25% | 100% |

Note: Country-level estimates are gross income weighted averages across banks surveyed in the country.

The estimates for EU-15, New Member States and EU-25 are country-level averages weighted by population.

Source: Commission’s “Retail Banking Survey”, 2005-2006.

The inquiry has found wide national variations in banks’ income for specific product lines. Table 4 below summarises the gross income per customer data – aggregated for EU25, EU15 and the New Member States – for the consumer retail banking products in the Commission’s market survey. Comparisons across a range of retail products show that banks’ income per customer is typically twice as high in the EU15 as it is in the new Member States.

Table 4: Gross income per consumer (€) by product line, weighted average, 2004

Current accounts | Deposits and savings | Consumer loans | Mortgages | Credit cards |

EU-15 Average | 133 | 69 | 421 | 1,126 | 64 |

NMS Average | 48 | 41 | 88 | 442 | 66 |

EU-25 Average | 119 | 64 | 367 | 1,015 | 65 |

Note: Country-level estimates are weighted averages by market share across banks surveyed in the country.

The estimates for EU-15, New Member States and EU-25 are country-level averages weighted by population.

Source: Commission’s “Retail Banking Survey”, 2005-2006.

Profitability and cost-income ratios in retail banking

This section summarises the inquiry’s overall findings on profitability and costs in retail banking across the EU25. Using market survey data, Figure 5 presents the country level weighted averages of the ratio of pre-tax profit to gross income (for all retail banking activity) from 2002 to 2004.[23]

Figure 5: Profitability ratio, 2002-2004, weighted average

(Profit before tax as a share of total retail income)

[pic]

Source: Commission’s “Retail Banking Survey”, 2005-2006

Most Member States show average pre-tax profitability close to the weighted EU average (20 to 30%). We can identify two groups of countries according to their sustained pre-tax profit record during the period. A first group of five Member States (Ireland, Spain and the three Nordic countries) reported sustained pre-tax profitability ratios of about 40% and are always above the EU average. A second group of Member States (containing Germany, Austria, and Belgium) reported low profitability throughout. The remaining Member States report profit ratios around the EU average during 2002-2004. It is notable that during the observation period, the volatility of profits is higher where profitability is lower.

Based on operating costs as a share of total retail income, the inquiry found a wide dispersion across Member States in banks’ cost bases. On average banks’ operating costs in 2004 accounted for 63% of total retail income. Banks in Spain and Ireland had the lowest cost ratios (45-50% on average), while banks in Germany, Austria and the Netherlands had the highest ratios (75-80% on average).[24] This pattern is unsurprising since a low cost-income ratio is largely the corollary of a high pre-tax profitability ratio, and vice versa.

Determinants of profitability in retail banking

The sector inquiry data presented above relating to profitability of retail banking and banks’ cost income ratios require further qualification. In their responses to the public consultation many stakeholders highlighted a range of influences on banks’ profitability, over the short- and long-term. These influences on retail banking profitability are discussed below.

In terms of macroeconomic influences, firstly the economic cycle clearly influences profitability, particularly over the short observation period of 2002-2004. Member States which experienced fairly rapid economic growth during the period should experience rising demand for banking services (particularly credit products) and a fairly low share of non-performing loans (which tend to materialise when the economy slows). By contrast Member States where growth was slow would generally find lower demand, constrained margins and a higher share of bad debts.[25] For example, Ireland recorded the fastest economic growth in the EU15 between 1998 and 2005 and also displayed the highest bank profitability in the Commission's market survey of 2002-2004. Economic growth in Italy and Germany was among the slowest in the EU15 during this period, and bank profitability was also low.

Secondly, the overall savings ratio and development of credit markets are additional macroeconomic determinants of banking profitability. Simply put, lending is more profitable for banks than taking deposits. Thus markets where demand for credit is strong – whether through mortgages, loans or credit cards – would be expected to provide greater opportunity for banks to generate profits.[26]

Three industry-specific factors also influence the observed level of profitability and costs in retail banking. Firstly, the level of banking sector competition will influence profitability. Factors including entry barriers, high market concentration, high switching costs and the scale advantages deriving from branch networks may all serve to weaken competition, and large banks in some Member States may be able (separately or collectively) to exercise market power in the setting of prices and margins. Thus notwithstanding macroeconomic influences on banking profitability, high and sustained profits may signify the exercise of significant market power. For example, the conjunction of high market concentration and high profitability observed in some Member States might raise concerns about the extent of banks' market power; particularly where there is additional evidence of obstacles to market entry and fair competition.[27] Conversely, sustained low or negative profitability in banking may also indicate weak competition, suggesting distortions in the process of market exit and entry. Such a pattern may be observed in Member States where there are regulatory obstacles to cross-border entry or historically high levels of public ownership or State aid have distorted market performance.[28]

Secondly, distribution models differ across Member States. Models based heavily on a branch network rather than remote channels such as internet and telephone will typically have a higher cost base. Moreover, a greater reliance IT tools rather than staff in areas such as credit scoring and internal risk management will tend to reduce costs further. Thirdly, the corporate and capital structures of retail banks still vary widely across the EU. Large shares of retail banking activity in Member States such as Germany, France, Italy and Spain are undertaken by cooperative banks and savings banks.[29] Many of these banks have explicit social objectives, including widening access to finance for consumers and SMEs. These objectives, coupled with a cooperative ownership structure, are likely to create a different set of profit incentives to shareholder-owned private banks.

