Steven Semeraro
United States Department of Justice, Antitrust Division
325 Seventh Street, NW, Suite 300, Washington, DC 20004
Attorney for the Plaintiff United States of America
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
| | ) | | | UNITED STATES OF
AMERICA, | ) | | |
| ) | | |
Plaintiff, | ) |
| | | ) | Civil Action
No. 98-civ.7076
| | v. | ) |
| | | ) |
COMPLAINT FOR EQUITABLE
| | VISA U.S.A. INC., | ) | RELIEF
FOR VIOLATIONS
| | VISA INTERNATIONAL CORP., AND
| ) | OF 15 U.S.C. § 1
| | MASTERCARD INTERNATIONAL | ) | | | INCORPORATED,
| ) | (SHERMAN ANTITRUST ACT)
| | Defendants. | )
) | | | | ) | |
Joel I. Klein (JK3481)
Assistant Attorney General
John M. Nannes (JN4148)
Deputy Assistant Attorney General
Rebecca P. Dick (RD5481)
Director, Civil Non-Merger Enforcement
M. J. Moltenbrey (MM4814)
Chief, Civil Task Force
Susan L. Edelheit (SE8020)
Assistant Chief, Civil Task Force
Melvin A. Schwarz (MS8604)
Special Counsel for Civil Enforcement
| Steven Semeraro (SS8817)
Kurt Shaffert (KS4333)
Scott A. Scheele (SS0496)
Jeffrey I. Steger (JS7416)
Sean T. Fox (SF8664)
Ahmed Taha (AT8157)
Attorneys, Civil Task Force
United States
Department of Justice
Antitrust Division
Suite 300
325 Seventh Street, N.W.
Washington, D.C. 20004
202/514-8374
202/514-7308 (fax)
|
Page i
Table of Contents
I. Jurisdiction and
Venue.........................................................................................................3
II. Defendants and
Co-Conspirators.........................................................................................3
III. Trade and
Commerce...........................................................................................................4
IV. Relevant
Market...................................................................................................................5
A.
Product Market...............................................................................................................6
B.
Geographic Market.........................................................................................................8
VA. Visa and MasterCard Have
Market Power in the Network Market.....................................9
A.
Visa and MasterCard Dominate the Market...................................................................9
B.
Competition Among Card Issuers is Not a Substitute for Network Competition........10
C.
There Are Significant Barriers to Network Entry........................................................11
VI. The Same Banks Have Taken
Control of Both Visa and MasterCard...............................12
A.
Visa and MasterCard Began As Entirely Separate Systems........................................13
B.
The Visa and MasterCard Governing Banks Adopted Duality....................................14
VII. Visa and MasterCard Restrain
Competition......................................................................15
A.
Duality Restrains Competition Between Visa and MasterCard....................................16
1. Duality Lessens the Associations' Incentives to Compete Against
One
Another......................................................................................................16
2. Visa
and MasterCard Top Executives Admit that Duality Restrains Competition...17
3. Proposals to Roll Back Duality Were
Rejected......................................................19
4. Duality Has Anticompetitive Effects on Brand
Development................................20
Page ii
5. Duality Has Anticompetitive Effects on Product
Development.............................22
a. Smart
Cards........................................................................................................23
b. Commercial
Cards..............................................................................................24
c. Secure Transactions Over the
Internet................................................................25
B.
Visa and MasterCard Restrain Competition From Other Networks
and Prohibit Certain Forms of Competition Among Their Member
Banks................26
1. Visa and MasterCard Impede the Ability of Other Networks to
Convince
Merchants to Accept Their
Cards............................................................................27
2. Visa and MasterCard Impede the Ability of Other Networks to
Provide Cash
Advances..............................................................................................................
...29
3. Visa and MasterCard Impede the Ability of Other Networks to
Contract with
Issuers...................................................................................................................
...30
a. Visa Adopts Bylaw
2.10(e).................................................................................31
b. MasterCard Adopts Competitive
Programs Policy............................................32
c. The Exclusionary Rules Restrain
Competition In the United States..................33
d. Competition Has Increased
Outside the U.S.
