Europe **** at companies making big profits..

[RexNecros]

http://www.fool.com/news/commentary/...ry06041705.htm

Fifteen years after the demise of the Soviet Union, Europe still yearns for the good old days.

All across the Continent, west of the old Berlin Wall, economies are stagnant, GDP growth is anemic, and the powers that be persecute successful companies with malice aforethought. One wonders whether there's a connection there.

In the latest example of Europe's anti-free market bent, the European Commission issued an ultimatum to the credit card companies last week: Lower your prices or face fines of as much as 10% of your annual revenue. The reason: Competition Commissioner Neelie Kroes says card providers such as MasterCard, Visa, and American Express (NYSE: AXP) are earning "outrageous" profits and must be brought to heel.

In support of the Commission's charges, Ms. Kroes cited a slew of pretty bad-sounding statistics:
Fees average 2.5% of the $1.6 trillion spent on card-facilitated purchases last year.
Fees charged to one country's retailers can be as much as six times those charged in another country.
Fees charged to one country's cardholders can be as much as 12 times those charged in another country.
Small- and medium-sized retailers are sometimes charged as much as 70% more per transaction as are large retailers.

Up to that point, I was nodding along in agreement with Ms. Kroes. Although I'm sure there's reason to give large retailers volume discounts on fees for the amount of business they generate, a 70% differential does seem kind of wide. Likewise, it seems strange that the putative "United States of Europe" would have one and the same service priced at $1 in one country, and up to $2 to $6 in another.

Define "outrageous"
But after reading all these numbers the Commission is bandying about: "$1.6 trillion," "six times" this, and "12 times" that, I notice that nowhere have I read -- in any of the press reports on the Commission's witch hunt -- an actual number being put to these "outrageous" profits.

So I turned to Capital IQ, the Oracle of financial data we use here at the Fool, to find out, and it turns out that American Express nets just 6% of its revenues as profit. MasterCard earns a 9% net margin. Only the 14% margin that Visa boasts even shares a zip code with "outrageous."

Don't get me wrong. Fourteen percent is certainly respectable, but I was sure there were companies out there making better margins than that. With a few more clicks, I dug up a handful:
Coca-Cola (NYSE: KO): 21% net margin
Intel (Nasdaq: INTC): 22%
eBay (Nasdaq: EBAY): 24%
Google (Nasdaq: GOOG): 24%
Microsoft (Nasdaq: MSFT): 32%

Now, these companies all have a couple things in common -- both with each other and with the major card providers as well. First, they've all been targeted for criticism by European authorities in recent years -- Coke for out-competing other pop vendors for shelf space, Intel for controlling too much market share, eBay for failing to do the European Community's tax collecting for it, Google for getting too inventive with its advertising, and Microsoft seemingly for every single thing it does.

And the second thing they have in common: They're all American companies.

A bridge too far
The problem with the Eurocrats is that they can't seem to quit when they're ahead to let a good argument stand on its merits. They always have to go one step too far and show their real motives for overregulation and interference in the market: Euro-jingoism.

If Ms. Kroes' (and her Commission's) real motivation is simply to stamp out alleged price gouging and flatten the market for financial services across European borders, then explain this portion of her statement:

"We need a European card payment system that can rival Visa and MasterCard...Those companies are welcome in Europe, as long as they conform to European competition rules, but there is evidence that [they] appear to be abusing the system at the moment."

"Those companies." As in "those American companies that try to earn profits in our Europe?"

Which begs the question: What is Europe's real motivation here? Is it to protect the consumer from price gouging or shut out foreigners in favor of a local "champion" that will probably be guilty of the same gouging?

Two final points
I'm almost at the end of my rant here, but I have two final points before I close. First, on the subject of timing. With none of the existing card providers earning profits that are truly excessive today, one wonders why the Commission is raising a ruckus at this particular time. I suspect the answer has something to do with the fact that MasterCard is planning an IPO any day now. The last thing any company wants is bad press at its coming-out party, so now is an excellent time to try and extract concessions from this weak link of the card industry.

My second point is on economics. For the head of an agency directly responsible for ensuring a free market in Europe, Ms. Kroes seems woefully ignorant of the function of the profit motive. If Europe truly does "need a European card payment system that can rival Visa and MasterCard," then its best bet is to permit the existing companies to earn as much profit as possible.