Long-term trends in banking sector profitability

Since the coverage of banks’ information systems limited the time horizon of the market survey to a handful of years, the Commission examined the long-term of banking sector profitability using data collected by the OECD. As described in Interim Report II, the methodology for the OECD’s figures[30] covering 1981-2003 is consistent with the method used above to analyse the 2002-2004 period. However, there are three important differences in the scope of the data. Firstly, since six EU Member States[31] are not member countries of the OECD, there is no long-term data on their banking sector. Secondly, the OECD’s own data describe all banking activity by country, of which retail banking comprises over 50 per cent of the total (measured by gross income). Thirdly, the OECD’s data describe the global performance of banks according to their nationality, whereas the Commission’s data describes their performance in one specific Member State. Despite these differences in scope, a comparison of the Commission and OECD profitability estimates for 2002 and 2003 shows a marked convergence. This is unsurprising since the majority of banks have significant operations only in one EU Member State and retail banking activity forms the bulk of the OECD’s dataset.

On this basis, the Commission concludes that the long-term trend of profitability is upwards in the EU banking sector as whole. Based on operating profits as a share of gross income from all banking activity , banks in almost every Member State have become more profitable since the 1980s. From the clear overall trend of rising pre-tax profitability, it can also be inferred that retail banking profitability has risen over the long-term.[32] By the end of the period, average profitability in most Member States was 20 to 40 per cent of gross banking income. Moreover, the profitability ratios for each Member State were consistent with those observed in the Commission’s market survey, which focused specifically on retail banking.

A.3. Credit registers and banking competition

Credit registers operate in almost all Member States and collect various kinds of financial information on individuals. The data stored on credit registers is provided by banks and other firms providing credit. Members of the registers are able to access this data for commercial purposes such as bank lending, subject to data protection rules. Banks and credit providers require access to good quality credit data in order to overcome information asymmetry when they set prices for new or potential borrowers. Thus credit registers are an important element of retail banking market infrastructure. To ensure strong competition among credit providers in retail banking markets it is vital that credit registers enable open and non-discriminatory access to credit data.

This chapter surveys the operation of credit registers in the EU and highlights potential competition issues. The information presented here is based on the literature on credit data markets and on the Commission’s extensive market survey of credit registers throughout the EU, conducted in the course of the sector inquiry.

This chapter is structured as follows:

- section 1 outlines the economics of credit data markets and credit registers;

- section 2 surveys the markets for credit data in the Member States;

- section 3 examines potential competition issues arising from credit registers; and

- section 4 concludes.

A.3.1. Economics of credit data markets and credit registers

The credit information industry displays strong network effects. The initial high fixed cost structure and near-zero marginal costs create strong forces for concentration in the industry.[33] Moreover, as the market coverage of a credit register increases, so does the register’s value to its clients and potential clients.

Common problems in markets with network effects are standardisation problems, path dependency, switching costs and lock-in to one network or technology. Many of these features are observable in credit reporting competition and they contribute to market concentration. Monopoly and oligopoly are common market forms in credit data markets; particularly where oligopoly is accompanied by very small niche players.[34] While typically one or a small number of large players satisfy the demand from banks and retailers in a particular Member State, small niche players specialize on specific areas such as tenant reporting.

Credit data sharing tends to have positive economic effects. First, credit data reduces the information asymmetry between a bank and its potential customer, which is likely to result in lower default rates (as does the sharing of positive and negative information compared to negative information only).[35] Second, credit information sharing acts as a borrower discipline device: borrowers know that if they default, this fact becomes public knowledge and their reputation with other lenders is affected. This could make it more expensive or even impossible for the customer to obtain credit. Third, credit reporting helps reduce problems of adverse selection[36], generally ensuring greater credit availability on better conditions. Finally, data sharing is also linked to consumer mobility: it has been argued that banking markets where databases are more active show more consumer mobility.[37] In summary, banks and other providers of credit require access to good quality credit information in order to price accurately for borrowers, and a greater availability of credit data tends to improve banking market performance.[38]

The European Court of Justice (ECJ) recently issued a judgement on the compatibility of credit registers with banking competition, following a request for a preliminary ruling from the Spanish competition court (the Tribunal Supremo). On the particular case, Asnef-Equifax v Ausbanc,[39] the ECJ judgement stated that Article 81 (1) EC must be interpreted as meaning that a credit reporting system " does not, in principle, have as its effect the restriction of competition within the meaning of that provision. This holds provided that the relevant market or markets are not highly concentrated, that the system does not permit lenders to be identified and that the conditions of access and use by financial institutions are not discriminatory, in law or in fact ."

A.3.2. Markets for credit information in the Member States

This section reviews the structure and regulatory framework for credit information markets in the EU. The section discusses:

- public and private credit registers in the Member States

- cross-border information sharing through credit registers; and

- the legal framework for credit information sharing in the EU.

Public and private credit registers in the Member States

There are three types of credit reporting systems evident in the Member States: (i) dual systems (combining public and private credit registers); (ii) private systems; and (iii) public systems. The breakdown by Member State shows:

- Dual systems in ten countries: Austria, Czech Republic, Germany, Italy, Latvia, Lithuania, Portugal, Slovakia, Slovenia, Spain;

- Private systems in twelve countries: Denmark, Estonia, Finland, Greece, Cyprus,[40] Hungary, Ireland, Malta, Netherlands, Poland, Sweden, UK; and

- Public systems in two countries: Belgium and France.

Table 6 presents an overview of the system in each Member State and the type of data held by each register.