Where
the Exclusionary Rules Do Not Apply... ....................................35
4. Visa and MasterCard Impede Other Networks' Ability to
Provide New General
Purpose Card
Products............................................................................................37
VIII. First Offense: Duality Combinations and
Conspiracies in Restraint of Trade..............38
IX. Second Offense: Exclusionary
Rules Combinations and Conspiracies in
Restraint of Trade
.............................................................................................................40
X. Prayer For
Relief.........................................................................................................................41
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
| | ) | | | UNITED STATES OF
AMERICA, | ) | | |
| ) | | |
Plaintiff, | ) |
| | | ) | Action
No. 98-civ.7076
| | v. | ) |
| | | ) |
COMPLAINT FOR EQUITABLE
| | VISA U.S.A. INC., | ) | RELIEF
FOR VIOLATIONS
| | VISA INTERNATIONAL CORP.,
AND | ) | OF 15 U.S.C. § 1
| | MASTERCARD
INTERNATIONAL | ) |
| | INCORPORATED, | ) | (SHERMA
N ANTITRUST ACT)
| | | ) |
| | Defendants. | ) | | | | ) | |
The
United States of America, by its attorneys, acting under the direction of the Attorney
General of the United States, brings this civil action to prevent and enjoin Visa U.S.A. Inc.
and
Visa International Corp. (collectively "Visa") and MasterCard International Incorporated
("MasterCard") from violating the antitrust laws by restraining competition in the market
for
general purpose card network products and services. General purpose cards which
include
credit cards and charge cards are payment devices that enable consumers to make
purchases
from unrelated merchants without immediately accessing or reserving funds. Visa and
MasterCard are the two largest general purpose card networks. Together, they account for
over
75% of all purchases made with general purpose cards in the United States.
Visa
and MasterCard are joint ventures or, as they call themselves, "associations"
created, owned, governed, and operated by and in the interests of their member banks.
These
Page 2.
banks use the associations' products and services either to issue cards to consumers, provide
card
acceptance services to merchants, or both.
The
same large banks control both associations by simultaneously serving on the board of
directors of one and on important committees of the other. In addition, each of these banks
issues significant numbers of both Visa and MasterCard cards. The control of the two
associations by banks that have significant interests in both known in the industry as
"duality"
has substantially lessened competition between Visa and MasterCard because these
banks
have been, and continue to be, significantly less willing to fund and implement competitive
initiatives that would cause consumers to switch their business from one association to the
other.
In
addition, both Visa and MasterCard on behalf of and in collaboration with the banks
that govern them have adopted rules and policies that restrict the ability of all member
banks
to do business with American Express, Discover/Novus, or any other network that the
controlling
banks deem to be "competitive." Importantly, Visa and MasterCard do not apply these rules
to
one another. Banks can therefore do business with the two largest general purpose card
networks, but not with smaller competitor networks. These exclusionary rules and policies
eliminate certain forms of competition among the Visa and MasterCard member banks, and
have
effectively precluded American Express and Discover/Novus from competing to enlist banks
in
the U.S. to issue their cards.
Through their common control of both Visa and MasterCard, the
largest banks have stifled
competition between these two networks and have thwarted competition from smaller
competitor
networks. This reduction in competition among general purpose card networks has hindered
and
delayed the development and implementation of improved network products and services,
and
Page 3.
has lessened consumer choice. If allowed to continue, the anticompetitive structure and
practices
of the associations will threaten competition in the development and marketing of new
general
purpose card products, such as products that integrate credit, debit, and stored value functions.
Accordingly, the United States brings this action and complains and alleges as follows:
I.
Jurisdiction And Venue
1. The United States files this Complaint under § 4 of the Sherman Act,
15 U.S.C. § 4, as
amended, to prevent and restrain Visa and MasterCard from violating § 1 of the Sherman
Act,
15 U.S.C. §1, as amended.
2. Visa and MasterCard maintain offices, transact business, and are found
within the
Southern District of New York, within the meaning of 15 U.S.C. § 22. This Court has
personal
jurisdiction over each defendant, and venue is proper under 15 U.S.C. § 22 and
28 U.S.C. § 1391(b).
II.
Defendants and
Co-Conspirators
3. Visa U.S.A. Inc. ("Visa U.S.A.") and Visa
International Corp. ("Visa International")
are associations of independent banks structured as membership corporations. Both
corporations
are organized under the laws of the State of Delaware, with their principal place of business
in
San Francisco, California. Visa International, Visa U.S.A., and all of their predecessors
and
subsidiaries are referred to herein collectively as Visa.
Page 4.