As Adam Smith teaches, excessive profits inevitably attract competition. Leave Visa and MasterCard to their business, and if their profits are truly "outrageous," a local competitor will inevitably arise to claim a portion of those outrageous profits for itself. (And incidentally, its arrival will create the very competition needed to deflate profit margins.)

On the other hand, if you cap Visa's and MasterCard's profits today, only one result is certain: With no outrageous profits to be claimed, no local champion will ever arise to claim them.

[RusskiSoldat]

Nice copy pasting job, there.
Except it should be in the Political Mudpit.

[imb39]

Quite true! Moved... - imb39

[Denny Crane!]

Small- and medium-sized retailers are sometimes charged as much as 70% more per transaction as are large retailers.

Fees charged to one country's retailers can be as much as six times those charged in another country.

Fees charged to one country's cardholders can be as much as 12 times those charged in another country.

Fees average 2.5% of the $1.6 trillion spent on card-facilitated purchases last year.

I'm sorry you agree with this? The unfair charging of small business is scandalous. If he is looking to standardise charges across the EU then that fits in with the EU objective of harmonisation. Regardless of wether there profits are scandalous they are certainly unbalanced. The first point is a particular sore point with me.

excessive profits inevitably attract competition

Not if stumbling blocks are placed in the way of competition which is exactly what is happening, the actions of these companies are conveniently ignored despite the fact that they are listed as being the very reasons this report has been made.

The EC says its sector inquiry into the payment cards industry shows several barriers to entry into the European markets, including technical obstacles and practices by banks and networks that may raise costs for new entrants.


Despite the existence of internationally accepted payment cards, the EC says barriers to entry mean that much of the industry operates on a purely national basis with 25 separate markets in the EU.


The report, which is based on responses from market participants, found that divergent technical standards across the EU prevent many service providers from operating efficiently on a pan-European scale. The lack of multilateral clearing houses in some markets may make entry more expensive.


The EC says some payment systems also exclude non-banks from the cards business and sometimes charge high joining fees to new entrants. Agreements among local banks may also raise costs for new entrants in some instances.

The payment cards industry in Europe remains national and some local players are preventing competition from developing. This pushes up payment card costs for consumers and businesses. Competition law and sector regulation must work together to create a better environment for business."

When companies try and monopolise an industry or profits then there should be intervention, and there is little cross border competition in these cases. This action could save the EU economy between 50-100 billion a year.

Britain aside from the EU is also hitting the credit card companies themselves The Office of Fair Trading (OFT) said unlawful penalty charges are costing consumers in excess of £300 million a year. charging thirty pounds for administration that costs them five.

http://news.bbc.co.uk/1/hi/programme...ox/4889058.stm

Peter

[Elu Barcino]

Oh, great, ANOTHER Europe bashing thread...

Seriously, do people EVER get bored of this? We have discussed economics, social trends, diesel-powered-submarines and God-knows-what-else. There really is nothing left to talk about.

[God]

diesel-powered submarines?

[Elu Barcino]

diesel-powered submarines?

I know. Things got THAT bad!

[Erik]

Fifteen years after the demise of the Soviet Union, Europe still yearns for the good old days.

All across the Continent, west of the old Berlin Wall, economies are stagnant, GDP growth is anemic, and the powers that be persecute successful companies with malice aforethought. One wonders whether there's a connection there.

I thought the 1990's were considered the good days?
Could it be that economies aren't progressing at a constant rate, but cycle trough periodic recessions and booms?
Is the "connection" the fact that we ALL went trough a GLOBAL recession in 2001-2002, and are now slowly recovering?

Don't get me wrong. Fourteen percent is certainly respectable, but I was sure there were companies out there making better margins than that. With a few more clicks, I dug up a handful:
Coca-Cola (NYSE: KO): 21% net margin
Intel (Nasdaq: INTC): 22%
eBay (Nasdaq: EBAY): 24%
Google (Nasdaq: GOOG): 24%
Microsoft (Nasdaq: MSFT): 32%

Now, these companies all have a couple things in common -- both with each other and with the major card providers as well. First, they've all been targeted for criticism by European authorities in recent years -- Coke for out-competing other pop vendors for shelf space, Intel for controlling too much market share, eBay for failing to do the European Community's tax collecting for it, Google for getting too inventive with its advertising, and Microsoft seemingly for every single thing it does.