Table 6: Credit reporting systems in Europe

Public credit register (PCR) | Private credit register (PRCR) |

Name of PCR | Data on Individuals? | Reporting Threshold* (Euro) | Information shared** | Data on Individuals? | Information shared** |

Austria | Grosskreditevidenz | Yes | 350.000 | + | Yes | +/- |

Belgium | Centrale des Crédits aux Particuliers | Yes | 200 | +/- | No | n/a |

Cyprus | None | n/a | n/a | n/a | Yes | - |

Czech Republic | Central Register of Credits | No | n/a | n/a | Yes | +/- |

Denmark | None | n/a | n/a | n/a | Yes | - |

Estonia | None | n/a | n/a | n/a | Yes | - |

Finland | None | n/a | n/a | n/a | Yes | - |

France | FICP | Yes | Unknown | - | No | n/a |

Germany | Evidenzzentrale für Millionenkredite | Yes | 1.500.000 | +/- | Yes | +/- |

Greece | None | n/a | n/a | n/a | Yes | - |

Hungary | None | n/a | n/a | n/a | Yes | +/- |

Ireland | None | n/a | n/a | n/a | Yes | +/- |

Italy | Centrale dei Rischi | Yes | 75.000 | +/- | Yes | +/- |

Latvia | Register of Debtors | Yes | 150 | - | Yes | +/- |

Lithuania | Loan Risk Database | Yes | 14.500 | +/- | Yes | - |

Luxembourg | None | n/a | n/a | n/a | No | n/a |

Malta | None | n/a | n/a | n/a | Yes | - |

Netherlands | None | n/a | n/a | n/a | Yes | +/- |

Poland | None | n/a | n/a | n/a | Yes | +/- |

Portugal | Servicio de Centralização de Riscos de Credito | Yes | 50 | +/- | Yes | +/- |

Slovakia | Register of Bank Loans and Guarantees | No | n/a | n/a | Yes | Unknown |

Slovenia | Credit Register | Yes | 0 | +/- | Yes | Unknown |

Spain | Central de Información de Riesgos | Yes | 6.000 | +/- | Yes | +/- |

Sweden | None | n/a | n/a | n/a | Yes | +/- |

United Kingdom | None | n/a | n/a | n/a | Yes | +/- |

Note: PCR is a public credit register and PRCR is a private credit register. FICP is the Fichier National des Incidents de Remboursement des Crédits aux Particuliers . The names of private credit registers in each Member State are not provided. The signs '+' and '-' denotes positive and negative information.

* The reporting threshold is the value above which credits must be declared to the register or debt amount outstanding threshold above which a borrower must be reported.

** Consistent with the definitions used in Interim Report II, 'negative' information describes defaults (e.g. late payments, arrears and bankruptcies). 'Positive' information describes total amounts and types of loans, accounts currently open and active, balances and credit limits.

There are several reasons for this diversity of credit reporting systems across the EU. Firstly, it may reflect the emphasis by policymakers on different objectives in different Member States, such as monitoring financial stability (e.g. the German public credit register Evidenzzentrale) or reducing over-indebtedness (e.g. the Belgian PCR). Secondly, attitudes differ concerning the use of personal data for commercial purposes. Countries have adopted different modes of information exchange. Thirdly, the structure of the credit reporting system will depend on – and also in turn, influence – the development of credit markets. It is notable that credit reporting systems tend to be less advanced in the New Member States, where retail banking markets are still maturing. Fourthly, as discussed below, the legal and regulatory frameworks for data protection, banking secrecy and credit data sharing still differ considerably across the Member States.

Incentive structures embodied in credit registers

Credit registers can be publicly or privately run. The Commission’s market survey covered nine public credit registers, all of which are run on a non-profit basis. Of the 20 private credit registers surveyed, 16 are run on a for-profit basis. Table 7 outlines the corporate status of the credit registers in the Commission’s market survey.

Table 7: For-profit versus non-profit registers

Responses (total) | 29 |

- for-profit information sharing | 16 |

- not-for-profit information sharing | 13 |

- of which: central banks | 9 |

As is argued below, the corporate structure of a credit register can create incentives towards full or partial data sharing, and thus affect the intensity of competition in downstream retail banking markets.

Public credit registers are owned by national central banks and run on a non-profit basis. Reporting to these institutions is mandated by law for specific items of data. In view of the governance of these registers, there is little risk that they are used directly as an instrument to distort banking market competition. However, this does not always imply that foreign banks will have full access to these institutions on a cross-border basis (which is discussed further below).

Private credit registers are primarily run on a for-profit basis, although their ownership structures vary. Approximately half of the PRCRs surveyed are run by specialist credit information providers and generally owned by a holding company.[41] For-profit institutions have a reputation to lose if they make partial decisions in favour of big market players. In these companies, banks are unlikely to have systematic influence on the policy of the credit bureau. Meanwhile, banks and other financial institutions might have more leverage in non-profit associations, foundations or other entities to influence access policy than they have in independent for-profit institutions. In non-profit environments, the opportunity and reputation costs of not accepting a (foreign) member are lower than in for-profit environments.[42]

Cross-border information sharing through credit registers

Credit information markets remain fragmented along national lines. Only a few credit bureaus conduct cross-border reporting, albeit for low volumes of data. The main reason for this low level of cross-border data sharing is the lack of demand (and to some extent, supply) for cross-border lending to retail customers. However there also are regulatory barriers in some Member States, which further limit the development of cross-border data sharing. The lack of cross-border credit reporting may create problems for consumers who are mobile and seek to borrow in more than one Member State. Currently they are generally required to build up separate credit histories in order to obtain credit, whether in the form of a mortgage, personal loan or credit card. Moreover, consumers who move permanently to another Member State might have problems accessing credit and telecom services, because their credit cannot be transferred to their new residence state.

One market-led initiative to extend cross-border data sharing is being sponsored by the Association of Consumer Credit Information Suppliers (ACCIS), an international association for credit information providers. To help its members to provide pan-European credit information services to their clients, ACCIS has developed a model contract for cross-border data exchange. The model contract embodies the key principle of reciprocal data sharing and permits individual credit registers to decide whether to engage in bilateral cross-border data exchange. Public authorities in the EU are also working to expand the scope of cross-border data sharing. In 2003, seven Member States signed a memorandum of understanding (MoU) on cross-border data exchange among credit providers, through the network of public credit registers.[43] The MoU covers data relating to lending where the value of the credit exceeds €25 000 (a fairly high threshold for the purposes of retail banking providers). The MoU came into force in May 2005 in the seven signatory countries: Austria, Belgium, France, Germany, Italy, Portugal and Spain. However, the most recent information suggests that Austria and France have still to fully implement the terms of the MoU.