4. Visa
International has ultimate authority over Visa U.S.A. Visa International has
delegated some authority to its regional boards, but Visa U.S.A.'s authority to regulate even
matters solely within the United States is subject to Visa International's policies.
5. MasterCard International Incorporated ("MasterCard International") is also
an
association of independent banks structured as a membership corporation. It is organized
under
the laws of the State of Delaware, with its principal place of business in Purchase, New York.
MasterCard International has created a separate Board of Directors and hired separate
management to run its business in the United States. Unlike Visa, MasterCard International
has
not created a separate corporate subsidiary for its United States operations. MasterCard
International and all of its predecessors and subsidiaries are referred to herein collectively
as
MasterCard.
6. Certain financial institutions not made defendants in this Complaint
participated as co-
conspirators in the violations alleged and have performed acts and made statements in
furtherance thereof.
III.
Trade And Commerce
7. Throughout the period covered by this Complaint, Visa and MasterCard
have operated
general purpose card networks throughout the United States. They provide card network
products and services in, and those products and services affect, a substantial amount of
interstate
commerce. In 1997, transaction volume on the Visa and MasterCard networks exceeded
$600
billion.
Page 5.
IV.
Relevant Market
8. General purpose cards are payment devices that a consumer can use to
make purchases
(a) from unrelated merchants and (b) without accessing or reserving the consumer's funds at
the
time of the purchase. There are two principal types of general purpose cards:
credit cards such as Visa and MasterCard
Classic and Gold cards, the
American Express Optima card, and the Discover card that usually
permit the
cardholder to either (i) pay all charges within a set period after a monthly
bill is
rendered, or (ii) pay only a portion of the charges within that time and
pay the
remainder in monthly installments, including interest; and
charge cards
such as the American Express Green Card that require the
cardholder to pay all charges within a set period after a monthly bill is
rendered.
General purpose cards do not include cards that can be used at only one merchant (e.g.,
department store cards) or cards that immediately access funds on deposit in a checking or
savings account (e.g., debit cards).
9. General purpose cards provide a consumer with a combination of
convenience,
widespread acceptance, security, and deferred payment options that is not effectively
replicated
by any other form of payment. For a significant number of consumers and types of
transactions,
other forms of payment are not a close substitute for general purpose cards.
10. Competition to provide general purpose cards occurs at two levels. First,
Visa and
MasterCard compete with American Express, Discover/Novus, Diners Club, and Japan
Credit
Bureau ("JCB") in an upstream market, hereinafter referred to as the general purpose card
Page 6.
network market. Second, individual Visa and MasterCard member banks compete with
each
other and with American Express, Discover/Novus, Diners Club, and JCB in two
downstream
markets:
the market for issuing general purpose cards to consumers ("the
card-issuing market");
the market for providing the services that enable merchants to accept
general purpose
cards for the purchase of goods or services ("the card-acceptance
market").
11. The Visa and MasterCard associations compete only in the upstream
network market.
Their member banks with the exception of Citibank, which owns Diners Club compete
only in the two downstream markets. American Express, Discover/Novus, Diners Club, and
JCB
are integrated entities that compete in all three markets.
A.
Product Market
12. Certain functions essential to the acceptance and use of general purpose
cards are most
efficiently performed by general purpose card networks, often because the functions
require
broad coordination across the network.
13. For example, among these functions, all general purpose card
networks:
invent, develop,
and implement systems and technologies, including systems to
authorize and settle card transactions and reduce fraud;
develop, market,
advertise, and promote their brand names among consumers and
merchants;
invent, develop,
implement, standardize, market, and advertise types of card
products;
develop and
implement rules and standards to govern their networks;
Page 7.
set fees and
assessments for use of the network's products and services, including
the interchange fee that accounts for the largest part of the price that
merchants
pay for the right to accept general purpose cards; and
extend card
acceptance to merchant segments that have not accepted cards in the
past.
14. The products and services provided by general purpose card networks
form a relevant
product market ("the network market"). Banks and other entities that issue cards and
provide
card acceptance services to merchants rely on general purpose card networks to provide a core
set
of these products and services for which there is no cost-effective alternative. Card issuers
and
banks that provide card acceptance services to merchants thus cannot substitute other
products
and services for the products and services provided by general purpose card networks in an
amount sufficient to deter the exercise of market power in the network market.
