Program Pendidikan Akuntansi BCA

Assignment Managerial Economics

Lestano, Ph.D.
To be handed: fnal eam date
!isa and MasterCard"s Association
Potentiall#
Anticom$etiti%e
Michael Ba#e and Patrick &cholten $re$ared this case to ser%e as the
basis 'or classroom discussion rather than to re$resent economic or
legal 'act. The case is a condensed and slightl# modifed %ersion o' the
$ublic co$# o' the Com$laint fled in (nited &tates o' America %ersus
!isa (.&.A., )nc. et al. dated *ctober +, ,--.. /o. -.0ci%.+1+2.
*!E3!)E4 *5 MA36ET 5*3 7E/E3AL P(3P*&E CA3D &E3!)CE&
!isa and MasterCard com$ete in the market 'or general $ur$ose card
net8ork $roducts and ser%ices. 7eneral $ur$ose cards, 8hich include
credit cards and charge cards, are $a#ment de%ices that enable
consumers to make $urchases 'rom unrelated merchants 8ithout
immediatel# accessing or reser%ing 'unds. !isa and MasterCard are the
t8o largest general $ur$ose card net8orks. Together, the# account 'or
o%er +9: o' all $urchases made 8ith general $ur$ose cards in the
(nited &tates.
!isa and MasterCard are ;oint %entures < or, as the# call themsel%es,
=associations> < created, o8ned, go%erned, and o$erated b# and in
the interests o' their member banks. These banks use the associations"
$roducts and ser%ices either to issue cards to consumers, $ro%ide card
acce$tance ser%ices to merchants, or both.
The same large banks control both associations b# simultaneousl#
ser%ing on the board o' directors o' one and on im$ortant committees
o' the other. )n addition, each o' these banks issues signifcant
numbers o' both !isa and MasterCard cards. The control o' the t8o
associations b# banks that ha%e signifcant interests in both < kno8n
in the industr# as =dualit#> < has $ossibl# substantiall# lessened
com$etition bet8een !isa and MasterCard because these banks seem
to ha%e been, and continue to seem to seem to be, signifcantl# less
8illing to 'und and im$lement com$etiti%e initiati%es that 8ould cause
consumers to s8itch their business 'rom one association to the other.
1
)n addition, both !isa and MasterCard < on behal' o' and in
collaboration 8ith the banks that go%ern them < ha%e ado$ted rules
and $olicies that might restrict the abilit# o' all member banks to do
business 8ith American E$ress, Disco%er?/o%us, or an# other net8ork
that the controlling banks deem to be =com$etiti%e.> )m$ortantl#, !isa
and MasterCard do not a$$l# these rules to one another. Banks can
there'ore do business 8ith the t8o largest general $ur$ose card
net8orks, but not 8ith smaller com$etitor net8orks. These
eclusionar# rules and $olicies might eliminate certain 'orms o'
com$etition among the !isa and MasterCard member banks, and might
ha%e e@ecti%el# $recluded American E$ress and Disco%er?/o%us 'rom
com$eting to enlist banks in the (.&. to issue their cards.
Through their common control o' both !isa and MasterCard, the largest
banks might ha%e stiAed com$etition bet8een these t8o net8orks and
might ha%e th8arted com$etition 'rom smaller com$etitor net8orks.
This $ossible reduction in com$etition among general $ur$ose card
net8orks might ha%e hindered and dela#ed the de%elo$ment and
im$lementation o' im$ro%ed net8ork $roducts and ser%ices, and might
ha%e lessened consumer choice. )' allo8ed to continue, the $ossibl#
anticom$etiti%e structure and $ractices o' the associations could
threaten com$etition in the de%elo$ment and marketing o' ne8
general $ur$ose card $roducts, such as $roducts that integrate credit,
debit, and stored %alue 'unctions.
&ince the mid0,-21s, !isa and MasterCard ha%e o$erated general $ur$ose
card net8orks throughout the (nited &tates. The# $ro%ide card net8ork
$roducts and ser%ices in, and those $roducts and ser%ices a@ect a
substantial amount o' interstate commerce. )n ,--+, transaction %olume
on the !isa and MasterCard net8orks eceeded B211 billion.
3ELE!A/T MA36ET
7eneral $ur$ose cards are $a#ment de%ices that a consumer can use
to make $urchases
CaD 'rom unrelated merchants and CbD 8ithout accessing or reser%ing
the consumer"s 'unds at the time o' the $urchase. There are t8o
$rinci$al t#$es o' general $ur$ose cards:
credit cards < such as !isa and MasterCard Classic and 7old cards,
the American E$ress *$tima card, and the Disco%er card < that
usuall# $ermit the cardholder to either CiD $a# all charges 8ithin a
set $eriod a'ter a monthl# bill is rendered, or CiiD $a# onl# a $ortion
o' the charges 8ithin that time and $a# the remainder in monthl#
installments, including interestE and
charge cards < such as the American E$ress 7reen Card < that
reFuire the cardholder to $a# all charges 8ithin a set $eriod a'ter a
monthl# bill is rendered.
7eneral $ur$ose cards do not include cards that can be used at onl#
one merchant Ce.g., de$artment store cardsD or cards that immediatel#
access 'unds on de$osit in a checking or sa%ings account Ce.g., debit
cardsD.
2
7eneral $ur$ose cards $ro%ide a consumer 8ith a combination o'
con%enience, 8ides$read acce$tance, securit#, and de'erred $a#ment
o$tions that are not e@ecti%el# re$licated b# an# other 'orm o'
$a#ment. 5or a signifcant number o' consumers and t#$es o'
transactions, other 'orms o' $a#ment are not a close substitute 'or
general $ur$ose cards.
Com$etition to $ro%ide general $ur$ose cards occurs at t8o le%els.
5irst, !isa and MasterCard com$ete 8ith American E$ress,
Disco%er?/o%us, Diners Club, and Ga$an Credit Bureau CGCBD in an
u$stream market, hereina'ter re'erred to as the general $ur$ose card
net8ork market. &econd, indi%idual !isa and MasterCard member
banks com$ete 8ith each other and 8ith American E$ress,
Disco%er?/o%us, Diners Club, and GCB in t8o do8nstream markets:
the card0issuing market 00 the market 'or issuing general $ur$ose cards
to consumersE the card0acce$tance market 00 the market 'or $ro%iding
the ser%ices that enable merchants to acce$t general $ur$ose cards 'or
the $urchase o' goods or ser%ices.
The !isa and MasterCard associations com$ete onl# in the u$stream
net8ork market. Their member banks < 8ith the ece$tion o' Citibank,
8hich o8ns Diners Club < com$ete onl# in the t8o do8nstream
markets. American E$ress, Disco%er?/o%us, Diners Club, and GCB are
integrated entities that com$ete in all three markets.
Product Market
Certain 'unctions essential to the acce$tance and use o' general
$ur$ose cards are most eHcientl# $er'ormed b# general $ur$ose card
net8orks, o'ten because the 'unctions reFuire broad coordination
across the net8ork. 5or eam$le, among these 'unctions, all general
$ur$ose card net8orks:
)n%ent, de%elo$, and im$lement s#stems and technologies,
including s#stems to authoriIe and settle card transactions and
reduce 'raudE
De%elo$, market, ad%ertise, and $romote their brand names among
consumers and merchantsE
)n%ent, de%elo$, im$lement, standardiIe, market, and ad%ertise
t#$es o' card $roductsE
De%elo$ and im$lement rules and standards to go%ern their
net8orksE &et 'ees and assessments 'or use o' the
net8ork"s $roducts and ser%ices,
3
including the interchange 'ee that accounts 'or the largest $art o'
the $rice that merchants $a# 'or the right to acce$t general $ur$ose
cardsE and
Etend card acce$tance to merchant segments that ha%e not
acce$ted cards in the $ast.