Legal framework for credit information sharing in the EU

Credit information sharing is based upon national laws and regulations governing data protection, banking and credit reporting; and the European data protection directive. The legal analysis of these laws shows that there is still divergence between the individual countries. Among the strictest regimes of credit reporting regulations are France, Germany and Ireland, on the lower end are Belgium and the Czech Republic.[44]

Table 8: Laws applying to information exchange and data protection

Country | Law |

Austria | Bundesgesetz über den Schutz personenbezogener Daten |

Belgium | Law of 8 December 1992 on Privacy Protection in Relation to the Processing of Personal Data |

Cyprus | Processing of Personal Data (Protection of the Person) Law |

Czech Rep. | Act on the Protection of Personal Data |

Denmark | Act on Processing of Personal Data |

Estonia | Personal Data Protection Act |

Finland | Personal Data Act |

France | Loi N° 78-17 du 6 Janvier 1978 relative à l'informatique, aux fichiers et aux libertés |

Germany | Federal Data Protection Act |

Greece | Law on Protection of individuals with regard to the processing of Personal Data |

Hungary | Protection of Personal Data and Disclosure of Data of Public Interest |

Ireland | Data Protection Act |

Italy | Protection of Individuals and other subjects with regard to the processing of personal Data |

Latvia | Law on Personal Data Protection |

Lithuania | Law on Legal Protection of Personal Data of 1996 |

Luxembourg | Protection des Personnes a l’egard du traitement des donnees a caractere personnel |

Malta | Data Protection Act |

Netherlands | Personal Data Protection Act |

Poland | Law on the Protection of Personal Data |

Portugal | Act on the Protection of Personal Data |

Slovakia | Act on Personal Data Protection |

Slovenia | Law on Personal Data Protection (1990), Personal Data Protection Act (1999) |

Spain | Organic Law 15/1999 of 13 December on the Protection of Personal Data |

Sweden | Personal Data Act |

UK | Data Protection Act |

Source: Jentzsch (2006)

European data protection laws typically cover the same core provisions: they attribute specific rights to the individual (access, correction, etc.), the supervisory authority (oversight, audits) and the credit reporting industry (notification, accuracy, registration). Moreover, many implementing regulations contain retention time periods for specific data items (such as bankruptcies) and guarantee extra protection for sensitive information such as race, political or philosophical belief, and religion as well as health data. Many countries do have clauses in their data protection acts that state that complete information must be shared (Table 9).

Table 9: Requirement of Completeness

Country | Complete info requested in law? | Clause |

Austria | right DS | Bundesgesetz über den Schutz personenbezogener Daten, § 27 |

Belgium | yes | Law of 8 December 1992 on Privacy Protection in Relation to the Processing of Personal Data, Art. 4 |

Czech Republic | n/a |

Denmark | yes, indirect | Act on Processing of Personal Data, Part 4 (24) |

Finland | yes | Personal Data Act, Sect. 9 (2) |

France | right DS | Loi N° 78-17 du 6 Janvier 1978 relative à l'informatique, au1 fichiers et au1 libertés, Sect. 36 |

Germany | indirect | Federal Data Protection Act |

Greece | indirect | Law on Protection of individuals with regard to the processing of Personal Data |

Ireland | yes | Data Protection Act, 3 Sect 2 |

Italy | right DS | Protection of Individuals and other Subjects with regard to the Processing of Personal Data, Art. 13 (3) |

Latvia | yes | Law on Personal Data Protection, Sect. 10(4) |

Lithuania | yes | Law on Legal Protection of Personal Data, Art. 3 |

Netherlands | right DS | Personal Data Protection Act, Art 36 |

Poland | right DS | Law on the Protection of Personal Data, Art. 32 |

Portugal | yes | Act on the Protection of Personal Data, Sect. 1 (d) |

Slovakia | indirect | Act on Personal Data Protection of 2002, Art. 12 |

Slovenia | right DS | Personal Data Protection Act, Art. 19 (1.) |

Spain | yes | Organic Law 15/1999 on the Protection of Personal Data, Title II, Art. 4 |

Sweden | yes | Personal Data Act, Sect. 9 |

UK | indirect | Data Protection Act |

Notes: No ‘complete information’ clause was found in the German, Greek and UK laws. “Right DS” refers to the right of the data subject to correct information if it is inaccurate or incomplete. “Indirect” means that there are statements that indirectly refer to complete information such as “inaccurate” or “misleading” – incomplete information can be misleading in terms of the credit risk it reflects.

International information sharing is regulated by the European Data Protection Directive (Directive 95/46/EC). Since all Member States have implemented this directive, data protection rules should not act as an obstacle to cross-border information flows.

A.3.3. Potential competition issues

Competition barriers in credit registers can arise from several sources, all of which can restrict access to credit data and thereby weaken competition in credit markets. This section considers three sets of competition issues in relation to credit registers:

- unfair or discriminatory access conditions;

- partial data sharing; and

- regulatory barriers.

It is shown below that the operation of some credit registers or the regulatory framework for credit data markets may weaken banking competition in several ways, by:

- disadvantaging or excluding foreign banks;

- disadvantaging non-shareholders;

- disadvantaging smaller players; and

- disadvantaging or excluding some types of non-bank credit provider.

The most basic test which should be applied to assess whether a credit register’s operation is consistent with competition rules is whether the register provides non-discriminatory access to credit data to all relevant credit providers. This provision is established in Article 8 of the Proposal for a Directive on Consumer Credit.[45]

Unfair or discriminatory access conditions

However these access conditions may also have a basis in law, where credit reporting is mandatory for banks (and other credit providers) and the data can be accessed through a public credit register. These access conditions comprise (i) membership criteria for the credit register; and (ii) the fee structure for membership and use of the credit register.