15. In addition, consumers do not substitute other forms of payment, and
merchants do not
stop accepting general purpose cards, in amounts sufficient to deter the exercise of market
power
in the network market.
16. The products and services provided by general purpose card networks are
critical
inputs to the entities that issue cards to consumers and provide card acceptance services to
merchants.
17. Card issuers compete for cardholders with respect to interest rates, annual
cardholder
fees, payment terms and conditions, card enhancements, and customer service. Entities
that
provide card acceptance services to merchants compete with respect to their fees and the
quality
of service they provide. This competition among Visa and MasterCard member banks in
the
card-issuing market and the card-acceptance market is not a substitute for, and does not
replace,
Page 8.
competition at the network level. Competition at the downstream levels thus cannot protect
consumers from the anticompetitive effects of the exercise of market power by general
purpose
card networks. Competition among card issuers does, however, ensure that if network
competition is vigorous, the benefits of that competition will be passed on to consumers.
B.
Geographic Market
18. The United States is the relevant geographic market for each relevant
product market.
19. Almost all of the general purpose cards issued by banks based in the
United States are
issued to domestic cardholders, and these consumers use their cards predominantly at
merchants
located in the United States.
20. Most general purpose card transactions with merchants located in the
United States are
made using cards issued in the United States, and most merchants would not consider
networks
operating outside the United States to be a substitute for networks operating in the United
States.
21. The defendants consider the United States to be a separate geographic
market, as
demonstrated in part by their establishing separate Boards of Directors for and separate
rules
governing the operation of their card networks in the United States. For example, the
Visa
and MasterCard rules permitting the member banks to issue Visa and MasterCard, but no
other
network's cards, apply only in the United States.
Page 9.
V.
Visa
and MasterCard Have Market Power in the Network Market
22. The anticompetitive effects alleged in this Complaint occur primarily in the
network
market.
23. Visa and MasterCard together have and exercise market power in the
network market.
24. Visa and MasterCard are the two largest general purpose card networks in
the United
States. Their only significant competitors are the American Express and Discover/Novus
networks, and entry into the network market is extremely difficult.
A.
Visa and MasterCard Dominate the
Market
25. In 1997, Visa accounted for approximately 50% of the dollar volume of
transactions
on all general purpose cards in the United States and approximately 53% of the number of
general purpose cards issued.
26. In 1997, MasterCard accounted for approximately 25% of the dollar
volume of
transactions on all general purpose cards in the United States and approximately 33% of
the
number of general purpose cards issued.
27. Together, Visa and MasterCard account for approximately 75% of general
purpose
card dollar volume and approximately 86% of the number of general purpose cards issued.
28. In the United States, approximately 3.4 million merchant outlets accept
both Visa and
MasterCard. Practically every merchant that accepts Visa also accepts MasterCard and
vice
versa. This common merchant base is significantly larger than the base of any other
network
competitor.
Page 10.
29. In 1997, American Express accounted for approximately 18% of dollar
volume and
5% of general purpose cards issued in the United States. Cards on the American Express
network were accepted at approximately 2.5 million merchant outlets in the United States.
30. In 1997, Discover/Novus accounted for approximately 6% of dollar
volume and 8.5%
of general purpose cards issued in the United States. Cards on the Novus network were
accepted
at approximately 3.1 million merchant outlets in the United States.
31. There are two other general purpose card networks that compete in the
United States:
Diners Club/Carte Blanche ("Diners"), which is
owned by Citicorp the bank that
has issued the largest number of Visa and MasterCard cards and
JCB, a network based in Japan that issues cards
in the United States primarily to
Japanese expatriates.
Both networks have competitively insignificant market shares and limited merchant
acceptance
in the United States.
B.
Competition Among Card Issuers is Not a Substitute for Network
Competition
32. Card issuers may compete on interest rates, fees, enhancements, and
customer service.
This competition, however, cannot cure the harm to consumers arising from a lack of
competition among card networks, nor does it prevent the Visa and MasterCard member
banks
from collectively exercising power in the network market to the detriment of consumers.
Page 11.
C.
There Are Significant Barriers to
Network Entry
33. The prospect of entry by new card networks does not prevent Visa and
MasterCard
from exercising market power in the network market.
34. Entry is extremely difficult because establishing a new general purpose
card network
requires large investments to develop both cardholder and merchant bases. Coordinated
development of both cardholder and merchant bases is critical because the utility of a
particular
card product to cardholders and merchants depends not only on the cost and features of the
card,
but also on the ubiquity of its acceptance and use.