The $roducts and ser%ices $ro%ided b# general $ur$ose card net8orks
'orm a net8ork market, 8hich is rele%ant $roduct market. Banks and
other entities that issue cards and $ro%ide card acce$tance ser%ices to
merchants rel# on general $ur$ose card net8orks to $ro%ide a core set
o' these $roducts and ser%ices 'or 8hich there is no cost0e@ecti%e
alternati%e. Card issuers and banks that $ro%ide card acce$tance
ser%ices to merchants thus cannot substitute other $roducts and
ser%ices 'or the $roducts and ser%ices $ro%ided b# general $ur$ose
card net8orks in an amount suHcient to deter the eercise o' market
$o8er in the net8ork market. )n addition, consumers do not substitute
other 'orms o' $a#ment, and merchants do not sto$ acce$ting general
$ur$ose cards, in amounts suHcient to deter the eercise o' market
$o8er in the net8ork market.
The $roducts and ser%ices $ro%ided b# general $ur$ose card net8orks
are critical in$uts to the entities that issue cards to consumers and
$ro%ide card acce$tance ser%ices to merchants.
Card issuers com$ete 'or cardholders 8ith res$ect to interest rates,
annual cardholder 'ees, $a#ment terms and conditions, card
enhancements, and customer ser%ice. Entities that $ro%ide card
acce$tance ser%ices to merchants com$ete 8ith res$ect to their 'ees
and the Fualit# o' ser%ice the# $ro%ide. This com$etition among !isa
and MasterCard member banks in the card0issuing market and the
card0acce$tance market is not a substitute 'or, and does not re$lace,
com$etition at the net8ork le%el. Com$etition at the do8nstream
le%els thus cannot $rotect consumers 'rom the anticom$etiti%e e@ects
o' the eercise o' market $o8er b# general $ur$ose card net8orks.
Com$etition among card issuers does, ho8e%er, ensure that i' net8ork
com$etition is %igorous, the benefts o' that com$etition 8ill be $assed
on to consumers.
7eogra$hic Market
The (nited &tates is the rele%ant geogra$hic market 'or each rele%ant
$roduct market. Almost all o' the general $ur$ose cards issued b#
banks based in the (nited &tates are issued to domestic cardholders,
and these consumers use their cards $redominantl# at merchants
located in the (nited &tates. Most general $ur$ose card transactions
8ith merchants located in the (nited &tates are made using cards
issued in the (nited &tates, and most merchants 8ould not consider
net8orks o$erating outside the (nited &tates to be a substitute 'or
net8orks o$erating in the (nited &tates.
!isa and MasterCard consider the (nited &tates to be a se$arate
geogra$hic market, as demonstrated in $art b# their establishing
se$arate Boards o' Directors 'or < and
4
se$arate rules go%erning the o$eration o' < their card net8orks in the
(nited &tates. 5or eam$le, the !isa and MasterCard rules $ermitting
the member banks to issue !isa and MasterCard, but no other
net8ork"s cards, a$$l# onl# in the (nited &tates.
!)&A A/D MA&TE3CA3D JA!E MA36ET P*4E3 )/ TJE /ET4*36
MA36ET
!isa and MasterCard"s Fuestionable actions related to anticom$etiti%e
e@ects occur $rimaril# in the net8ork market. !isa and MasterCard
together ha%e and eercise market $o8er in the net8ork market. !isa
and MasterCard are the t8o largest general $ur$ose card net8orks in
the (nited &tates. Their onl# signifcant com$etitors are the American
E$ress and Disco%er?/o%us net8orks, and entr# into the net8ork
market is etremel# diHcult.
!isa and MasterCard Dominate the Market
)n ,--+, !isa accounted 'or a$$roimatel# 91: o' the dollar %olume o'
transactions on all general $ur$ose cards in the (nited &tates and
a$$roimatel# 9K: o' the number o' general $ur$ose cards issued. )n
,--+, MasterCard accounted 'or a$$roimatel# L9: o' the dollar
%olume o' transactions on all general $ur$ose cards in the (nited
&tates and a$$roimatel# KK: o' the number o' general $ur$ose cards
issued. Together, !isa and MasterCard account 'or a$$roimatel# +9:
o' general $ur$ose card dollar %olume and a$$roimatel# .2: o' the
number o' general $ur$ose cards issued.
)n the (nited &tates, a$$roimatel# K.M million merchant outlets acce$t
both !isa and MasterCard. Practicall# e%er# merchant that acce$ts !isa
also acce$ts MasterCard and %ice %ersa. This common merchant base
is signifcantl# larger than the base o' an# other net8ork com$etitor. )n
,--+, American E$ress accounted 'or a$$roimatel# ,.: o' dollar
%olume and 9: o' general $ur$ose cards issued in the (nited &tates.
Cards on the American E$ress net8ork 8ere acce$ted at
a$$roimatel# L.9 million merchant outlets in the (nited &tates. )n
,--+, Disco%er?/o%us accounted 'or a$$roimatel# 2: o' dollar
%olume and ..9: o' general $ur$ose cards issued in the (nited &tates.
Cards on the /o%us net8ork 8ere acce$ted at a$$roimatel# K.,
million merchant outlets in the (nited &tates.
There are t8o other general $ur$ose card net8orks that com$ete in
the (nited &tates:
Diners Club?Carte Blanche CDinersD, 8hich is o8ned b# Citicor$ <
the bank that has issued the largest number o' !isa and MasterCard
cards < and
GCB, a net8ork based in Ga$an that issues cards in the (nited &tates
$rimaril# to Ga$anese e$atriates.
Both net8orks ha%e com$etiti%el# insignifcant market shares and
limited merchant acce$tance in the (nited &tates.
5
Com$etition among Card )ssuers is /ot a &ubstitute 'or /et8ork
Com$etition
Card issuers ma# com$ete on interest rates, 'ees, enhancements, and
customer ser%ice. This com$etition, ho8e%er, cannot cure the harm to
consumers arising 'rom a lack o' com$etition among card net8orks,
nor does it $re%ent the !isa and MasterCard member banks 'rom
collecti%el# eercising $o8er in the net8ork market to the detriment o'
consumers.
There Are &ignifcant Barriers to /et8ork Entr#
The $ros$ect o' entr# b# ne8 card net8orks does not $re%ent !isa and
MasterCard 'rom eercising market $o8er in the net8ork market. Entr#
is etremel# diHcult because establishing a ne8 general $ur$ose card
net8ork reFuires large in%estments to de%elo$ both cardholder and
merchant bases. Coordinated de%elo$ment o' both cardholder and
merchant bases is critical because the utilit# o' a $articular card
$roduct to cardholders and merchants de$ends not onl# on the cost
and 'eatures o' the card, but also on the ubiFuit# o' its acce$tance and
use.
&ince !isa and MasterCard 8ere 'ormed in the mid0,-21s, onl# one
net8ork has success'ull# entered the rele%ant market. )n ,-.9, &ears
created that ne8 net8ork, then called Disco%er and no8 kno8n as
/o%us, b# building on the in'rastructure and the cardholder and
merchant bases o' the &ears single0retailer card s#stem. At the time,
&ears 8as one o' the largest retailers and card issuers in the (nited
&tates.
)n the earl# ,-.1s, Citicor$ < the largest issuer o' !isa and MasterCard
cards and, at the time, a large $ro%ider o' card acce$tance ser%ices to
merchants < unsuccess'ull# attem$ted to enter the net8ork market.
*ther com$anies that considered entering the net8ork market
concluded that the high cost o' building a merchant and cardholder
base made entr# too diHcult. 5or eam$le, in the late ,-.1s, ATNT
considered 'orming a ne8 general $ur$ose card net8ork. A'ter
anal#Iing the Disco%er and Citicor$ e$eriences, ho8e%er, it decided
not to enter the net8ork market. ATNT instead entered onl# at the
card0issuing le%el b# becoming a member o' !isa and MasterCard.
!isa and MasterCard ha%e ado$ted and maintained $ossible
anticom$etiti%e rules and $olicies that 'urther increase an entrant"s cost
o' de%elo$ing cardholder and merchant bases. B# %irtue o' their dominant
market shares and the diHcult# o' entr# into the highl# concentrated
net8ork market, !isa and MasterCard together ha%e $otential $o8er to
in;ure com$etition in that market. As described belo8, the# might ha%e
eercised that $o8er to the detriment o' consumers b# reducing
com$etiti%e in%estments in the inno%ation, de%elo$ment, and marketing
o' im$ro%ed net8ork $roducts and ser%ices, and ma#be b# restraining the
com$etiti%eness o' smaller net8orks.
