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Colombia’s antitrust authority has ordered Visa and Mastercard to drop plans to restrict the operation of local agents who provide a cheaper alternative to the card networks for cross-border payments.
On July 28, the Superintendency of Industry and Commerce (SIC) issued an order directing Visa and Mastercard to abandon plans that would require local agents to process cross-border payments via two specific schemes.
The move would restrict competition for cross-border card payments and significantly drive costs up for cross-border transactions, including foreign subscription-based streaming services, SIC said.
Who are these local agents?
The local agent (LCA) model emerged five years ago as a lower-cost alternative to Visa and Mastercard when buying from a merchant based in another country.
Originally, when Colombians pay abroad, cross-border card payments go through the international payment networks of Visa or Mastercard.
These transactions are typically very costly, SIC said, because they are processed in foreign currency, involve high exchange rates and banks automatically defer payments to 24 or 36 instalments.
The LCA model was created with a view to providing a cheaper alternative to this system. Under this model, businesses create local agents in each country, which then serve as intermediaries that connect foreign merchants directly with local payment systems and consumers.
Cross-border transactions using the LCA model therefore work as local transactions in the sense that they use local currency and enable consumers to choose in how many instalments they want to pay their deferred payment.
Local agents, such as Ebanx, PayU and NextBank, can transfer the funds to foreign businesses without the need for the use and intermediation of card networks, which enables them to provide a less expensive alternative for cross-border payments.
According to the document, subscription giants such as Netflix and Spotify are paid under this model.
Card networks react
Earlier this year, Visa and Mastercard started to communicate with acquiring banks that the LCA model may breach their terms of use and could lead to penalties or to the revoking of their card licences.
In a letter sent to one of the banks, Mastercard wrote “it is aware” of the existence of these transactions.
“Connecting domestic cardholders with merchants located outside the acquirer's jurisdiction may violate Mastercard’s terms of use and could create risks in the Mastercard network by hiding the identity of merchants,” the card network warned.
Visa and Mastercard urged banks to stop partnering with more foreign businesses for the LCA model and informed banks that if they wish to use local agents for cross-border payments, they must do so either via Visa’s Expanded Merchant Location Program (EMLP) or via Mastercard’s Payment Intermediary Foreign Exchange Operators (PIFO) scheme.
Payments to foreign merchants made outside of the EMLP and PIFO schemes will be blocked, they warned.
According to the SIC, the fees and costs included in these schemes are similar to those of the traditional cross-border model.
In March, Patricio Sandoval, country manager of Mastercard Chile and Paraguay, told Forbes Chile that adherence to the new schemes would mean transparency for the transactions on the network.
“For example, when an international transaction is considered as if it were domestic, it generates various distortions.”
It may create “economic benefits for some actors, an unfair advantage for actors who do not respect the rules, and risks posed by some actors hiding information in these transactions”, he explained.
“Our main goal with the PIFO scheme is to fix the distortions that take place when international operations are incorrectly considered as domestic operations,” Sandoval emphasised.
The new requirements were originally planned to come into effect at some point between July and September 2022 in Colombia, while the SIC noted that similar plans have also been announced in Chile, Argentina and Peru.
DLocal, an agent and the complainant in the case, estimates that it would increase fees for LCA transactions by 700 to 1,000 percent.
The SIC now directs Visa and Mastercard to stop these communications and abandon their plans to introduce schemes that would prohibit or restrict the operation of local agents in the LCA model.
The SIC explicitly urged financial institutions and banks to continue contracting with local agents.
The agency said the measures are “proportional” because they maintain the status quo and are “not detrimental to the economic activity carried out by Visa and Mastercard".
