The Turkish Competition Authority (“TCA”) had initiated a preliminary inquiry into Garanti Bank’s activities following the complaint lodged by the association representing the Turkish payment and electronic money sector (“ODED” in Turkish).
Though the TCA decided1 not to launch a full-fledged investigation, it nevertheless withdrew the individual exemptions granted to Garanti Bank between 2014 and 2017.
Recalling that payment and electronic money institutions are subject to the Act No. 6493 on the Payment and Securities Settlement Systems, Payment Services and, Electronic Money Institutions, ODED alleged (i) that payment services providers horizontally compete with banks on the merchant acquiring services market, (ii) that while banks tend to offer their services to companies with higher sales volume, payment and electronic money institutions try to respond to the financial needs of smaller companies, (iii) that credit card schemes, whose main benefit for consumers is that they enable them to obtain instalment plans2, owe their existence to interbank cooperation, which made it possible for banks to offer various benefits to card acceptors (e.g. merchants, retailers, etc.), and that competition takes place on the level of those schemes (and not on the basis of banks), (iv) that payment institutions’ provision of service to card acceptors is conditional upon the procurement of point-of-sale (“POS”) terminals from banks so that the said terminals constitute an essential facility, (v) that Garanti Bank did not respond to POS terminal requests and prevented other banks included in the Bonus scheme from providing POS terminals to payment institutions, (vi) that the supply relationship between Garanti Bank and payment institutions created downstream and upstream markets, that the commissions paid for POS terminals make up the largest cost item for payment institutions, that Garanti Bank prevents competition to take place by charging prohibitive commissions3, (vii) that Garanti Bank has leveraged its position on the banking market to drive payment institutions out of the merchant acquiring services market, and (viii) that the concerned anti-competitive practices may stem from Garanti Bank’s exempted agreements.
The TCA’s Assessments
The TCA noted that payment service providers are card acceptors’ main service providers and that payment institutions have started to provide, on the merchant acquiring services market, digital and physical POS terminals as do acquiring banks (i.e. banks of the card acceptors).
The Bonus scheme helps companies to reach more clients, provides a non-cash payment means to customers, and offers the opportunity to benefit from different companies’ instalment plans and points with a single card. In light of the foregoing, the TCA established the relevant product market as being the “multi-branded credit card issuing market” (the upstream market).
However, as the inclusion of merchants into credit card schemes is of utmost importance, the TCA, to perform its competition analysis, also defined a second relevant market as being the “merchant acquiring services market” (the downstream market).
The TCA first examined the Interbank Card Center’s (“BKM” in Turkish) data according to which there are 1.8 million POS terminals for 59 million issued credit cards in Turkey and established that the competition structure of the merchant acquiring services market has recently changed with the entry of payment institutions on a market on which only banks were active. Indeed, in an environment where card acceptors were encountering difficulties with banks, payment institutions’ services provided them with an alternative. Payment institutions, however, should supply themselves with POS terminals from banks in order to provide their services on the downstream market.
The TCA, taking into account that payment institutions have no difficulty to access POS terminals which allow cash transactions, established that what is at stake in this case is the access to POS terminals enabling instalment payments. As stressed above, ODED alleged that Garanti Bank’s refusal to supply prevents payment institutions from supplying themselves with POS terminals giving access to Bonus cards from the banks that are members to the Bonus scheme and that payment institutions are driven out of the market because they are barred from offering POS terminals allowing instalment payments.
The TCA determined from the evidence gathered during on-the-spot inspections (i) that Garanti Bank had limited cooperation with payment institutions since 2012, (ii) that Garanti Bank’s managers perceived payment institutions as a strategic threat after the adoption of the Act No. 6493 that made it compulsory to meet tough conditions for a company to have the Banking Regulation and Supervision Agency’s (“BDDK” in Turkish) approval to provide payment services, and consequently (iii) that Garanti Bank had a negative approach to developing the cooperation with payment institutions on the grounds that those institutions became Garanti Bank’s competitors on the merchant acquiring services market and that their business model was expanding.
The TCA ruled (i) that Garanti Bank does not hold a dominant position on the upstream multi-branded credit card issuing market, (ii) that stronger competitors have higher market shares, and consequently (iii) that Garanti Bank did not violate Article 6 of the Act No. 4054 on the Protection of Competition (“Competition Act”).
In response to the allegation of entry barriers through Garanti Bank’s exempted agreements, Garanti Bank stressed that the signatory banks to the Bonus scheme may, outside the inclusion of new merchants to the Bonus scheme, freely determine their merchant acquiring services, to which institutions they will provide merchant acquiring services, and that Garanti Bank does not intervene in this process. Indeed, Garanti Bank’s agreements entered into with certain banks had been exempted by the TCA from the year 2002 onwards.
The TCA noted that all the agreements signed between Garanti Bank and banks that are members to the Bonus scheme set out the prohibition to delegate to other banks, credit card issuing institutions, payment institutions5, or institutions providing merchant acquiring services Bonus scheme members’ power to issue, or distribute Bonus credit cards, or to include additional merchants to the Bonus scheme (“sub-licensing prohibition”).
The TCA determined (i) that 29 payment institutions obtained the BDDK’s approval since 2013, (ii) that to offer merchants the possibility to sell on instalment, payment institutions need to have access to credit card schemes’ infrastructures, and (iii) that due to the sub-licensing prohibition the banks that are members to the Bonus scheme could not provide payment institutions such a possibility.
The TCA’s Individual Exemption Assessment
In view of the foregoing, the TCA decided to review the individual exemptions it previously granted to Garanti Bank. First, the TCA examined whether the Bonus scheme contributes to improving the production or distribution of goods, the provision of services, or to promoting technical or economic progress and established that banks use this scheme to benefit from an extensive network rather than to invest in their infrastructure and that they do not incur costs related to repair, maintenance, or human resources. Morever, the TCA underlined that the Bonus scheme allows merchants to reduce their costs as they have the opportunity to accept credit cards from different banks with a single POS terminal.