Membership criteria for the credit register

Public and private credit registers stipulate a range of criteria which their members or clients must meet in order to gain access to the register. These criteria vary across public and private credit registers and across Member States. The majority of credit registers responding confirmed that in order to access the database, the interested entity must meet some or all of the following criteria:

- undertaking credit granting activity;

- holding a banking license;

- having a physical presence in the Member State;

- compliance with reciprocity agreements; and

- compliance with data protection laws.

Most credit registers required members to be credit providers[46], to hold a bank license or be defined by law as ‘reporting institution’. In a minority of replies it was mentioned that the reporting institution needs a physical presence in the country. The vast majority of registers replied that members must adhere to reciprocity principles as well as to data protection principles. There was no direct evidence that foreign banks established in the home country of the credit register were subject to any per se discrimination from membership criteria.[47] From the perspective of retail banking market performance, two types of membership criteria highlighted above might be seen as restricting competition. Firstly, the requirement for a banking license in order to access the credit register could have the effect of excluding non-bank credit providers such as credit card companies and finance companies. Such requirements might also exclude companies that provide services involving the credit risk of deferred payments, such as retailers, mail order companies or telecom companies. Access of these institutions to central databases must be judged in the light of data protection.[48]

Secondly, requiring a physical presence in a particular Member State in order to access the credit register is likely to weaken banking market competition. Providers in another Member State wishing to supply credit cross-border will be unable to obtain reliable data on their prospective client, increasing lending risk and increasing prices. Such a restriction would appear to apply whether the account supplied cross-border was located in the home country of the provider or of the borrower (e.g. if supplied remotely by an internet bank). Explicit national presence required to access the register was stated by the Austrian Central Bank Register, the credit registers of the Bank of Spain, Bank of Portugal and the Bank of Latvia.

Fee structures

The vast majority of credit registers in Europe, whether public or private, charge fees to their members. However, fee structures and levels vary greatly across the Member States. The sector inquiry has already examined specific instances where fee setting in payment systems can foreclose entry or restrict competition in retail banking and payment card markets.[49] Similar risks arise in relation to fee setting for access to credit registers. However it should be noted that because of the lower scale of economic activity conducted through credit registers, operational costs and fees tend to be lower in absolute terms than in payment systems.

The inquiry has examined the fee structures and fee levels of public and private credit registers in the Member States, based on responses to the market survey. Fee structures for credit registers can comprise: one-off joining fees; ongoing membership fees; and per-transaction fees for consulting the credit register. The inquiry has found that three aspects of the fee structure for credit registers can weaken competition in retail banking markets. These aspects are:

- high joining fees;

- discriminatory volume-based transaction fees; and

- high fixed transaction fees for access to the register.

The level of joining fees for credit registers varies first according to whether the register is public or private. All of the public credit registers responding to the Commission’s market survey reported a zero joining fee. Of the twenty private credit registers sampled, twelve reported zero joining fees and one private register reported a nominal joining fee of €90. The remaining seven private registers reported fees in excess of €1000. Among this latter group there is a surprising degree of divergence. Three of the four highest joining fees are observed among credit registers owned and managed by banks, which charge joining fees of €75 000, €25 000 and €13 500.[50] The relatively high level of joining fees charged by these private credit registers raises two potential competition concerns. Firstly, such fees may be used as a tool to extract rent from new entrant banks requiring access to credit data; or secondly, high joining fees may be set with the intention of discouraging membership of the register and reducing the contestability of clients of the incumbent banks.

Transaction fees for access to credit registers vary according to the type of data extracted, with positive and full data generally having higher prices than negative data. Fees for access to most credit registers in Europe are generally in the range of zero to €1 per consultation, whether positive or negative data is requested. However, some private credit registers charge per transaction fees significantly above these levels. In such cases, fees for consulting a credit register may weaken banking competition.

Three private credit registers apply relatively high transaction fees, and two of these registers operate in the same Member State. The average cost of obtaining positive and negative data on clients in this Member State is among the highest reported in the market survey, at around €2 per credit report inquiry. Moreover, the cost of consulting the register varies significantly according to the volume of usage. One private credit register in this Member State (which is jointly owned by a holding company and a group of banks) reported that the average per transaction fee varied from 0,46 € for its largest clients to €10.95 for its smallest clients, according to a volume-based price schedule. The latter level of transaction fee might discourage smaller players from making full use of the credit register.

A credit register in one Member State charges a fee of €2.24 to €2.44 per consultation, and also requires the highest joining fee reported in the market survey. Thus it is unlikely that the high joining fee is not used to cross-subsidise low access fees for members of this register. Moreover, this credit register is owned and operated by domestic banks, which are able to set per transaction fees for access to client data; data which principally relates to the client base of the incumbent banks. The banks operating this credit register might have an incentive to set high fees of consulting the register, in order to raise the costs of competitors and discourage them from making full use of the information held in the register.

Partial data sharing

As discussed in Section 1 of this chapter, greater availability of credit data will tend to reduce information asymmetry between lenders and clients and reduce the informational advantage of large banks over new entrants. The evidence suggests that overall, consistent with data protection and competition rules, greater credit data availability strengthens banking market competition. However the structure of some credit data markets and the operation of some credit registers may significantly limit the availability of credit data, thereby reducing the ability of banks to compete for rivals’ customers.

Two forms of partial data sharing (or composition effects) may potentially inhibit banking market competition:

- low market coverage rates of credit registers; and

- incomplete reporting by credit register members.

Low market coverage rates of credit registers

The market coverage of a credit register describes the share of all (retail) borrowers in a particular Member State on which the register has data. The share of market coverage will depend on four factors: (i) the share of credit institutions in the market that provide credit reports; (ii) whether reporting institutions provide positive, negative or full data;[51] (iii) the reporting standards used, since these still vary from country to country[52]; and (iv) the reporting threshold applied, i.e. the de minimis value of credits reported to the register.