6
TJE &AME BA/6& JA!E TA6E/ C*/T3*L *5 B*TJ !)&A A/D
MA&TE3CA3D
Both !isa and MasterCard are organiIed as membershi$ cor$orations
that ostensibl# o$erate on a not0'or0$roft basis. Their acti%ities are
fnanced through 'ees and assessments le%ied on their members. Both
card net8orks $ermit a %ariet# o' fnancial institutions to become
members, including commercial banks, thri'ts, credit unions, and
entities that are engaged $rimaril# in the card business, commonl#
kno8n as =non0bank banks> or =monocline banks.> 5rom here on, all
t#$es o' fnancial institutions that are eligible to become members o'
!isa and MasterCard are re'erred to collecti%el# as =banks,> and all
fnancial institutions that are members o' !isa and?or MasterCard are
re'erred to collecti%el# as =member banks.>
(nder !isa"s and MasterCard"s cor$orate structures, a member bank in
either association has the right to issue cards bearing the association"s
trademark and to o@er card acce$tance ser%ices 'or the association"s
cards. Most member banks < including all o' the largest ones < also
become o8ners o' the association and recei%e a bundle o' rights
similar to those o' a shareholder in a cor$oration. These rights include
the o$$ortunit# to %ote 'or a board o' directors, $artici$ate in the
go%ernance o' the association, and share in the association"s assets
u$on dissolution. !oting and dissolution rights are a$$ortioned
according to the dollar %olume o' transactions that the bank has
transmitted through the net8ork. Member banks also agree to abide b#
the associations" b#la8s, rules, regulations, and $olicies.
!isa and MasterCard Began As Entirel# &e$arate &#stems
Prior to ,-+1, !isa and MasterCard 8ere controlled b# di@erent grou$s o'
banks. )n ,-+1, one o' !isa"s member banks, 4orthen Bank o' Arkansas,
sought to become a cardissuing member o' both net8orks. MasterCard
did not ob;ect, but !isa res$onded b# ado$ting a b#la8 that $rohibited
member banks 'rom issuing an# other net8ork"s cards.
4orthen then sued !isa and the district granted summar# ;udgment 'or
4orthen. The Eighth Circuit, ho8e%er, re%ersed and remanded 'or trial.
4hile the case 8as a8aiting trial, !isa asked the De$artment o' Gustice
to e$ress its %ie8s < $ursuant to a De$artment $rocedure called a
=Business 3e%ie8> < on the legalit# o' a more restricti%e b#la8 that
8ould ha%e $rohibited !isa members 'rom both issuing cards and
$ro%iding card acce$tance ser%ices 'or =an# other OcardP $rogram
$resentl# eisting or 8hich ma# de%elo$.> The De$artment res$onded
that it 8ould not ob;ect to a b#la8 that restricted !isa members to
issuing !isa cards eclusi%el# =to the etent it is necessar# to insure
continued inters#stem com$etition.> But the De$artment e$ressed
concern that !isa"s $ro$osed $rohibition on banks $ro%iding card
acceptance ser%ices to merchants 'or both net8orks =might 8ell
handica$ e@orts to create ne8 bank credit card s#stems and ma# also
diminish com$etition among the banks in %arious markets.>
7
The !isa and MasterCard 7o%erning Banks Ado$ted Dualit#
/ot8ithstanding the Business 3e%ie8 Letter, the member banks on
!isa"s Board o' Directors, o%er the ob;ections o' !isa"s 7eneral Counsel,
%oted to $ermit !isa member banks to o8n and $artici$ate in the
go%ernance o' MasterCard, and to $ermit MasterCard members to o8n
and $artici$ate in the go%ernance o' !isa. MasterCard"s Board o'
Directors also $ermitted MasterCard member banks to become o8ners
and go%ernors o' !isa, and !isa members to become o8ners and
go%ernors o' MasterCard. This o%erla$$ing o8nershi$ and go%ernance
structure has become kno8n in the industr# as dualit#.
&ince ,-+9, %irtuall# all signifcant card0issuing banks ha%e become
o8ners o' both !isa and MasterCard. Almost all o' the largest card0
issuing banks ha%e re$resentati%es on one o' the associations" boards
o' directors as 8ell as ha%e re$resentati%es on the im$ortant
committees that inAuence $olic# 'or each net8ork. 5or eam$le,
MasterCard"s Business Committee and !isa"s Marketing Ad%isors
Committee ad%ise their res$ecti%e net8ork"s $ro'essional sta@ and
management on ke# strategic and com$etiti%e issues. )n ,--2, t8el%e
o' the t8ent#0one banks re$resented on !isa"s Board o' Directors 8ere
also re$resented on MasterCard"s Business Committee. &e%enteen o'
the t8ent#0se%en banks on MasterCard"s Business Committee had
re$resentati%es on !isa"s Marketing Ad%isors Committee. &e%en o' the
t8ent#0t8o banks re$resented on MasterCard"s Board o' Directors also
8ere re$resented on !isa"s Marketing Ad%isors Committee. )n total, as
o' #ear0end ,--2, a$$roimatel# nineteen banks < including Chase
Manhattan, Citibank, 5irst Chicago, Bank o' America, and /ationsBank
< had a re$resentati%e on the board o' directors o' one association
and on at least one im$ortant committee o' the other association.
Des$ite this o%erla$ in o8nershi$ and go%ernance, neither !isa nor
MasterCard en'orces the sa'eguards necessar# to $re%ent one association
'rom obtaining confdential com$etiti%e in'ormation about the other. )n
,--L, MasterCard )nternationalQs Eecuti%e !ice President and 7eneral
Counsel 8rote in a letter to the De$artment o' Gustice that =8hen one
board acts 8ith res$ect to a matter, the results o' those actions are
disseminated to the members 8ho are members in both organiIations. As
a result, each o' the associations is a fshbo8l and oHcers and board
members are a8are o' 8hat the other is doing, much more so than in the
normal cor$orate en%ironment.>
!)&A A/D MA&TE3CA3D P*TE/T)ALLR 3E&T3A)/ C*MPET)T)*/
!isa and MasterCard < on behal' o' and in collaboration 8ith their
go%erning banks < make com$etiti%e decisions that CaD $ossibl#
restrain com$etition bet8een the t8o associationsE and CbD $ossibl#
restrain com$etition 'rom other net8orks and eliminate certain 'orms
o' com$etition among the member banks. As a result o' this $otentiall#
8
anticom$etiti%e beha%ior, certain $ossible com$etiti%e initiati%es that
8ould ha%e benefted consumers ha%e been abandoned, dela#ed,
su$$ressed, and dilutedE consumer choices ha%e been reducedE and
com$etition among general $ur$ose card net8orks has been restrained
substantiall#.
Dualit# Possibl# 3estrains Com$etition bet8een !isa and MasterCard
The common control o' both !isa and MasterCard b# banks 8ith
signifcant fnancial interests in both net8orks $ossibl# restrains
com$etition bet8een those t8o general $ur$ose card net8orks.
Dualit# Possibl# Lessens the Associations" )ncenti%es to Com$ete
Against *ne Another
The banks that go%ern !isa earn substantial $rofts 'rom issuing
MasterCard cards. 5or eam$le, as o' #ear0end ,--+, !isa (.&.A."s
Board o' Directors included re$resentati%es o' 5irst (nion Cor$oration
and Associates 5irst Ca$ital Cor$oration, both o' 8hich had issued
nearl# M1: o' their general $ur$ose cards on the MasterCard net8ork.