35. Since Visa and MasterCard were formed in the mid-1960s, only one
network has
successfully entered the relevant market. In 1985, Sears created that new network, then
called
Discover and now known as Novus, by building on the infrastructure and the cardholder
and
merchant bases of the Sears single-retailer card system. At the time, Sears was one of the
largest
retailers and card issuers in the United States.
36. In the early 1980s, Citicorp the largest issuer of Visa and MasterCard
cards and, at
the time, a large provider of card acceptance services to merchants unsuccessfully
attempted
to enter the network market.
37. Other companies that considered entering the network market concluded
that the high
cost of building a merchant and cardholder base made entry too difficult. For example, in
the
late 1980s, AT&T considered forming a new general purpose card network. After analyzing
the
Discover and Citicorp experiences, however, it decided not to enter the network market.
AT&T
instead entered only at the card-issuing level by becoming a member of Visa and
MasterCard.
Page 12.
38. Visa and MasterCard have adopted and maintained anticompetitive rules
and policies
described in paragraphs 101 to 154 that further increase an entrant's cost of developing
cardholder and merchant bases.
39. By virtue of their dominant market shares and the difficulty of entry into
the highly-
concentrated network market, Visa and MasterCard together have the power to injure
competition in that market. As described below, they have exercised that power to the
detriment
of consumers by reducing competitive investments in the innovation, development, and
marketing of improved network products and services, and by restraining the competitiveness
of
smaller networks.
VI.
The
Same Banks Have Taken Control of Both Visa and MasterCard
40. Both Visa and MasterCard are organized as membership corporations that
ostensibly
operate on a not-for-profit basis. Their activities are financed through fees and
assessments
levied on their members. Both card networks permit a variety of financial institutions to
become
members, including commercial banks, thrifts, credit unions, and entities that are engaged
primarily in the card business, commonly known as "non-bank banks" or "monoline banks."
Throughout this Complaint, all types of financial institutions that are eligible to become
members
of Visa and MasterCard are referred to collectively as "banks," and all financial institutions
that
are members of Visa and/or MasterCard are referred to collectively as "member banks."
41. Under Visa's and MasterCard's corporate structures, a member bank in
either
association has the right to issue cards bearing the association's trademark and to offer card
acceptance services for the association's cards. Most member banks including all of the
Page 13.
largest ones also become owners of the association and receive a bundle of rights similar
to
those of a shareholder in a corporation. These rights include the opportunity to vote for a
board
of directors, participate in the governance of the association, and share in the association's
assets
upon dissolution. Voting and dissolution rights are apportioned according to the dollar
volume
of transactions that the bank has transmitted through the network. Member banks also agree
to
abide by the associations' bylaws, rules, regulations, and policies.
A.
Visa
and MasterCard Began As Entirely Separate Systems
42. Prior to 1970, Visa and MasterCard were controlled by different groups of
banks.
43. In 1970, one of Visa's member banks, Worthen Bank of Arkansas, sought
to become a
card-issuing member of both networks. MasterCard did not object, but Visa responded by
adopting Bylaw 2.16, a bylaw that prohibited member banks from issuing any other
network's
cards.
44. Worthen then sued Visa, alleging that Bylaw 2.16 violated § 1 of
the Sherman Act.
The district court determined that the bylaw was a per se violation and granted
summary
judgment for Worthen. The Eighth Circuit, however, reversed and remanded for trial under
the
rule of reason.
45. While the case was awaiting trial, Visa asked the Department of Justice to
express its
views pursuant to a Department procedure called a "Business Review" on the legality of
a
more restrictive bylaw that would have prohibited Visa members from both issuing cards
and
providing card acceptance services for "any other [card] program presently existing or which
may
develop."
Page 14.
46. The Department responded that it would not object to a bylaw that
restricted Visa
members to issuing Visa cards exclusively "to the extent it is necessary to insure
continued
intersystem competition." But the Department expressed concern that Visa's proposed
prohibition on banks providing card acceptance services to merchants for both networks
"might
well handicap efforts to create new bank credit card systems and may also diminish
competition
among the banks in various markets."
B.