And the second thing they have in common: They're all American companies.

And the last thing they have in common: Neelie Kroes doesn't work for any of those companies.
So what companies does she work for?
Well, here's the list:
-Ballast Nedam
-Brambles Industries Ltd.
-McDonald's Nederland
-N.I.B. (Nationale Investeringsbank) N.V.
-Digital Nederland
-NV Nederlandse Spoorwegen
-N.L.O. (Nederlands Luchtvaart Overleg)
-Bank Mees en Hope n.v.
-ICL Nederland
-Royal Nederland Verzekering Mij.
-N.I.B. (Nationale Investeringsbank) N.V.
-Newtron Holding N.V.

Pretty long list, huh?
And several of those are banks or other financial institutions.
So let me guess: maybe one of her companies want to bring out a credit card of their own?
Could it be that Neelie Kroes is doing this just for her own personal benefit?
Wil one of her companies pay her a *ahum* a "special bonus" for this decission?

A bridge too far
The problem with the Eurocrats is that they can't seem to quit when they're ahead to let a good argument stand on its merits. They always have to go one step too far and show their real motives for overregulation and interference in the market: Euro-jingoism.

I agree.
The EC always goes over the top.
But what can we do about it?
They aren't elected in any democratic way, and they can basically do whatever they want.

If Ms. Kroes' (and her Commission's) real motivation is simply to stamp out alleged price gouging and flatten the market for financial services across European borders, then explain this portion of her statement:

"We need a European card payment system that can rival Visa and MasterCard...Those companies are welcome in Europe, as long as they conform to European competition rules, but there is evidence that [they] appear to be abusing the system at the moment."

"Those companies." As in "those American companies that try to earn profits in our Europe?"

Which begs the question: What is Europe's real motivation here? Is it to protect the consumer from price gouging or shut out foreigners in favor of a local "champion" that will probably be guilty of the same gouging?

I already awnsered this question, but I'm going to use this opportunity to point out two vital things:
-"Europe" didn't make this policy, it's the un-democratic and corrupt institution called the EC that does those things, please leave the rest of Europe out of it since we have no way to influence it.
-Kroes is strongly influenced by the many companies she works for, she earns her big money by pleasing those companies, not by doing what is best for Europe.

[Mad Guitar Murphy]

uhm... I think you ppl don't understand what this is about. The EC attempts to save competition on a market that is dominated by only Visa and Mastercard. It is extremely difficult to do what Smit described as 'excessive profits inevitably attract competition'. Smit also said: 'greatest of all monopoly benefits is an easy life' and although in this situation there is a oligopoly there is very little competition and that is the problem Kroes tries to solve.

[Denny Crane!]

Eric can you refute the idea that it will save the economies of the EU 50-100 billion? Can you refute the idea that there are massive stumbling blocks in the way of competitive practice or just speculation?

As the owner of a company that pays extortionate charges I am well aware that the larger companies pay far less and you are damn right I am unhappy about it and welcome legislation.

PEter

[Sidmen]

You pay higher rates because you are more of a risk. Sorry to say it but a mom-and-pop store is much more likely to become bankrupt, or close down than a large multi-national coorperation. Large companies are also much more likely to pay thier bills on time. I'm not saying that you would pay your bills late, or that you will go bankrupt but it is much more likely, thus the higher rates.

The same thing applies from region to region. A company in X country may be more of a risk (due to a variety of factors) than a company of a similar nature in B country.

[Denny Crane!]

You pay higher rates because you are more of a risk. Sorry to say it but a mom-and-pop store is much more likely to become bankrupt, or close down than a large multi-national coorperation. Large companies are also much more likely to pay thier bills on time. I'm not saying that you would pay your bills late, or that you will go bankrupt but it is much more likely, thus the higher rates.

The same thing applies from region to region. A company in X country may be more of a risk (due to a variety of factors) than a company of a similar nature in B country.

Err yeah there is virtually no risk to a credit card company by me going bankrupt. They charge on a regular basis with comparitvely tiny amounts (on a quiet month I may only pay 2.5% of £1000) compared to the big companies and there machines are insured and easily recoverable as they are worth nothing to anyone except the providers, so creditors or recievers are not interested in them.(usually there is only 1-5 in a small business).