The banks that go%ern MasterCard earn an e%en greater $ercentage o'
their $rofts 'rom issuing !isa cards. 5or eam$le, as o' #ear0end ,--+,
at least f%e banks that $laced directors on the MasterCard board 'or
the (nited &tates 3egion issued more !isa cards than MasterCard
cards. The most $ronounced eam$les among MasterCard"s ,--+
board members 8ere Pro%idian Bancor$ )nc. and Ca$ital *ne Bank,
8hich had issued more than -9: and more than 22: o' their cards on
the !isa net8ork, res$ecti%el#.
Because o' these signifcant o%erla$$ing fnancial interests, the banks
that go%ern each association ha%e $ossibl# re;ected in%estments in,
and im$lementation o', com$etiti%e initiati%es that might lead
consumers to s8itch 'rom one association"s brand o' card to the
others. 5rom the banks" $ers$ecti%e, these inno%ations 8ould merel#
shi't their $rofts 'rom cards issued on one o' their net8orks to cards
issued on the other. Because the same banks control the associations,
the o%erla$$ing interests o' the go%erning banks $ossibl# substantiall#
restrain the abilit# o' the se$arate managements o' !isa and
MasterCard to com$ete.
!isa and MasterCard To$ Eecuti%es Admit that Dualit# 3estrains
Com$etition
*Hcials at the highest le%els o' !isa and MasterCard ha%e
ackno8ledged < re$eatedl#, $ublicl#, and under oath < that the
common o8nershi$ and go%ernance o' !isa and MasterCard
signifcantl# limit com$etition bet8een the t8o associations.
)n ,--L, !isa )nternational"s President and Chie' Eecuti%e *Hcer
testifed:
S: &o #ou belie%e consumers 8ould be better o@ 8ithout dualit#T
A: Res.
9
Je e$lained that =!isa 8as a better organiIation be'ore its o8ners
acFuired an interest in MasterCard. )t created more, it 8as more
inno%ati%e and it 8as more %ital and more imaginati%e. . . . The real
creati%it#, ingenuit#, desire to de%elo$, OandP su$$ort 'rom members
that made !isa 8hat it is toda# came be'ore dualit# because there
8ere grou$s o' banks 8ho 8anted to su$$ort !isa to go beat u$ on
MasterCard, and there 8ere grou$s o' banks in MasterCard 8ho
8anted to su$$ort MasterCard to go beat u$ on !isa. And the# 8eren"t
sitting there as shareholders o' both organiIations not reall# caring
8ho beat u$ on 8hom or i' the# didn"t beat u$ on an#one or not caring
8ho 8on. )' #ou"%e got one 'oot frml# $laced on both sides o' the
street, 8ho cares . . . and ) think that not onl# 8ould the banks ha%e
benefted had the# gone this 8a# O8ithout dualit#P, but ultimatel# the
consumer 8ould, too . . . . >
)n ,--L, !isa )nternational"s Eecuti%e !ice President and 7eneral
Counsel testifed that =it is %er# diHcult 'or us to take a ste$, an
aggressi%e ste$ that hurts MasterCard because the same banks 8ho sit
there on the board, 8ho are in !isa are also in MasterCard.> )n
res$onse to the Fuestion 8hether =dualit# has led to a decrease in
inters#stem com$etition bet8een !isa and MasterCard,> he re$lied,
=Absolutel#,> and 8hen asked 8hether dualit# harmed consumers, he
ans8ered =) think in the long run the# 8ould be better o@ 8ithout
dualit# . . . .>
)n ,--L, MasterCard )nternationalQs Eecuti%e !ice President and
7eneral Counsel 8rote in a letter to the De$artment o' Gustice that
!isa"s and MasterCard"s =members, 8hich necessaril# under8rite the
Onet8orks"P costs, %ie8 the associations as com$lementar# and are
dis$leased 8hen one attem$ts to enhance itsel' at the e$ense o' the
other. . . .
MasterCard and !isa sim$l# do not Ucom$ete" in an# con%entional
business sense.>
)n Ganuar# ,--+, the President o' MasterCard )nternational"s (.&. 3egion
testifed: =)t is clear that because o' dualit# toda# #ou don"t see
MasterCard and !isa in the market$lace attacking each other . . . The
o8ners . . . don"t 8ant us attacking the other thing the# o8n
. ..>
Also in Ganuar# ,--+, the President and Chie' Eecuti%e *Hcer o' !isa
(.&.A. testifed that =#ou can"t com$ete in certain areas i' #ou"re co0
o8ned.> Je em$hasiIed that !isa 8ould seek to di@erentiate its
net8ork ser%ices 'rom MasterCard"s to a greater etent i' !isa 8ere not
o8ned b# the same banks that o8n MasterCard.
Pro$osals to 3oll Back Dualit# 4ere 3e;ected
3ecogniIing that dualit# blunts com$etition bet8een the associations,
each net8ork"s sta@ and management ha%e sought at %arious times to
increase their net8ork"s inde$endence and enhance net8ork
com$etition. The banks that control !isa and MasterCard ha%e resisted
these e@orts.
10
)n ,--,, !isa )nternational"s President and Chie' Eecuti%e *Hcer
$ro$osed eliminating the o%erla$ bet8een the t8o net8orks. (nder the
$ro$osal, each member bank 8ould issue $ros$ecti%el# onl# one
general $ur$ose card brand, !isa or MasterCard, and 8ould $artici$ate
eclusi%el# in the go%ernance o' the s#stem on 8hich it chose to issue
cards. Also in ,--,, !isa"s (.&. Eecuti%e?Planning Committee
considered the ad%antages and disad%antages o' $hasing out dualit#.
According to an internal !isa document, an antici$ated beneft o'
eliminating dualit# 8as to create =real com$etition 8ith MasterCard.>
The !isa Board re;ected these $ro$osals, %oting instead to continue to
$ermit a bank to go%ern !isa regardless o' the etent o' the bank"s
interest in MasterCard.
&imilarl#, throughout the ,--1s, MasterCard"s $ro'essional sta@
re$eatedl# urged the net8ork"s Chie' Eecuti%e *Hcers to end the
$ractice o' $ro%iding member banks 8ith eFual access to MasterCard
net8ork ser%ices regardless o' the banks" interests in !isa. )n ,--L, a
MasterCard sta@ memorandum re$orted that MasterCard"s =inno%ati%e
ideas are totall# neutraliIed in a dual 8orld.> Then in ,--M, a
MasterCard management team ad%ised MasterCard )nternational"s
then0ne8 President and Chie' Eecuti%e *Hcer about the =t#rann# to
issuer dualit#> and the =dri%e . . . to homogeniIe> that resulted in =no
meaning'ul di@erence> in the net8ork $roducts and ser%ices o@ered b#
MasterCard and !isa. )n ,--2, a high0ranking MasterCard eecuti%e
again em$hasiIed that increasing the re%enues collected b# card
issuers, ad%ertising more e@ecti%el#, and increasing o%erall eHcienc#
are =matters that become marginaliIed in a dual 8orld 8ith a larger
com$etitor.>
As one o' these memoranda concluded, =The cure is in a core o'
dedicated issuersE dedicated not dual.> (nder these sta@ $ro$osals,
ne8 MasterCard inno%ations 8ould ha%e been made a%ailable onl# to
member banks that agreed to 'a%or MasterCard o%er !isa. Des$ite
these $ro$osals, MasterCard, like !isa, continued to $ermit banks to
go%ern MasterCard, regardless o' their interest in !isa.
Dualit# Jas Potential Anticom$etiti%e E@ects on Brand De%elo$ment
Brand de%elo$ment is an essential as$ect o' establishing and
de%elo$ing a general $ur$ose card net8ork. A net8ork $romotes and
di@erentiates its brand in order to attract consumers, merchants, and
banks to use its brand rather than a com$eting net8ork"s brand.
Ad%ertising cam$aigns, such as !isa"s ubiFuitous =the# don"t take
American E$ress> ad%ertisements, are an im$ortant com$onent o'
net8ork com$etition because the# educate consumers and merchants
about im$ortant attributes o' the net8ork. )n recent #ears, ad%ertising
has accounted 'or a$$roimatel# a Fuarter o' all e$enses 'or both !isa
(.&.A. and MasterCard"s (.&. region.