Using data gathered in the market survey, the Commission has estimated the market coverage of credit registers across the EU. The numerator of this ratio – the number of individual borrowers on whom data is held – is based on data provided by credit registers. The denominator of the ratio – the total number of retail banking clients in a Member State – is estimated using the total population of a country above fifteen years of age as a proxy for economically active population.[53] The estimate coverage rates of various credit registers are shown below in Figure 10 on an anonymised basis.

Figure 10: Coverage rates of various credit registers in the EU

[pic]

The data show a striking divergence in the level of coverage of credit registers across the EU. Twelve of the credit registers described below have coverage rates of five per cent or less. Of these twelve registers, six[54] are public registers to which credit reporting is compulsory for credit institutions in a given Member State. Therefore the very low coverage of these PCRs results from their limitation to negative-only data and/or use of high reporting thresholds (where information can also be positive and negative). Of the six private registers with very low coverage rates, many contain only negative data.

The remaining thirteen credit registers shown above have estimated market coverage ratios between 35 and 80 per cent, with nine registers estimated above 50 per cent coverage. Of these registers, three[55] are PCRs which hold positive data. Of the remaining ten, there are at least two registers from a single Member State, pointing to competition among credit data providers and overlapping coverage of borrowers. The clear majority of the registers showing high coverage are in the EU15. Poland is the only New Member State for which credit data market coverage is estimated above 35 per cent. As discussed above, the extent of credit data market coverage is likely to influence the strength of competition in retail banking. Where the coverage of credit registers is low, larger banks are likely to have an advantage since their extensive client book will enable them to build more accurate risk models than smaller players and new entrants. This advantage is likely to be compounded where credit registers in a particular Member State hold only negative data, since available credit data is limited to a small, adversely selected pool of borrowers. Such a position in a Member State may be entirely consistent with data protection rules and the framework of contracts governing the operation of credit registers. Nonetheless it is likely to weaken retail banking competition.

Incomplete reporting by credit register members

Many non-bank institutions such as credit card providers share their information voluntarily. In many countries, positive and negative information is exchanged over credit bureaus. However, in some countries credit bureaus collect only negative information. Some of the systems are dual systems where the public credit register could potentially be a substitute for the private credit bureau, but only for the reporting institutions. This is the case if the register collects information on consumers starting from a relatively low threshold. Low thresholds exist in Belgium and France, Latvia, Portugal and Spain – again this is only possible for institutions that are obliged to report.[56]

The customer data which banks hold – particularly detailed positive data – are a significant asset and potentially a source of competitive advantage. This advantage may arise from better risk scoring models or more effective marketing and cross-selling. In an environment where information sharing is voluntary, banks may have incentives to disclose or withhold specific types of information. For instance, if banks disclose negative information and with it incomplete positive information[57], this can blur the true picture of a consumer’s credit risk, placing rival lenders at a competitive disadvantage. A recent study by the Federal Reserve Bank in the United States highlighted the extent of incomplete information reporting in the banking industry. The Federal Reserve study found that in 1999 around 70 percent of consumers sampled had missing credit limits on one or more of their revolving accounts. Action was taken by private and public sector to improve the accuracy and consistency of reporting. Nevertheless, a sample taken in June 2003 showed credit limits still missing from 14 percent of revolving accounts; and omissions affecting the records of 46 percent sampled consumers.[58]

Incomplete reporting by lenders should not arise in public credit registers where full disclosure is a legal obligation. In private credit registers, however, there may be conflicting incentives. Specialist private credit registers will naturally seek full disclosure from lenders, since more and richer information increases the value of the register to its clients. Lenders, however, face a strategic decision on the benefit of joining the register compared to the ‘cost’ of enabling rival banks to access valuable client information. The larger a lender’s market share, the less attractive this trade-off is likely to appear. Thus some private credit registers may accommodate larger banks by waiving the requirement for full disclosure of data. One specialist private credit register responding to the Commission’s market survey indicated that it was common practice among lenders not to report the balances owed by customers or their overdraft limit. Another specialist private credit register confirmed that over twenty of its clients chose to share only negative information; and that three lenders refused to share data relating to specific products (such as mortgage and personal loans).[59]

Where a private credit register is owned and managed by the main domestic banks, a different set of incentives arise. The credit register has no strong commercial incentive[60] to ensure full information disclosure by lenders. Meanwhile, the main banks may have incentives to withhold information and to free-ride on the full disclosure of their rivals. The Commission’s market survey has identified at least one credit register owned by incumbent banks where this conflict of interest results in incomplete information sharing. Monitoring by the register appears to be weak, with the management unable to estimate what proportion of the data held was positive, negative, or both. This situation also raises some concerns about the strength of data protection safeguards in this register.

Regulatory barriers

Regulatory barriers also raise competition issues. Entry into credit information markets can be explicitly foreclosed by specific regulations, or implicitly foreclosed by a particular interpretation of relevant laws. France is an example of the former case. France has established a public and centralised system of information sharing. All reporting institutions (banks), must contribute data on incidents to the register and only these institutions are able to access the register. Currently, there are no other credit registers active in the country. The interpretation of laws in the country by authorities such as the Commission Nationale de l'Informatique et des Libertés (CNIL) prevents sharing of positive information. This provides an advantage to incumbent banks, which are able to build accurate and efficient credit scoring models based on their existing client book. By contrast, new entrants are only able to access an adversely selected pool of borrowers for whom only negative information is available. This situation does not appear to constitute an infringement of competition law. However one effect is to maintain the information advantage of incumbent banks over smaller banks and new entrants.

In Spain the interpretation of existing laws has acted as a de facto entry barrier for some credit data providers. As discussed above, a recent ECJ ruling on the ASNEF-Equifax case appears to remove any legal obstacles to that player entering the Spanish credit data market. However the initial notification from ASNEF-Equifax of its intention to enter the market was made in 1999 and the company has been effectively foreclosed from the market since then.

