April 11, 2013
MasterCard, the world's second largest credit card network, continues to face allegations of anticompetitive behavior on both sides of the Atlantic.
In addition to MasterCard facing the still yet-to-be-fully-approved $7.2 billion class action lawsuit in the U.S., the European Commission announced this week that it had opened an investigation into the company's potentially anticompetitive interchange fees. This dovetails with the Commission's ongoing investigation into similarly anticompetitive practices by Visa, which began last July, and the efforts of the eight European Union countries where both card-processing giants are either under investigation or facing court proceedings.
The Commission announced that it was focusing particularly on transaction fees levied by MasterCard on payments made by cardholders from countries outside the European Economic Area (EEA), as when a U.S. resident uses their MasterCard to pay a merchant in the EEA for a purchase, rather than fees for cross-border transactions within the EEA, which were outlawed in 2007. Furthermore the Commission said it would be broadly investigating any of MasterCard's related business practices that amplify the risk of anticompetitive behavior, such as the "honor all cards" rule, which requires merchants to accept all or none of MasterCard's payment cards.
"These fees and practices may restrict competition. The inter-bank fees are generally passed on to the merchants, leading to higher overall fees for them," said the Commission. "Ultimately, such behavior is liable to slow down cross-border business and harm EU consumers," they added, noting that new regulations on payment card fees are expected to be proposed by the Commission before summer.
Antitrust enforcement in the EU has always been extraordinarily rigorous, and the Commission's approach of aiming to eliminate or prohibit the use of fees by card networks offers a sharp contrast to the approach taken in the United States. The Visa/MasterCard antitrust settlement, which has left merchants with more questions than answers, doesn't target the fees themselves so much as it aims to shift the burden. Whereas the European Commission seems to want to eliminate credit card fees as a source of revenue for companies like Visa and MasterCard, in the U.S., those fees will just come from elsewhere, which is partly why the American Visa/MasterCard settlement doesn't offer much in the way of a mechanism to allow merchants to negotiate for lower fees.
"There is a term in the agreement that provides for Visa and MasterCard to be forced to come to the negotiating table to the extent that you have merchants band together to demand a discussion or negotiation, but no one knows what the teeth of that provision will actually be," said Ron Clifford, Esq. of Blakeley & Blakeley LLP during an interview in late 2012. "One of the things the settlement doesn't do is answer the question, 'how do we get away from the interchange fee, period?'"
- Jacob Barron, CICP, NACM staff writer
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Depending on what numbers experts take most to heart, it appears Germany's production levels are finally coming out of an uncharacteristically poor period that marked Europe's cold-weather months. Although, in the past, such news would signal improvement for the greater European Union, this rebound likely has much more to do with recently improved economic conditions in the United States and China as well as an increased focus on buying power in emerging markets.
The German Economic Ministry reported a 0.5% bump in production from January to February, welcome news after the economy actually lost ground in 2012's fourth quarter. German companies spent more on capital expenditures and increased energy production that, as NACM Economist Chris Kuehl, PhD characterized it, "matches a rise in industrial output."
"The German economy is still highly dependent on the export sector, but that is starting to pay off a little as there was some recovery in the economies of the U.S. and China," said Kuehl. "There is not much demand coming from within the euro zone to be sure, but there is at least some return of the domestic demand that Germany saw last year." It's also worth noting just how far German companies have come in exporting to companies based in emerging countries outside of the usual suspects. Berlin-based economic research outfit DIW also noted in a recent report how other EU members have slid in importance in the eyes of many German businesses now setting sights on up-and-coming markets not as tied to the crisis in Europe.
Granted, not everyone is sold that Germany has entirely left a bleak 4Q2012 behind. Even Kuehl said conditions are more upbeat while warning "not all things have reversed." In addition, Markit's Purchasing Managers' Index for March declined by more than a full point to a level of 49 (50 is considered growth-neutral). The study illustrates a problem of falling orders, perhaps suggesting that Germany has more work to do in penetrating emerging economies to offset the potential volatility of the EU and, to a somewhat lesser extent, the U.S. and China.
- Brian Shappell, CBA, NACM staff writer
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Banks participating in the U.S. Treasury's Small Business Lending Fund (SBLF) continued to outshine their non-participant counterparts. Lending levels among institutions receiving SBLF capital have increased for seven consecutive quarters to the tune of $8.9 billion since the depths of the recession in 2009, representing an estimated 38,000 small business loans over baseline levels.
The SBLF works by providing capital to community banks with less than $10 billion in assets. Each bank's dividend or interest rate that it pays on funds provided to them through the SBLF is reduced as the bank increases its lending to small businesses.
Treasury's latest report on the program also showed that SBLF participants increased their lending by $1.5 billion more than the prior quarter, representing the second highest increase since the program's inception as part of the Small Business Jobs Act, enacted in 2010. All in all, community banks relying on SBLF funds have increased their business lending by 38%, a substantially greater amount than a peer group of similar banks across median measures of size, geography and loan type.
Increases in lending were also reflected in recent figures from the Federal Deposit Insurance Corporation (FDIC), which reported this week that the total amount of outstanding small business loans increased for the first time since 2010, inching up from $584 billion in the third quarter to $586 billion in the fourth. Despite these improvements, however, lending for small businesses remains historically low and demand exceptionally weak. For example, while lending in the final quarter of 2012 increased from the prior quarter, it was still down year-over-year. The total at the end of 2011 hit $598 billion, and 2010 ended at $626 billion.