Because consumers %alue the abilit# to use their cards to make $urchases
8hene%er and 8here%er the# 8ant, a card net8ork must o@er 8ides$read
merchant acce$tance. )n the
11
(nited &tates, %irtuall# all merchants that acce$t an# credit card
acce$t both !isa and MasterCard. Ret, studies ha%e long sho8n that
consumers 8rongl# $ercei%e that !isa is acce$ted b# signifcantl# more
merchants than MasterCard.
)n ,--L, MasterCard management 8as ad%ised b# its ad%ertising
consultant that MasterCard =must name !isa> in its ad%ertisements in
order to combat this mis$erce$tion. As a result, MasterCard
management $ro$osed that MasterCard institute an ad%ertising
cam$aign $roclaiming: =/o other card is more acce$ted. /ot !isa. /ot
American E$ress.> Bank re$resentati%es on the MasterCard Business
Committee ob;ected on the ground that this ad%ertisement 8ould harm
!isa. MasterCard"s (.&. 3egion President res$onded to these ob;ections
b# assuring member banks that MasterCard"s acce$tance claim
com$arison to !isa 8ould be used onl# i' it =did not negati%el# im$act
!isa.>
During the same time $eriod, MasterCard 'aced a similar $ercei%ed
acce$tance ga$ %is0V0 %is !isa in Canada, 8here dualit# does not eist.
There, MasterCard"s Canadian 3egion ran the ad%ertising that 8as
re;ected in the (nited &tates. )t used the tag line < =/o card is acce$ted
in more $laces 8orld8ide than MasterCard. /ot !isa. /ot American
E$ress.> 4ithin t8o #ears, MasterCard"s Canadian 3egion concluded that
=the use o' this tag line .
. . has hel$ed im$ro%e acce$tance imager# as 8ell as reduce the !isa
brand a8areness ad%antage.> *ne stud# sho8ed a dro$ in the
$ercei%ed acce$tance ga$ in Canada 'rom ,9: to M: during a one0
#ear $eriod in 8hich MasterCard named !isa in its ad%ertisements.
/ot8ithstanding the success o' this cam$aign, MasterCard has not
named !isa in a com$arati%e acce$tance ad%ertisement in the (nited
&tates. &ur%e#s continue to sho8 that consumers in the (nited &tates
8rongl# $ercei%e that !isa is signifcantl# more 8idel# acce$ted than is
MasterCard. &imilarl#, !isa does not name MasterCard in its (.&.
ad%ertising. But, in the non0dual Canadian market, !isa has named
MasterCard. 5or eam$le, in one ad%ertisement, !isa highlighted a
Canadian merchant that onl# acce$ted !isa. A !isa eecuti%e testifed
that !isa management ne%er $ro$osed running the Canadian
ad%ertisement in the (.&. =because 8e kne8 that the# Cthe banksD
8ouldn"t acce$t it.> Je 'urther testifed that 8hen !isa"s (.&. Marketing
Ad%isors Committee 8as sho8n the ad%ertisement, Wtheir reaction
clearl# 8as don"t #ou sho8 that in the (.&., on (.&. tele%ision.>
Dualit# Jas Possible Anticom$etiti%e E@ects on Product De%elo$ment
The o%erla$ in control o' !isa and MasterCard constrains each
association"s $ro'essional sta@ and management 'rom $ro$osing
com$etiti%e initiati%es likel# to lead consumers to s8itch 'rom one brand
to the other. )n ,--,, a !isa eecuti%e testifed that member banks
o$$osed !isa initiati%es =against MasterCard because the# had a %ested
interest on that side too, and this 8as an ongoing $roblem in almost
e%er#thing 8e did and continue
12
to do.> Je added that !isa"s managers =o'ten don"t e%en $ro$ose them
Ccom$etiti%e initiati%esD because 8e kno8 the# are unacce$table to
members.>
The $ossible anticom$etiti%e e@ects o' dualit# eceed 8hat can be
readil# obser%ed because man# $roducts, ser%ices, and inno%ations
that 8ould ha%e emerged in a com$etiti%e en%ironment 8ere ne%er
e%en considered b# the associations or their managements.
/e%ertheless, there are se%eral instances in 8hich the controlling
banks seem to ha%e restrained critical com$etiti%e initiati%es
de%elo$ed b# the managements o' !isa and MasterCard.
&mart Cards
)n the ,-.1s, MasterCard de%elo$ed and etensi%el# tested smart cards. A
smart card di@ers 'rom the cards in 8ides$read use in the (nited &tates in
that it can store in'ormation on an integrated circuit instead o', or in
addition to, a magnetic stri$e. )ntegrated circuits are ca$able o' storing
signifcantl# more in'ormation than magnetic stri$es. This additional data
storage ca$acit# 8ould enable a card net8ork to enhance its $roducts b#,
among other things, storing cash and $ersonal in'ormation such as airline
and hotel $re'erences, identifcation numbers, and medical data. &mart
cards 8ould also enable issuers to reduce their costs b# $ro%iding su$erior
'raud and credit risk control.
)n ,-.+, MasterCard"s sta@ concluded that introducing this $roduct
8ould gi%e MasterCard a signifcant ad%antage o%er !isa, and sought
board a$$ro%al to introduce smart cards. Bank re$resentati%es on the
MasterCard Board"s Eecuti%e Committee re'used, ho8e%er, to a$$ro%e
the initiati%e 8ithout !isa"s agreement. MasterCard then a$$roached
the !isa Board, and the t8o net8orks hired a consultant to consider
8hether to introduce this ne8 $roduct ;ointl#.
A'ter se%eral banks re$resented on !isa"s Board o' Directors e$ressed
their o$$osition to the introduction o' the smart card, !isa notifed
MasterCard that it 8ould not introduce the $roduct. MasterCard"s
Board then re'used to $ermit MasterCard to mo%e 'or8ard, and the
$lanned de%elo$ment 8as shel%ed. A'ter a decade o' dela#, !isa and
MasterCard are no8 fnall# testing se$arate smart card o$tions,
although 8ith 'ull kno8ledge o' each other"s strategic $lans.
Commercial Cards
)n ,--K, !isa sta@ concluded that $rohibiting !isa member banks 'rom
issuing both !isa and MasterCard commercial cards < i.e., cor$orate
cards and other cards issued to businesses rather than consumers <
8ould enable !isa to inno%ate and di@erentiate its commercial $roducts
'rom MasterCard"s more e@ecti%el# than i' dualit# 8ere $ermitted. Based
on !isa management"s recommendation, its Board initiall# ado$ted a
resolution that 8ould ha%e reFuired !isa member banks to decide b# earl#
,--2 8hether to issue
13
!isa or MasterCard commercial cards eclusi%el#. !isa then $lanned to
$romote its commercial cards aggressi%el# and allocated a substantial
budget to the initiati%e.
4ides$read bank o$$osition led !isa to re%erse its decision and allo8
banks to issue both MasterCard and !isa commercial cards. &oon a'ter
the decision to $ermit banks to issue both associations" commercial
cards, !isa scaled back its in%estment in de%elo$ing commercial card
$roducts. !isa"s 'ormer Eecuti%e !ice President o' Market
De%elo$ment testifed that =the amount o' mone# that !isa s$ent Con
the commercial cardD 8as reduced because it became a$$arent that it
8as going to be a dual 8orld.>
&ecure Transactions o%er the )nternet
The member banks also dela#ed !isa"s introduction o' the frst s#stem
to $ro%ide
secure general $ur$ose card transactions o%er the )nternet and
thereb# $re%ented !isa 'rom gaining a com$etiti%e ad%antage o%er
MasterCard.
)n *ctober ,--9, !isa and Microso't ;ointl# announced the
s$ecifcations 'or a s#stem to $ro%ide secure transactions o%er the
)nternet. !isa intended to use Microso't encr#$tion so't8are to
im$lement the announced standard. )n a message to member banks,
MasterCard stated that it had =no choice but to res$ond com$etiti%el#>
to the !isa0 Microso't alliance and it began to 'orm alliances 8ith other
so't8are $ro%iders. The member banks $ressured !isa to abandon its
agreement 8ith Microso't in 'a%or o' a coo$erati%e e@ort 8ith
MasterCard to de%elo$ a standardiIed a$$roach. !isa com$lied 8ith
the banks" 8ishes.