As regards allowing consumers a fair share of the resulting benefit from Garanti Bank’s restricting practice, Garanti Bank indicated that thanks to the agreements entered into between Garanti Bank and the Bonus scheme’s member banks card holders of the Bonus scheme member banks (i) enjoy the advantages brought by a multi-branded credit card service, (ii) benefit from the instalment possibilities and points provided by the Bonus scheme, and (iii) access more easily a growing variety of goods and services. Eventually, according to Garanti Bank, the Bonus scheme’s member banks have the opportunity to provide better services thanks to the investment, cost, price, and human resource advantages that Garanti Bank’s agreements provide them with.
The TCA, however, noted that merchants’ possibility to sell on instalment could be restricted in case payment institutions are driven out of the merchant acquiring services market. Indeed, according to the TCA, despite the increase in the number of card holders, the fact that many merchants cannot make sales on instalment or can only offer instalment plans to some credit cards could affect consumers’ welfare. Moreover, the TCA also considered that to be compelled to enter into separate agreements with different banks in order to enable sales on instalment to cards included in more than one credit card scheme at the same time could increase merchants’ costs and thus affect consumers’ welfare.
As it is not clear which effect on consumers would prevail after the balancing of the advantages and disadvantages stemming from the sub-licensing prohibition, the TCA eventually concluded that consumers’ welfare condition has not been met.
The TCA held in its previous decisions that competition in the credit cards market takes place between credit card schemes such as World, Bonus, Axess, Advantage, or Maximum rather than between banks themselves. Moreover, the TCA expected the credit cards market to expand with the entry of payment institutions as banks would be able to reach more merchants and as consumers would have more opportunities to purchase on instalment. In this context, as the sub-licensing prohibition bars the entry to payment institutions to the merchant acquiring services market and thereby prevents them from becoming efficient players on the market, the TCA ruled that this condition has not been met either.
Garanti Bank argued that the sub-licensing prohibition only concerns the Bonus brand and the Bonus scheme and that banks that are members to the scheme are free to provide merchant acquiring services to their own merchants by using their own brand. Nevertheless, it has been determined that merchants’ inclusion in the Bonus scheme is subject to Garanti Bank’s approval.
Garanti Bank pointed out that the agreements signed with the Bonus scheme’s member banks since 2002 only confers a non-exclusive, non-transferable, and non-sub-licensable licence to use the name “Bonus” and the Bonus scheme’s practices.
Garanti Bank also argued that many payment institutions which obtained licences have had difficulties they could not predict due to the fact that they have been subjected to new regulations. Garanti Bank suggested that payment institutions cannot manage risks due to their lack of strong fraud and chargeback processes. Garanti Bank further alleged that certain payment institutions gave merchants access to Bonus POS terminals they have been provided with by banks while no agreement has been entered into between the concerned banks and merchants regarding the setting up of POS terminals and without the concerned banks’ knowledge. This latter case led, according to Garanti Bank, to enabling the concerned merchants to benefit from the advantages of the Bonus scheme without signing any agreement with the Bonus scheme’s member banks.
The TCA mentioned that, according to other banks’ responses to the TCA’s request for information, (i) the majority of banks do business with payment institutions, (ii) the banks have a positive opinion of payment institutions’ risk perception, which are subject to the BDDK’s regulations and to the standards of institutions such as VISA and Mastercard, and (iii) the variety of services provided by payment institutions increases consumers’ welfare and contributes to the expansion of card usage.
Following its analysis, the TCA admitted that the sub-licensing prohibition could be deemed reasonably necessary to protect Bonus’ brand image. The TCA, however, established that the sub-licensing prohibition could prevent payment institutions from supplying themselves with POS terminals from banks that are members to the Bonus scheme and that this constitutes an impediment to payment institutions acting as intermediaries in the sales on instalment realised by merchants in the merchant acquiring services market.
In the light of the foregoing, the TCA decided (i) that Garanti Bank did not infringed Article 6 of the Competition Act on the ground that it does not hold a dominant position, (ii) that Garanti Bank’s agreements are not eligible for negative clearance, (iii) that the said agreements are not eligible neither for block exemption on the ground that they have been entered into between competitors, nor for individual exemption given that they do not meet the conditions determined by Article 5 of the Competition Act, but nevertheless (iv) that no full-fledged investigation should be launched into Garanti Bank’s activities. The TCA further decided to withdraw the individual exemptions previously granted to Garanti Bank’s agreements.
In addition, the TCA held on the basis of Article 9(3) of the Competition Act (i) that the provisions (contained in Garanti Bank’s agreements) restricting payment institutions’ access to the Bonus scheme should be repealed and (ii) that the banks that are members to the Bonus scheme should be able to enter into contract with any merchant in the market of merchant acquiring services market. Eventually, the TCA ruled that individual exemption could be granted to Garanti Bank’s agreements provided the said repeals are carried out and submitted to the TCA within 2 months after the notification of its decision.
1. The TCA’s decision numbered 17-28/462-201 and dated 07.09.2017.
2. Indeed, around 70% of credit card sales are instalment sales.
3. According to ODED’s allegation, the commission rate charged by Garanti Bank is 5-6 times higher than the interchange commission rate determined by the Interbank Card Center.
4. For example, by offering merchants POS terminals without charging any commission.
5. Those have been included in Garanti Bank’s agreement after the entry into force of the Act No. 6493.
By Baris Yuksel, Senior Associate, Mustafa Ayna, Associate, and Hasan Guden, Associate, ACTECON