- Jacob Barron, CICP, NACM staff writer
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Hope that the confidence levels of U.S. small businesses could continue a three month improvement streak was dashed April 10, as a March fallback has put a key index below its average for the entire economic recovery, lackluster as it has been.
The National Federation of Independent Business (NFIB) reported that its March Index of Small Business Optimism, which had been gaining since December, declined 1.3 points to 89.5. To add insult to injury, the new level is 1.2 points below the 90.7 average the index has tracked at since the onset of the economic recovery (July 2009). Among the indicators dragging down the optimism index were low sales expectations and potential inventory investment.
"After another false start, small business confidence has sputtered and stalled again," said NFIB Chief Economist Bill Dunkelberg. "Virtually no owners think the current period is a good time to expand because they simply don't know what the future holds. So why invest? And with the lack of any sustainable fiscal policy or a federal budget, no one's banking that Washington will be at forefront of any meaningful change." The critique of lawmakers in Congress and the Obama Administration as key to the slide in the March optimism level is far from a unique assertion on the part of NFIB.
The report showed a 5% decline in business owners planning to increase inventory, a 6% drop in those expecting an improvement in credit conditions and a 23% plummet in those anticipating better earnings trends.
- Brian Shappell, CBA, NACM staff writer
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Total commercial bankruptcies in March 2013 increased by 10% over the previous month to 4,074, but compared to years prior, filings still remain at historic lows.
Commercial cases filed in March 2012, for example, were 29% higher than they were this year, and the story is the same everywhere in the world of bankruptcy. While there may be some month-to-month swings, the overall mood is one in which fewer and fewer businesses and individuals are using the courts to reorder their debt.
"Bankruptcy filings continue to fall due to persistent low interest rates, reduced consumer spending and sustained deleveraging by businesses and households," said American Bankruptcy Institute (ABI) Executive Director Samuel Gerdano. "We expect that the 2013 bankruptcy totals will be lower than last year's as companies and families remain committed to cutting costs and shoring up their balance sheets."
In the first quarter of 2013, there were 11,521 commercial bankruptcy filings, representing a 27% decrease from the 15,869 filings during the same period in 2012. Total filings in the U.S., including commercial and noncommercial, decreased 16% in the first quarter of this year when compared to 2012.
Measuring on a monthly basis, however, March still saw double-digit increases over February's figures in all categories. In addition to the 10% jump in commercial cases, both total filings and noncommercial filings increased by 25%. The per capita filing rate for the first three months of 2013 also increased to 3.40 (total filings per 1,000 per population) from the 3.11 filing rate of the first two months of the year. States with the highest filing rates were the usual suspects: Tennessee (6.70), Georgia (5.77), Alabama (5.71), Illinois (5.35) and Nevada (5.03).
- Jacob Barron, CICP, NACM staff writer
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Statistics early this year seemed to indicate that China was rebounding from sagging growth rates. However, China got a couple of unwelcome surprises this month. First, various statistics and analyses suggest that China's export strength may not be exactly what it appeared to be in recent months or years. Then, other factors led a major credit ratings agency to downgrade the Asian powerhouse in one category for the first time this century.
Perhaps the biggest surprise in business and economic news since the European Union badly bungled a proposed Cyprus banking bailout was the uncharacteristic Chinese trade deficit exceeding $884 million reported for last month. Though China's import levels surged because of the need for raw materials, its export growth shrunk to 10%, which is less than half the level from this period in 2012, and well off projections. Additionally, statistical anomalies within the data have caused louder and more widespread questions from economists about the accuracy of Chinese statistics. In short, more and more experts are accusing the Chinese of padding. It's worth noting that China is also seen throughout the world as the most significant manipulator of currency value, something that critics say gives them a massive and unfair trade advantage.
Meanwhile, for much of 2011 and 2012, Fitch Ratings tended to be a little quieter and less controversial than its colleagues in the "Big Three" credit ratings agencies. That changed this year with some of Fitch's moves, the latest of which being this week's downgrade of a Chinese rating. Though Fitch affirmed China's Long Term Foreign Currency Issuer Default Rating (IDR) at the top A+ level, the agency downgraded the Long-Term Local Currency IDR from A+ to AA-. It is the first downgrade of a Chinese rating since 1999. The reasoning is an increase of debt-related risk to China's overall financial stability. According to Fitch's release:
"Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012. The stock of bank credit to the private sector was the third-highest of any Fitch-rated emerging market...Fitch believes total credit in the economy including various forms of 'shadow banking' activity may have reached 198% of GDP at end-2012, up from 125% at end-2008."
Still, for China, the Fitch outlook is set at "stable." Granted, the agency noted this could all change with a steep and surprising downturn or, perhaps more poignantly, increased volatility among neighbors in the region, whether directly or indirectly involving China.
"The ratings assume there is no significant deterioration of geopolitical risk, for example a conflict between China and Japan or an outbreak of war on the Korean peninsula," Fitch noted.
- Brian Shappell, CBA, NACM staff writer
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