The Visa and MasterCard Governing Banks
Adopted Duality
47. Notwithstanding the Business Review Letter, the member banks on Visa's
Board of
Directors, over the objections of Visa's General Counsel, voted to permit Visa member banks
to
own and participate in the governance of MasterCard, and to permit MasterCard members to
own
and participate in the governance of Visa. MasterCard's Board of Directors also permitted
MasterCard member banks to become owners and governors of Visa, and Visa members to
become owners and governors of MasterCard.
48. This overlapping ownership and governance structure has become known
in the
industry as duality.
49. Since 1975, virtually all significant card-issuing banks have become
owners of both
Visa and MasterCard. Almost all of the largest card-issuing banks have representatives on one
of
the associations' boards of directors as well as have representatives on the important
committees
that influence policy for each network. For example, MasterCard's Business Committee
and
Visa's Marketing Advisors Committee advise their respective network's professional staff
and
management on key strategic and competitive issues. In 1996, twelve of the twenty-one
banks
Page 15.
represented on Visa's Board of Directors were also represented on MasterCard's Business
Committee. Seventeen of the twenty-seven banks on MasterCard's Business Committee
had
representatives on Visa's Marketing Advisors Committee. Seven of the twenty-two banks
represented on MasterCard's Board of Directors also were represented on Visa's Marketing
Advisors Committee.
50. In total, as of year-end 1996, approximately nineteen banks including
Chase
Manhattan, Citibank, First Chicago, Bank of America, and NationsBank had a
representative
on the board of directors of one association and on at least one important committee of the
other
association.
51. Despite this overlap in ownership and governance, neither Visa nor
MasterCard
enforces the safeguards necessary to prevent one association from obtaining confidential
competitive information about the other.
52. In 1992, MasterCard International's Executive Vice President and General
Counsel
wrote in a letter to the Department of Justice that "when one board acts with respect to a
matter,
the results of those actions are disseminated to the members which are members in both
organizations. As a result, each of the associations is a fishbowl and officers and board
members
are aware of what the other is doing, much more so than in the normal corporate
environment."
VII.
Visa and MasterCard Restrain
Competition
53. Visa and MasterCard on behalf of and in collaboration with their
governing banks
make competitive decisions that (a) restrain competition between the two associations; and
(b)
restrain competition from other networks and eliminate certain forms of competition among
the
Page 16.
member banks. As a result of this anticompetitive behavior, certain competitive initiatives
that
would have benefited consumers have been abandoned, delayed, suppressed, and diluted;
consumer choices have been reduced; and competition among general purpose card networks
has
been restrained substantially.
A.
Duality Restrains Competition Between Visa and MasterCard
54. The common control of both Visa and MasterCard by banks with
significant financial
interests in both networks restrains competition between those two general purpose card
networks.
1.
Duality Lessens the Associations' Incentives to Compete Against One
Another
55. The banks that govern Visa earn substantial profits from issuing
MasterCard cards.
For example, as of year-end 1997, Visa U.S.A.'s Board of Directors included representatives
of
First Union Corporation and Associates First Capital Corporation, both of which had
issued
nearly 40% of their general purpose cards on the MasterCard network.
56. The banks that govern MasterCard earn an even greater percentage of their
profits
from issuing Visa cards. For example, as of year-end 1997, at least five banks that placed
directors on the MasterCard board for the United States Region issued more Visa cards
than
MasterCard cards. The most pronounced examples among MasterCard's 1997 board
members
were Providian Bancorp Inc. and Capital One Bank, which had issued more than 95% and
more
than 66% of their cards on the Visa network, respectively.
Page 17.
57. Because of these significant overlapping financial interests, the banks that
govern
each association have rejected investments in, and implementation of, competitive initiatives
that
might lead consumers to switch from one association's brand of card to the other's. From
the
banks' perspective, these innovations would merely shift their profits from cards issued on one
of
their networks to cards issued on the other.
58. Because the same banks control the associations, the overlapping interests
of the
governing banks substantially restrain the ability of the separate managements of Visa and
MasterCard to compete.
2.
Visa and MasterCard Top
Executives Admit that Duality Restrains Competition
59. Officials at the highest levels of Visa and MasterCard have acknowledged
repeatedly, publicly, and under oath that the common ownership and governance of Visa
and
MasterCard significantly limit competition between the two associations.
60. In 1992, Visa International's President and Chief Executive Officer
testified:
Q: So you believe consumers would be better off without duality?