A.3.4. Conclusions

The analysis has highlighted three sets of issues in relation to credit registers which can weaken competition in retail banking markets: unfair access conditions; partial data sharing; and regulatory barriers. These competition issues should be addressed through competition law and, where appropriate, through other measures.

Application of competition law

Credit data markets are generally fragmented along national lines and cross-border data sharing is limited. Where a credit register holds a dominant position in a Member State credit data market and sets access conditions that may be regarded as unfair or discriminatory (e.g. accepting only members that are banks established in that Member State), such conduct might constitute an abuse of dominance[61] under Article 82 of the EC Treaty. Alternatively, where a credit register is run by a consortium or joint undertaking of banks in a Member State, the application of unfair access conditions might constitute an infringement of Article 81 of the EC Treaty. Clearly, however, such legal assessments could only be made following investigation of a specific case and based on the full facts.

Full enforcement of data protection rules

The sector inquiry has identified concerns in relation to compliance with national data sharing rules. For example, there appear to be instances where some parties fail to disclose full information on their clients to a credit register and where the credit register does not exercise close scrutiny of the information provided by its members. The evidence suggests that such problems may arise in only a small number of Member States. In such cases, compliance with data protection rules should be investigated by the appropriate national regulators. Full compliance by credit registers with data protection rules is vital to protect the integrity of individuals’ data and to ensure their fair access to credit. Moreover, it will strengthen banking competition.

Assessment of non-discriminatory access to credit registers

The principle of non-discriminatory reciprocal access to credit registers is enshrined in the rules of most, if not all credit registers in Europe. The Proposal for a Directive on Consumer Credit seeks to embed this principle in European law, including for cross-border access to credit registers. However, the sector inquiry has highlighted that this principle is not yet fully operational. Firstly, there are still regulatory obstacles in some Member States to cross-border data sharing. Secondly, aspects of the fee structure of some credit registers may be regarded as discriminatory and disadvantageous to small players and new entrants. Thirdly, even at domestic level the principle of reciprocal data sharing is not always fully enforced by credit registers, and the risk of abuse appears to be highest where registers are owned by incumbent banks. Therefore a future examination of credit registers may be warranted to assess their compatibility with an open and competitive European credit market.

Review of the regulatory framework for credit data sharing in some Member States

Finally, practice in credit data sharing still varies considerably across the EU, particularly in relation to the treatment of positive and negative data and the threshold level of credits to be reported. The frameworks for data protection and credit data sharing are sensitive matters and require careful scrutiny by Member State governments. Authorities should note that credit data sharing regimes with high reporting thresholds or based on the exchange of only negative data are likely to favour large incumbents at the expense of smaller players and particularly new entrants. Therefore national authorities that are seeking to enhance competition in the banking sector and improve the efficiency of credit markets may wish to consider reforms to their regulatory framework for credit data sharing. Such reforms may prove particularly helpful in the New Member States, where the coverage of credit registers is generally low and credit markets are still maturing.

A.4. Cooperation among banks: Savings and co-operative banks

The banking industry in general and retail banking in particular is characterised by a high level of cooperation between market players. Cooperation frequently occurs with respect to the ownership and management of payments systems or credit registers as well as the development of codes of conducts and other forms of self regulation. Usually, cooperation takes place at the level of banking associations, but it can also go wider; for instance, when nationwide payment systems or credit registers require cooperation between specific associations.

A large part of the rather extensive co-operative activity in the banking sector can be explained by the industry’s standardisation and compatibility requirements. In order to handle non-cash payments, for instance, banks have to agree on issues such as technology formats or mutual cost compensation. From the first clearing houses in the 19th or even 18th century to the current preparations of the SEPA banks have, therefore, relied on a variety of networks for cooperation.

This chapter is structured as follows:

- Section 1 discusses the scope of the inquiry's analysis of cooperation;

- Section 2 discusses cooperation among cooperative banks;

- Section 3 discusses cooperation among savings banks;

- Section 4 examines the competition issues raised by cooperation among banks; and

- Section 5 concludes.

A.4.1. Scope of the inquiry's analysis of cooperation

Cooperation between competitors always bears the risk that co-ordination goes beyond what is strictly necessary to achieve economic benefits and affects the competitive behaviour of the co-operating parties, for instance, with respect to price setting or market presence. Effective market competition is in particular impeded if independent banks with a significant combined market position engage in anticompetitive behaviour that limits competition among the co-operating parties or hinders third parties (such as potential competitors) from market entry. Insofar as such issues arise in the context of payment systems and credit registers, they are dealt with in chapters B.10. and A.3. respectively.

Cooperation among banks may go beyond the joint operation of platforms and concern wider areas such as common guarantee schemes, joint marketing and business strategies or regional market sharing. This is particularly the case for savings and cooperative banks which, due to their origins, tend to have closer ties than other banks. These specific types of banks or ‘sub-sectors’ cover a significant proportion of the retail banking activities in Europe and play an important role in several Member States such as Germany, France, Italy, Spain or Austria.

Due to the variety of ownership patterns, company structures, cooperation areas and regulatory provisions within the Member States, fact finding, even with regulatory bodies or national competition authorities, is difficult and an overall competition assessment is impossible. However, on the basis of an additional fact finding exercise following publication of the interim report, the Commission has now a clearer picture including potential competition issues that may arise in these contexts.

This inquiry can only give an overview and not replace an in-depth competition analysis on a case-by-case basis. The Commission, however, will carry out such investigations following this inquiry in cases that indicate the existence of competition problems with a community interest. The same applies if regulatory aspects or other forms of state intervention are involved. Depending on the issues in question, national authorities may be well placed to act. In any event, the Commission and the competent authorities of the Member States will apply the Community competition rules in close cooperation to ensure an effective enforcement of Articles 81 and 82 of the Treaty.

