Treasury bill would bring competition to credit card sector

Despite fierce opposition from the credit card companies, Finance Minister Yuval Steinitz yesterday presented a bill aimed to step up competition in the industry. The Ministerial Committee for Legislation must decide whether to give the bill coalition support.

Credit card issuers often charge businesses outside central Israel higher transaction fees on customer purchases. They are likely to be the main beneficiaries. The biggest loser may be Isracard, which will be forced to provide clearing services to its rivals: Leumi Card and Israel Credit Cards, better known as Visa Cal.

When a customer makes a credit-card purchase, one of the three Israeli credit card firms clears the transaction to transfer the money from the customer's account to the business.

The business receives the money from the firm that clears the transaction, minus a fee. The average transaction or clearing fee is about 1.3% of the transaction, but in more remote parts of the country business owners pay as much as 2%.

The company that performed the clearing then asks the customer's card issuer for the money that it has already paid to the business. The clearing firm also pays the issuing firm an interchange fee, also known (at least in Israel ) as a cross-clearing fee. The business pays both the transaction fee and the interchange fee - it's considered part of the cost of doing business.

In 2006 Antitrust Commissioner Ronit Kan struck a deal with the credit card companies to reduce the transaction fee from 1.25% to 0.875% by 2012. The rates are scheduled to drop from their current level of 1.1% to 0.975% in August.

To put this in perspective, credit card transactions in 2009 amounted to NIS 160 billion, which means that every 0.1% in fees was worth NIS 160 million.

Israel's credit-card market is divided among Bank Hapoalim's subsidiary Isracard (45.5% ), Leumi Card (27.4% ) and Visa Cal (27.1% ).

According to a recent report from Visa Europe, the interchange fees are probably significantly higher than the companies' actual costs.

The proposed law, which was drawn up by Finance Ministry Accountant General Yehoshua (Shuki ) Oren, together with the Bank of Israel, has four main goals: to give the supervisor of banks in the Bank of Israel the authority to supervise, and possibly to also set, interchange fees; to open clearing to competition; to remove barriers preventing the entry into the market of new credit card issuers; and to open factoring to competition. Factoring is when a business that allows a customer to divide a credit-card transaction into monthly installments pays a factoring company - a subsidiary to a credit card issuer or a third party - the interest charges on the installments in order to receive the entire amount of the transaction immediately. Factoring was a NIS-30 billion business in 2008 and it is growing fast.

Isracard said it is in favor of fair competition based on the law and has acted to benefit its customers since the day it was founded. "We have still not received the proposed law. When we receive it, we will study it and respond appropriately."