)n a ,--9 $resentation to the 5ederal Trade Commission on ;oint
%entures, !isa )nternationalQs Eecuti%e !ice President and 7eneral
Counsel blamed dualit# 'or the dela# in introducing the )nternet
securit# s#stem. Je stated that i' =8e had our grou$ Co' banksD and
CMasterCardD had their grou$ . . . this thing 8ould be out there
alread#.> )n ,--+, !isa (.&.A."s President and Chie' Eecuti%e *Hcer
testifed that this 8as #et another case in 8hich !isa =had an
o$$ortunit# to get out ahead Oo' MasterCardP and had to come back,
8ork again 8ith MasterCard.>
Also in ,--+, !isa (.&.A."s 'ormer Eecuti%e !ice President o' Market
De%elo$ment testifed in regard to )nternet securit# that the !isa sta@
and management =deser%eCdD the o$$ortunit# to either $ro%e that 8e
8ere right or to 'ail. &tandardiIing things too Fuickl# in ne8, emerging
$roducts and markets, 'rom m# e$erience as a marketing $erson, has
the . . . ca$abilit# o' stiAing inno%ation.>
!isa and MasterCard Possibl# 3estrain Com$etition 'rom *ther
/et8orks and Prohibit Certain 5orms o' Com$etition among Their
Member Banks
)n addition to restraining net8ork com$etition bet8een themsel%es, !isa
and MasterCard
< on behal' o' and in collaboration 8ith their go%erning banks < ha%e
ado$ted and
14
maintained rules and $olicies that might $rohibit all member banks
'rom doing business 8ith other general $ur$ose card net8orks such as
American E$ress and Disco%er?/o%us. These rules might restrain
com$etition CaD bet8een the bank0controlled !isa and MasterCard
net8orks and the general $ur$ose card net8orks not so controlled, and
CbD among the !isa and MasterCard member banks.
Prior to the mid0,-.1s, !isa and MasterCard did not com$ete directl#
8ith other net8orks. At that time, other general $ur$ose card
net8orks, such as American E$ress, issued charge cards intended
$rimaril# 'or use in the tra%el and entertainment sectors. )n contrast,
!isa and MasterCard cards 8ere targeted 'or use in the general retail
sector.
B# the mid0,-.1s, !isa and MasterCard had e$anded into tra%el and
entertainmentE American E$ress had e$anded into the retail sectorE
and &ears had entered the net8ork market 8ith the Disco%er net8ork,
no8 called /o%us. These changes brought the bankcontrolled !isa and
MasterCard net8orks into direct com$etition 8ith American E$ress
and Disco%er?/o%us.
!isa and MasterCard < on behal' o' and in collaboration 8ith their
go%erning banks < res$onded to this com$etiti%e threat b# ado$ting
rules that $ossibl# lessened the abilit# o' those net8orks to com$ete
e@ecti%el# CaD 8ith !isa and MasterCard in the net8ork market and CbD
8ith the associations" member banks in the do8nstream card0issuing
and cardacce$tance markets. !isa and MasterCard both eem$t each
other and the Citicor$0 o8ned Diners Club net8ork 'rom these
eclusionar# rules, en'orcing them onl# against American E$ress and
Disco%er?/o%us.
B# ado$ting and maintaining these $ossibl# discriminator#
eclusionar# rules, !isa and MasterCard $reser%e and etend their
;ointl# held market $o8er. As MasterCard e$lained to its members in a
,--, document discussing com$etition among !isa, MasterCard,
American E$ress, and Disco%er: =C!isa and MasterCard 'ormD a
segment o' the credit card marketC,D . . . a market 8here MasterCard
and !isa together are fghting to maintain their dominance . . . and
minimiIe incursion o' non0bank or com$etiti%e Fuasi0 bank $roducts.>
CEm$hasis in the originalD.
!isa and MasterCard Potentiall# )m$ede the Abilit# o' *ther /et8orks
to Con%ince Merchants to Acce$t Their Cards
*ne diHcult# that a net8ork 'aces in con%incing merchants to acce$t
its cards is that merchants strongl# $re'er to use a single card
acce$tance terminal to $rocess transactions 'or all brands o' general
$ur$ose cards. Processing transactions in%ol%es transmitting
transaction data 'rom a merchant"s terminal to a central com$uter that
directs the in'ormation to the a$$ro$riate card net8ork 'or
authoriIation and settlement. !isa and MasterCard $ermit banks to
$rocess transactions 'or both net8orks through a single merchant
terminal, enhancing the abilit# o' both net8orks to con%ince merchants
to acce$t their cards.
15
)n the mid0,-.1s, !isa, MasterCard, and their member banks used their
control o' merchant terminals to hinder American E$ress"s and
Disco%er?/o%us"s e@orts to build merchant bases. )n res$onse to these
$ractices, American E$ress and Disco%er?/o%us de%elo$ed their o8n
card acce$tance terminals ca$able o' handling all card transactions.
American E$ress and Disco%er?/o%us then entered into agreements
8ith a 'e8 !isa and MasterCard member banks that 8ere 8illing to
$ermit American E$ress and Disco%er?/o%us to $rocess those banks"
!isa and MasterCard transactions through terminals that acce$ted all
card brands.
*ther banks com$lained to !isa and MasterCard about these
agreements, and the associations then ado$ted ne8 regulations that
$rohibited an# member bank 'rom $ermitting American E$ress or
Disco%er?/o%us to $rocess !isa and MasterCard transactions. These
regulations < 8hich 8ere an ece$tion to the eisting rules that
$ermitted the banks to contract 8ith third0$art# $rocessors <
substantiall# hindered American E$ress"s and Disco%er?/o%us"s abilit#
to $ersuade merchants to acce$t their cards.
E%entuall#, because o' strong merchant demand 'or a single terminal,
!isa and MasterCard agreed to modi'# their regulations to $ermit
banks to link their $rocessing ser%ices to American E$ress and
Disco%er?/o%us. (nder the modifed regulations, an# net8ork could
$lace a terminal 8ith a merchant as long as all transactions on the
terminal that in%ol%ed another net8ork"s cards 8ere di%erted to that
other net8ork 'or $rocessing.
American E$ress then began to di%ert transactions in accordance 8ith
the modifed !isa and MasterCard regulations and, b# o@ering card
acce$tance ser%ices at lo8 $rices, American E$ress $laced terminals
8ith a number o' merchants. This $rom$ted se%eral !isa and
MasterCard member banks to again com$lain about American
E$ress"s $ricing $ractices to !isa and MasterCard.
)n res$onse, !isa and MasterCard ado$ted additional rules e@ecti%el#
reFuiring merchants to $a# a higher 'ee 'or !isa and MasterCard
transactions i' the# used a card acce$tance terminal $laced b#
American E$ress. According to !isa"s Eecuti%e !ice President and
7eneral Counsel, these discriminator# 'ees 8ere ado$ted to =make it
more diHcult 'or Ame to $rice our Omember bankP acFuirers out o' the
market$lace> and remained in e@ect until at least ,--,.
!isa and MasterCard )m$ede the Abilit# o' *ther /et8orks to Pro%ide
Cash Ad%ances
A %aluable 'eature o' an# general $ur$ose card net8ork is the abilit# to
$ro%ide cardholders 8ith con%enient access to cash ad%ances, most
im$ortantl# through automated teller machines CATMsD. !isa and
MasterCard each o8n one o' the t8o 8orld8ide ATM net8orks, Plus and
Cirrus res$ecti%el#. !isa"s rules $ermit member banks
16
that issue MasterCard cards to use the Plus s#stem to $ro%ide cash
ad%ances on MasterCard cards. &imilarl#, MasterCard"s rules $ermit
member banks that issue !isa cards to use the Cirrus s#stem to
$ro%ide cash ad%ances on !isa cards. As a result, an# member bank
can enable its cardholders to use general $ur$ose cards to obtain cash
ad%ances 8orld8ide at o%er L11,111 locations. To obtain access to
these ATMs, a bank merel# needs to agree to $a# a 'ee to the ATM
o$erator 8hene%er one o' its cardholders obtains a cash ad%ance, and
to agree to acce$t cards issued b# Cirrus or Plus member banks at its
o8n ATMs.
