Are Credit Card Companies Next in Line for Competition?

The sector is controlled by the banks and is highly concentrated, and the companies take in massive fees from businesses - which roll the costs onto consumers.

Now that the government has tackled the cell phone sector, forcing the three major companies to accept competition and reduce their interconnect fees, it's the credit card companies' turn: The Ministerial Committee for Legislation is set to vote on a proposal that would create competition in the credit card sector and reduce fees.

Dov Kotler
Guy Raivitz

The sector is controlled by the banks and is highly concentrated, and the companies take in massive fees from businesses - which roll the costs onto consumers.

The main party liable to be hurt by the government's initiative is Isracard, the country's largest credit card company. Isracard hired lobbyists to pressure the ministers, but they are expected to approve the proposal all the same. After that, the bill will be passed on to the Knesset, at which point Isracard is expected to start lobbying the MKs.

These reforms may all sound dry and technical, but they have could have an incredible impact on the economy - and your wallet. In 2009, Israelis made NIS 160 billion in credit card purchases, so reducing fees by even 0.1% would mean a NIS 160 million saving for businesses, and potentially consumers too. This money would be coming out of the credit card companies' pockets.

This is how the sector works: Israel's three credit card companies, Isracard, Cal and Leumi Card, have clearing infrastructure that enables them to take money from credit card holders and to give it to businesses where they made purchases. The clearing credit card company gives the business the money, and charges a fee for the service. Then, the clearing company needs to get the actual payment from the credit card company that issued the consumer's card, and the latter company charges an interchange fee for this - much like cellular companies pay each other an interconnect fee when a customer calls someone whose phone is on a different network. The fees that businesses pay are set based on the interchange fees, and the former are always higher.

Fees are currently 0.975%, and will be 0.875% by 2012, under a 2006 agreement. However, it is most likely still much higher than the actual cost to the companies - Visa Europe estimated that its cost is 0.65%.

Businesses pay an average of 1.3% to the credit card companies, but small businesses in the periphery pay even more - an average of 2%, the Knesset was told.

The Knesset Research and Information center recently published a report stating that consumers are indeed hurt by the many failures in the country's credit card sector, while the companies profit from them.

Work on a reform began while Yaron Zelekha was Finance Ministry accountant general, but was shelved due to pressure from the credit card companies. A bill that was drafted in July would let the Finance Ministry banks supervisor supervise the credit card sector and potentially set interchange fees, thereby opening the sector to competition.

More specifically, it would force any credit card company that issued more than 10% of the country's credit cards to let any other clearing company clear its cards. This would let businesses choose which clearing company to work with. These moves would hurt Isracard, which currently forces many businesses to take it as their clearing company because it does not let other companies clear its credit cards.

Currently, all the credit card companies in Israel can clear their competitors' cards, with three exceptions: American Express and Isracard, which are cleared by Isracard, and Diners, which is cleared by Visa.

In 2005, Isracard was declared to have a monopoly in the credit card clearing business, which means more than 50%.

Isracard, led by CEO Dov Kotler, said in response that since it holds only 17% of the country's credit cards, it is not a monopoly and the market does not need regulatory intervention.