Compare that to how much they stand to lose if a big company goes bankrupt? Millions in charges. 10000 small business could go under and not cost the company as much as one big business going under not even half as much, compare £250000 - £100000 in lost charges from small business closure to millions from just one company that year liquidating or going into recievership.

So compare how many medium to large companies go out of business compared to small business' then think about what the credit companies have lost in each case and you will see why that is terrible logic.

Peter

[vikingsiddhu]

Competition should exist, but not at the cost of a free market. If the EU begins to create ultimatiums like this, they will gain too much power.

[Denny Crane!]

Competition should exist, but not at the cost of a free market. If the EU begins to create ultimatiums like this, they will gain too much power.

Anti monopolising and harmonisation are completely different to anti free trade.

Free trade is where supply and demand are not limited by anything but minor regulations. I can't see how this is major or ultimate. It is intended to create competition not subdue it.

Peter

[Mad Guitar Murphy]

Anti monopolising and harmonisation are completely different to anti free trade.

Free trade is where supply and demand are not limited by anything but minor regulations. I can't see how this is major or ultimate. It is intended to create competition not subdue it.

Peter

Quoted for being true, exactly the point I wished to make above.

This is actually a measure to promote free trade and market access. When a market is dominated by 1 or 2 companies, it is very difficult for new companies to enter this market and there generally is very little competition due to the fact that lowering prices would generally result in the same action by the other oligopolist(s). The result is that the rational thing for oligopolists is not to engage each other in price wars but maintain exactly the same prices so there is no real competition left.

In reality, oligopolits very often control the vertical process as well, this means they control most different levels of the production/distribution cycle and this makes it even harder for new firms to enter the market.

[Sidmen]

I don't see your point then. If you charge tiny ammounts of course they will have to charge you a higher percentage than a large company just to make any kind of profit. I would like to see a comparison of european intrest rates from these companies, and american. If they are hugely different I might be concerned, otherwise they are simply applying practices that they have developed over a hundred years of practice.

[Denny Crane!]

I don't see your point then. If you charge tiny ammounts of course they will have to charge you a higher percentage than a large company just to make any kind of profit. I would like to see a comparison of european intrest rates from these companies, and american. If they are hugely different I might be concerned, otherwise they are simply applying practices that they have developed over a hundred years of practice.

I await their inevitable collapse when this ruling comes into place and they have to start supplying small business at a loss (sarcasm off).

Peter

[Dirty Harry]

There is competition tho. Retailers are fighting back:

WASHINGTON, April 11 (Reuters) — Federal regulators wrapped up on Tuesday the first set of public hearings on a request by Wal-Mart Stores to open a bank, but gave scant indication of how they might decide on the application.

Based on questions posed by regulators at the Federal Deposit Insurance Corporation over the last two days, some lobbyists and analysts said that any approval of Wal-Mart's plan would come with strict limits on the banking activities allowed.

Some analysts speculated that Wal-Mart might, for example, be explicitly prohibited from opening full-service bank branches in its stores.

While Wal-Mart executives had earlier considered the benefits of getting into retail banking, the company abandoned that strategy in 2003 and opted to increase sharply the number of independent banks in its stores. Now, the company says it wants a bank to transmit electronic payments.

But many groups opposing Wal-Mart's plan, including banks and some members of Congress, say they do not believe that the retailer has given up its hope of offering everything from checking accounts to home mortgages.

Wal-Mart has applied to open a bank known as an industrial loan company in Utah to process credit card and debit transactions from its stores. Industrial banks are state-chartered and state-regulated. Commercial companies may own them because they are not considered banks under federal laws that bar nonfinancial companies from engaging in banking.

Wal-Mart's bank would transmit payment requests from shoppers to credit card issuers and then transfer payments back to Wal-Mart. It would be a conduit for payments, which would not be deposited into Wal-Mart Bank.

Wal-Mart, in testimony to the F.D.I.C., said its intention to keep community banks in its stores was best illustrated by the long-term contracts it had signed with 1,400 banks and credit unions.