!isa stated in its ,-.. Cor$orate &trategic Plan that =The success'ul
consolidation o' regional ATM s8itches into a unifed, bank0o8ned and
o$erated national net8ork 8ill de$ri%e Disco%er and American E$ress
o' the o$$ortunit# to chi$ a8a# at a ma;or strategic ad%antage b# the
banking industr# through the $rogressi%e creation o' a national
net8ork o' their o8n.> !isa and MasterCard 8ill not $ermit American
E$ress and Disco%er?/o%us to use Cirrus or Plus to $ro%ide cash
access to their cardholders. As a result o' !isa"s and MasterCard"s
eclusionar# $ractices, American E$ress and Disco%er?/o%us ha%e
had to negotiate indi%iduall# 8ith scores o' regional ATM net8orks and
banks to secure ATM access 'or their cardholders, o'ten at access
$rices higher than those $aid b# member banks.
The cash access net8orks that American E$ress and Disco%er ha%e
assembled through these indi%idual negotiations are smaller, more
geogra$hicall# une%en, and more costl# to maintain than those that
!isa and MasterCard make a%ailable to each other"s member banks.
!isa and MasterCard )m$ede the Abilit# o' *ther /et8orks to Contract
8ith )ssuers
)n the last 'e8 #ears, American E$ress and Disco%er?/o%us ha%e
attem$ted to e$and their net8orks b# con%incing other entities,
including banks, to issue cards on their net8orks. )n the (nited &tates,
those e@orts ha%e been st#mied b# !isa and MasterCard rules that
$rohibit all member banks 'rom issuing cards on the American E$ress
and Disco%er?/o%us net8orks.
!isa Ado$ts B#la8 L.,1CeD
)n ,--,, !isa (.&.A"s Board o' Directors ado$ted B#la8 L.,1CeD, 8hich
states that =the membershi$ o' an# member shall automaticall#
terminate in the e%ent it, or its $arent, subsidiar# or aHliate, issues,
directl# or indirectl#, Disco%er Cards or American E$ress Cards, or an#
other card deemed com$etiti%e b# the Board o' Directors.>
!isa has asserted that it ado$ted B#la8 L.,1CeD to $re%ent Disco%er?/o%us
and American E$ress 'rom becoming card0issuing members o' !isa b#
acFuiring member banks, as Disco%er attem$ted to do in ,--1. As 8ritten,
ho8e%er, the b#la8 also $rohibits all
17
inde$endentl# o8ned !isa member banks 'rom issuing cards on the
American E$ress or Disco%er?/o%us net8orks. B#la8 L.,1CeD $rohibits
!isa"s member banks 'rom issuing cards on an# net8ork that is =deemed
com$etiti%e> b# !isa"s Board. But !isa"s Board has not deemed
MasterCard to be a com$etitor, and !isa"s member banks ma# thus issue
cards 8ithout restriction on the MasterCard net8ork. The b#la8 a$$lies
onl# to American E$ress and Disco%er?/o%us, the net8orks not controlled
b# the member banks.
B# ,--M, American E$ress and Disco%er?/o%us had begun to $ursue a
number o' com$etiti%e initiati%es to strengthen their net8orks,
including arrangements 8ith certain banks in the (nited &tates to issue
cards on the American E$ress or Disco%er?/o%us net8orks in addition
to the !isa and MasterCard net8orks.
!isa (.&.A."s B#la8 L.,1CeD has e@ecti%el# $recluded member banks in
this countr# 'rom issuing American E$ress or Disco%er cards.
MasterCard Ado$ts Com$etiti%e Programs Polic#
)n Ma# ,--2, American E$ress, through its Chairman, $ublicl#
announced its intention to contract 8ith banks to issue American
E$ress cards. (nlike !isa, MasterCard at that time had no rule that
$rohibited its member banks 'rom issuing cards on other net8orks.
American E$ress thus 'ocused its e@orts on banks that $rimaril#
issued MasterCard. Man# banks e$ressed interest in American
E$ressQs $ro$osal and, 8ithin a month, discussions commenced
bet8een American E$ress and a number o' banks. MasterCard
learned o' some o' these negotiations.
At its Gune ,--2 meeting, the MasterCard (.&. Board ado$ted a $olic#
that mirrored the !isa b#la8. MasterCard"s $olic# on =com$etiti%e
$rograms> $ro%ides that:
4ith the ece$tion o' $artici$ation b# members in !isa, 8hich is
essentiall# o8ned b# the same member entities, and CDiners Club and
GCBD, members o' MasterCard ma# not $artici$ate either as issuers or
acFuirers in com$etiti%e general $ur$ose card $rograms.
At the meeting in 8hich MasterCard ado$ted the $olic#, the board
considered the American E$ress $ro$osal to $artner 8ith member
banks and concluded that the ne8l# ado$ted $olic# 8ould $rohibit
member banks 'rom issuing American E$ress cards.
The Eclusionar# 3ules 3estrain Com$etition in the (nited &tates
5ollo8ing ado$tion o' the MasterCard $olic#, those banks that had been
negotiating 8ith American E$ress terminated the discussions. The banks
8ere not interested in issuing American E$ress cards i' doing so 8ould
reFuire them to 'or'eit their right to issue both !isa and MasterCard, the
t8o dominant general $ur$ose card brands. )n addition, !isa"s B#la8
L.,1CeD and MasterCard"s com$etiti%e $rograms $olic# 8ould $rohibit a
bank that issued American E$ress or Disco%er cards 'rom accessing the
8ide arra# o' other !isa or
18
MasterCard $roducts and ser%ices, including the Plus and Cirrus ATM
s#stems and the associations" $oint0o'0sale debit cards that can be
used to make $urchases 'rom merchants 8ith 'unds deducted directl#
'rom the cardholder"s bank account.
)n these 8a#s, the rules raise the cost to a member bank o' issuing
American E$ress or Disco%er?/o%us credit cards to high le%els and make
it $racticall# im$ossible 'or American E$ress and Disco%er?/o%us to
con%ince banks < the most e$erienced and skilled card issuers and the
onl# entities that hold the demand de$osit accounts o' most consumers
< to issue cards on their net8orks.
The current $residents o' both !isa (.&.A. and MasterCard"s (.&.
3egion ha%e said that, 8ere it not 'or the eclusionar# rules, some o'
their member banks in the (nited &tates 8ould issue American E$ress
cards. )n addition, in ,--+, the 'ormer Chairman o' MasterCard
)nternational and then Chie' Eecuti%e *Hcer o' a bank that 8as
among the to$ ten general $ur$ose card issuers, testifed that
eliminating !isa"s and MasterCard"s eclusionar# rules in the (nited
&tates =8ould 'orce MasterCard and !isa to com$ete more intensel# 'or
the a@ection o' the members.>
This increased com$etition bet8een the net8orks 'or banks" card0
issuing resources < as 8ell as com$etition among the banks to o@er
additional card brands < 8ould s$ur the de%elo$ment and
im$lementation o' higher Fualit# and lo8er $riced net8ork $roducts
and ser%ices. )n addition, consumer choice 8ould be enhanced b#
eliminating the eclusionar# rules. Consumers 8ould ha%e access to
ne8 general $ur$ose cards that 8ould combine the net8ork attributes
o' American E$ress or Disco%er?/o%us 8ith the card0issuing attributes
o' indi%idual banks. 5or eam$le, a consumer 8ould ha%e the o$tion o'
obtaining American E$ress and Disco%er?/o%us net8ork cards 'rom an
institution that also o@ers other banking $roducts such as a demand
de$osit checking account or a !isa or MasterCard card.