A.4.2. Co-operative banks

Co-operative banks play a major role in France where the three co-operative banking groups (Crédit Agricole including Crédit Lyonnais, Banques Populaires and Crédit Mutuel) together account for roughly around 50% of the national retail sector, with, however, significant variations across the relevant product markets[62]. Considering that following restructuring the French savings banks were also transformed into a co-operative form and that they have partially merged with the Groupe Banque Populaire[63], the co-operative sector, including the Groupe Caisse d’Epargne (GCE), has an even stronger position on the French retail banking market.

Apart from France, co-operative banks have significant market positions in countries such as the Netherlands, Finland, Italy and Austria. In the Netherlands Rabobank has a leading share of almost 40% in some national retail markets such as private savings and lending to small and medium sized enterprises.[64] In Finland, OP Bank group has shares of over 30% in some retail markets and/or segments such as loans and deposits.[65] In Italy the Banche popolari and Credito cooperativo combined account for roughly 25% of the whole Italian banking sector.[66] Meanwhile in Austria, two associations, Raiffeisenbanken and Volksbanken, hold a roughly estimated combined share of around 20-25% of the whole banking sector and in relation to saving deposits.[67] In Germany, the roughly 1300 co-operative banks (mainly Volks– and Raiffeisenbanken) also play an important role, in particular regarding their local presence. Their combined share of the German retail banking market is difficult to assess but based on figures for the German banking market in general is estimated at about 10-15%.[68] Co-operative banks also exist in other Member States where their scope of activities and market presence, however, appears to be more limited.

Co-operative banks go back to the 19th century when they were founded across Europe, mostly in rural areas, by common people and small businesses. Co-operative banks originated from the idea of take borrowing and lending into the hands of the members and, thereby, providing financial services for the members at bearable costs. This original and principal purpose of co-operative banks remains to a large extent relevant. One usual feature of co-operative banks therefore is the customers’ ownership (membership): either all or a large part of a co-operative bank’s customers (natural and/or legal persons) constitute its owners and members.[69]

Another common feature is the “one man one vote principle”, independent of the number of shares an individual member holds. Consequently, it is impossible for individuals or other institutions to gain decisive influence over a co-operative bank. Some co-operative banks permit more than one vote, however, there is always a strict limitation on voting rights to preserve the basic co-operative principle and, thereby, prevent the acquisition of controlling rights. A takeover of co-operative banks or banking groups by other banks is, therefore, excluded. Some co-operative banking groups, on the other hand, are quite active in acquiring controlling stakes in other banks. For instance, the central institute of the Austrian co-operative Raiffeisenbanken, the Raiffeisen Zentralbank Österreich AG (RZB) – more precisely its fully consolidated subsidiary the Raiffeisen International Bank-Holding AG – has over the last 10-15 years acquired a significant number of banks in Central and Eastern Europe.[70] The French Crédit Agricole, to give another example, is not only the leading retail bank in France but also one of the leading European banks with subsidiaries in several countries and a targeted expansion strategy outside France.[71]

Whereas the described ownership and voting principles are similar and practically define co-operative banks, company structures differ significantly. Some co-operative banks have transformed completely into a consolidated group or developed ‘group-like’ structures that allow for consolidation according to national supervisory rules. Others remain legally and economically independent credit institutions, at least with respect to the local banks carrying out the retail business. In practice, however, hybrid structures are predominant. Notwithstanding other differences these structures follow similar patterns. For example, the local or regional retail banks typically own (or are members of) one or more central institutions. These central institutions, firstly, carry out infrastructure and assistance tasks such as providing payment systems and IT platforms, running the protection scheme (guarantee fund) and supporting individual member banks regarding business strategies, accounting, marketing and similar areas. Secondly, the central institutions often also function as a true group holding for subsidiaries that offer financial services other than retail banking (investment and corporate banking, leasing, insurances etc.) or retail banking in non-domestic countries (e.g. the new Member States). In some cases, however, the central bank also is the controlling body for the retail business of the local or regional banks. This is, for instance, given with full cross-guarantee schemes, as in the case of the Dutch Rabobank, where instructive powers by the central institution are required for the participants of the scheme to be accepted as a consolidated group from the viewpoint of prudential rules.[72]

Within the described principal structures, there is a sliding scale from the most centralised co-operative banks, such as Rabobank, to the most decentralised groups such as the co-operative banks in Germany. As said above, most company structures are, however, hybrids with varying degrees of centralisation. The French co-operative banks are, for instance, perceived as groups, also by the competition authorities, which for the purpose of merger evaluations regard the groups (not the individual local retail banks) as the decisive competitive entities for the supply of retail banking products[73]. This is despite an apparently varying degree of independence of the local banks within the different groups[74]. Other co-operative banks such as the Finish OP Bank group and the Austrian Raiffeisenbanken have structures somewhere in between with a strong consolidated sub-group. Even less centralised groups such as the German Volks- and Raiffeisenbanken have, though comparatively small, consolidated sub-groups for activities other than retail banking.

It is often difficult to judge whether in any individual case the domestic retail banking activities are controlled by the central institution, co-ordinated within the whole group or network or carried out independently by the individual banks with the central institution only providing auxiliary services. These distinctions are relevant, for instance, regarding the potential application of antitrust rules, but can only be analysed on a case by case basis.

There is rather limited regulation, and in most countries general banking and supervisory rules apply to co-operative banks. Specific provisions normally exist only with respect to the definition of co-operative banks; auditing; the obligations of the member owners regarding own funds and similar issues; or the one-man-one-vote principle[75]. In Austria, cooperation between co-operative banks are, at least to a certain extent exempted from antitrust rules.[76] Some co-operative banks in Europe support social, regional, environmental or other non-profit projects; however, on a voluntary basis.

In France the so-called regional or territorial principle is applied by the co-operative banking groups[77] effectively limiting the retail activities of the regional co-operative banks to a territory defined in their statutes. Some of these statutory definitions are based on the respective provisions in the French Code Monétaire et Financier in its sections on co-operative banks[78]. According to information submitted