The F.D.I.C. faces no deadline for its decision on the application, first filed in July 2005. The regulatory agency will hold another public hearing later this month in Kansas.

http://www.nytimes.com/2006/04/12/business/12bank.html

Other retailers have tried to set this up and failed, but if anyone can take on the credit card companies it's walmart and once they are sucessful, others will follow.

Europe is just going to muck this up if they try and solve this through redistribution schemes. But we all know how much Old europe despises "anglo-saxon capitalism" and Adam Smith, and that's why their economies are failing and they are becoming increasingly 2nd world. Waging legislative wars against large corporations (the most efficient and economically productive businesses) for "unfair profit making" is probably the dumbest thing they can do right now, but that's never stopped arrogant, reactionist french polticians before.

[Erik]

T
Europe is just going to muck this up if they try and solve this through redistribution schemes. But we all know how much Old europe despises "anglo-saxon capitalism" and Adam Smith, and that's why their economies are failing and they are becoming increasingly 2nd world. Waging legislative wars against large corporations (the most efficient and economically productive businesses) for "unfair profit making" is probably the dumbest thing they can do right now, but that's never stopped arrogant, reactionist french polticians before.

"Old Europe" does choose a different economic system then the "Anglo-Saxons" do.
But why should everybody choose the same way of doing things?
Do you honestly beleive there is only one good way of running an economy?
I happen to prefer our system, but you can keep yours if you want.

And Europes economy isn't failing, it simply goes trough cycles like all economies do.
Greenspan has reduced these short-cycle recessions in America by encouraging household debts at the earliest signs of recession.
This might sound like a good plan but these household debts wil eventually come back to haunt the American economy. (and this isn't going to take long, btw, most likely within two decades)
I also wonder what Adam Smith has to say about this form of economic management by the government (and the FEDS are part of the government, stop fooling yourselves).

It's also a cultural thing.
Europeans and especially the Dutch (Kroes is Dutch if you didn't notice) don't like debts.
Creditcards encourage people to take on more debts, and this is something we don't want from a cultural point of view.
In our culture it's custom for people to work and save up to buy nice things.
In American culture it's more custom to buy nice things first, and then work to pay it back.
I'm not saying one culture is better than the other, but you have to understand that not everybody wants to live like Americans do.

[Dirty Harry]

"Old Europe" does choose a different economic system then the "Anglo-Saxons" do.
But why should everybody choose the same way of doing things?
Do you honestly beleive there is only one good way of running an economy?
I happen to prefer our system, but you can keep yours if you want.

Got news for you buddy, there are winners and losers in life, you can keep your moral high ground along with your 1% economic growth, I'll bank my evil anglo-saxon capitalism and in 30 years be living in a large house with a big family and SUV while you'll still be scrounging to pay rent for a dirty 2 and a half in a run down neighbourhood of rotterdam. Europe's economic policies are driving the whole continent into the ground, the best and brightest with ambition will flock to anglo-saxon countries while the losers who dream of fat civil service jobs will stick around.

And Europes economy isn't failing, it simply goes trough cycles like all economies do.
Greenspan has reduced these short-cycle recessions in America by encouraging household debts at the earliest signs of recession.
This might sound like a good plan but these household debts wil eventually come back to haunt the American economy. (and this isn't going to take long, btw, most likely within two decades)
I also wonder what Adam Smith has to say about this form of economic management by the government (and the FEDS are part of the government, stop fooling yourselves).

Japan just went through 9 years of Eurostagnation after their statist economy fell apart, and only after Koizumi rocked the country with a painful dose of thatcherism and now theyre back on track with a more open anglo-saxon system. Europe's problems are a bit more than cyclical, and it's a fantasy that it will just magically right itself next year with the next upturn.

America's govt is overspending, which most conservatives are not happy about and the GOP might get thrashed this november because of it, but at the same the economy is still growing at a great 4% clip, which means that when they do cut back and focus on debt payment, it will be easier to payoff.

It's also a cultural thing.
Europeans and especially the Dutch (Kroes is Dutch if you didn't notice) don't like debts.
Creditcards encourage people to take on more debts, and this is something we don't want from a cultural point of view.
In our culture it's custom for people to work and save up to buy nice things.
In American culture it's more custom to buy nice things first, and then work to pay it back.
I'm not saying one culture is better than the other, but you have to understand that not everybody wants to live like Americans do.

let the good times roll!