5inall#, eliminating the eclusionar# rules 8ould beneft consumers b#
enhancing the com$etiti%e e@ecti%eness o' !isa"s and MasterCard"s
smaller net8ork com$etitors, thereb# enabling those net8orks to
com$ete more %igorousl# against !isa and MasterCard. 5or eam$le,
!isa (.&.A."s 'ormer Eecuti%e !ice President o' Market De%elo$ment
testifed in ,--+ that issuing through banks 8ould hel$ a com$etiti%e
net8ork to obtain additional %olume and thereb# realiIe lo8er costs
and =better economies o' scale.>
4ithout ubiFuitous merchant acce$tance o' its cards, a card net8ork
cannot com$ete 'ull# and e@ecti%el# 8ith !isa and MasterCard. To
ensure ubiFuitous acce$tance throughout the (nited &tates, a card
net8ork needs a substantial market share. 4ithout issuance b# some
!isa and MasterCard member banks, a net8ork could not, as a
$ractical matter, maintain the necessar# minimum market share.
19
!isa"s internal documents re%eal that allo8ing com$etiti%e net8orks to
issue cards through !isa member banks 8ould increase com$etition.
5or eam$le, !isa documents state that the member banks are a Whuge
and e@ecti%e distribution net8orkEW that =through $artnershi$s 8ith
!isa member banks> com$etitor net8orks 8ould =threaten to ra$idl#
erode C!isa"s merchantD acce$tance ad%antageE> and banks issuing a
com$etitor"s cards =8ould strengthen Cthe com$etitor"sD other $roducts
0 commercial cards, tra%eler"s cheFues, stored %alue cards.>
MasterCard"s internal documents similarl# ackno8ledge the im$ortance o'
banks to the e@ecti%eness o' com$etition 'rom other net8orks. 5or
eam$le, MasterCard documents state that member banks $ossess
=$o8er'ul distribution channel ca$abilities 'or ne8 $roducts> and that, b#
issuing through banks, com$etitor net8orks 8ould =ob%iousl# build
re%enue . . . to rein%est back into the business, $robabl# continuing to
o$en u$ ne8 acce$tance channels that the# do not $ercei%e !isa or
MasterCard to be dominating.>
Com$etition Jas )ncreased *utside the (.&. 4here the Eclusionar#
3ules Do /ot A$$l#
)n ,--2, both !isa and MasterCard res$onded to American E$ress"s
8orld8ide e@ort to con%ince banks to issue cards on the American
E$ress net8ork. Both associations considered 8hether to ado$t a
8orld8ide rule < mirroring !isa (.&.A."s B#la8 L.,1CeD < that 8ould
$rohibit member banks 'rom issuing cards on the American E$ress
and /o%us net8orks. !isa"s management concluded that !isa could
com$ete e@ecti%el# 8ithout an eclusionar# rule and told !isa"s
)nternational Board member banks that it 8as =not necessar#> to
$rohibit banks 'rom issuing com$etiti%e cards. MasterCard"s
management reached a similar conclusion, and both international
boards then delegated authorit# to each region to decide 'or itsel'
8hether to $rohibit member banks 'rom issuing cards on the American
E$ress and Disco%er?/o%us net8orks.
Aside 'rom the (nited &tates < and Canada, 8here each bank ma#
issue onl# one card brand < no !isa or MasterCard regional board has
ado$ted a rule $rohibiting banks 'rom issuing other net8orks" cards. )n
se%eral countries 8here the rule has been considered, com$etition
authorities ha%e ob;ected to the rule and e$ressed concern that such
a rule 8ould ha%e anticom$etiti%e e@ects.
)n more than a doIen 'oreign countries, American E$ress has
success'ull# contracted 8ith !isa and MasterCard member banks to
also issue cards on the American E$ress net8ork. )n man# o' these
countries, !isa and MasterCard ha%e res$onded b# introducing ne8
$roducts and ser%ices. 5or eam$le, !isa )nternational"s Euro$ean
3egion im$lemented an aggressi%e set o' com$etiti%e initiati%es
shortl# a'ter its regional board re;ected an eclusionar# rule analogous
to B#la8 L.,1CeD. These initiati%es included $roduct enhancements,
increased net8ork su$$ort 'or the !isa 7old card and co0 branding
deals, and im$ro%ed merchant ser%ices.
20
MasterCard res$onded in a similar 'ashion a'ter Puerto 3ico"s largest
bank, Banco Po$ular, decided to issue American E$ress cards. Puerto
3ico is $art o' MasterCard"s Latin American 3egion, 8hich re;ected a
strict $rohibition on banks issuing American E$ress cards. A'ter Banco
Po$ular in'ormed MasterCard o' the bank"s deal 8ith American
E$ress, the President o' MasterCard"s Latin America?Caribbean 3egion
told a Banco Po$ular eecuti%e =that MasterCard 8ill stri%e Ctr# e%en
harderD to be com$etiti%e b# im$ro%ing the ser%ice and attention
$ro%ided to Banco Po$ular in order to assure that Othe bankP
continueOsP the e$ansion o' OitsP MasterCard business.>
!isa and MasterCard Potentiall# )m$ede *ther /et8orks" Abilit#
to Pro%ide /e8 7eneral Pur$ose Card Products
!isa B#la8 L.,1CeD and the MasterCard com$etiti%e $rograms $olic#
also could
reduce net8ork com$etition in de%elo$ing ne8 general $ur$ose card
$roducts. These $roducts < 8hich 8ill retain the core characteristics o'
ubiFuitous acce$tance and de'erred $a#ment o$tions < 8ill integrate
additional 'unctionalities such as debit and stored %alue. A strateg#
document $resented to the MasterCard Eecuti%e Committee
e$lained that =B# utiliIing a multi0a$$lication o$erating s#stem, our
members also ha%e the abilit# to use the chi$ technolog# to create
Urelationshi$ cards" allo8ing their customers to ha%e credit, debit and
stored %alue resident on a single card 8ith a choice o' $a#ment t#$e at
the $oint o' sale.> )n a ,--9 $roceeding be'ore the 5ederal Trade
Commission, !isa )nternational"s Eecuti%e !ice President and 7eneral
Counsel agreed, stating that =The $a#ment engine ) 'oresee is a chi$
card 8hich 8ill ha%e all #our relationshi$s on it.> As a $ractical matter,
onl# banks that hold consumers" demand de$osit accounts can $ro%ide
this t#$e o' general $ur$ose card. &uch a card is likel# to $la# a critical
role in net8ork com$etition in the 'uture.
The associations" rules might substantiall# diminish com$eting
net8orks" abilit# to de%elo$ general $ur$ose card $roducts, including
$roducts that incor$orate debit or stored %alue 'unctionalit#. 5or
eam$le, a consultant 'or one bank that 8as considering 8hether to
issue American E$ress cards re$orted that American E$ress =is not
$ositioned to ta$ into the burgeoning debit card market> and it ='aces
an increasing challenge in the ra$idl# e%ol%ing $a#ment s#stems
industr#, 'actoring in the reach o' thousands o' !isa?MasterCard
issuers.> But =4ith its $lat'orm o' core de$osit relationshi$s,> the
re$ort concluded, the bank =could assist American E$ress in
establishing success'ul debit card $rograms.>
21
R*(3 TA&6&
1. 4rite do8n M11 8ords summar# o' the case. Rour summar#
ma# lead #ou to discuss and sol%e the 'ollo8ing Fuestions.
2. 4hat conce$ts and in 8hat cha$ters o' Dominick &al%atore"s
book +e that #ou think #ou need mostl# to discuss the
'ollo8ing FuestionsT
3. 4ho are the com$etitors 'or !isa and MasterCardT 4hat are
the barriers to entr# 'or ne8 com$etitionT
4. Jo8 does the dual o8nershi$ o' !isa and MasterCard lessen
com$etition bet8een the t8oT
5. Jo8 ha%e !isa and MasterCard 8orked to restrain its
com$etitors 'rom com$eting in the marketT
6. 4hat e%idence is there that !isa and MasterCard 8ould
com$ete more aggressi%el# 8ithout dualit#T
22