A: Yes.
He explained that "Visa was a better organization [before its owners acquired an interest in
MasterCard. I]t created more, it was more innovative, it was more vital and more
imaginative. . . . The real creativity, ingenuity, desire to develop, [and] support from
members
that made Visa what it is today came before duality because there were groups of banks
who
wanted to support Visa to go beat up on MasterCard, and there were groups of banks in
MasterCard who wanted to support MasterCard to go beat up on Visa. And they weren't
sitting
Page 18.
there as shareholders of both organizations not really caring who beat up on whom or if
they
didn't beat up on anyone or not caring who won. If you've got one foot firmly placed on
both
sides of the street, who cares. . . . [a]nd I think that not only would the banks have benefited
had
they gone this way [without duality], but ultimately the consumer would, too . . . . "
61. In 1992, Visa International's Executive Vice President and General
Counsel testified
that "it is very difficult for us to take a step, an aggressive step that hurts MasterCard because
the
same banks who sit there on the board, who are in Visa are also in MasterCard." In response
to
the question whether "duality has led to a decrease in intersystem competition between Visa
and
MasterCard," he replied, "Absolutely," and when asked whether duality harmed consumers,
he
answered "I think in the long run they would be better off without duality . . . ."
62. In 1992, MasterCard International's Executive Vice President and General
Counsel
wrote in a letter to the Department of Justice that Visa's and MasterCard's "members,
which
necessarily underwrite the [networks'] costs, view the associations as complementary and
are
displeased when one attempts to enhance itself at the expense of the other. . . . MasterCard
and
Visa simply do not compete' in any conventional business sense."
63. In January 1997, the President of MasterCard International's U.S. Region
testified: "It
is clear that because of duality today you don't see MasterCard and Visa in the marketplace
attacking each other. . . . [T]he owners . . . don't want us attacking the other thing they
own . . . ."
64. Also in January 1997, the President and Chief Executive Officer of Visa
U.S.A.
testified that "you can't compete in certain areas if you're co-owned." He emphasized that
Visa
Page 19.
would seek to differentiate its network services from MasterCard's to a greater extent if
Visa
were not owned by the same banks that own MasterCard.
3.
Proposals to Roll Back Duality Were Rejected
65. Recognizing that duality blunts competition between the associations,
each network's
staff and management have sought at various times to increase their network's independence
and
enhance network competition. The banks that control Visa and MasterCard have resisted
these
efforts.
66. In 1991, Visa International's President and Chief Executive Officer
proposed
eliminating the overlap between the two networks. Under the proposal, each member bank
would issue prospectively only one general purpose card brand, Visa or MasterCard, and
would
participate exclusively in the governance of the system on which it chose to issue cards.
67. Also in 1991, Visa's U.S. Executive/Planning Committee considered the
advantages
and disadvantages of phasing out duality. According to an internal Visa document, an
anticipated benefit of eliminating duality was to create "real competition with MasterCard."
68. The Visa Board rejected these proposals, voting instead to continue to
permit a bank to
govern Visa regardless of the extent of the bank's interest in MasterCard.
69. Similarly, throughout the 1990s, MasterCard's professional staff
repeatedly urged the
network's Chief Executive Officers to end the practice of providing member banks with
equal
access to MasterCard network services regardless of the banks' interests in Visa.
70. In 1992, a MasterCard staff memorandum reported that MasterCard's
"innovative
ideas are totally neutralized in a dual world."
Page 20.
71. In 1994, a MasterCard management team advised MasterCard
International's then-
new President and Chief Executive Officer about the "tyranny to issuer duality" and the "drive .
.
. to homogenize" that resulted in "no meaningful difference" in the network products and
services offered by MasterCard and Visa.
72. In 1996, a high-ranking MasterCard executive again emphasized that
increasing the
revenues collected by card issuers, advertising more effectively, and increasing overall
efficiency
are "matters that become marginalized in a dual world with a larger competitor."
73. As one of these memoranda concluded, "[t]he cure is in a core of
dedicated issuers;
dedicated not dual." Under these staff proposals, new MasterCard innovations would have
been
made available only to member banks that agreed to favor MasterCard over Visa.
74. Despite these proposals, MasterCard, like Visa, continued to permit banks
to govern
MasterCard, regardless of their interest in Visa.
4.
Duality Has Anticompetitive Effects
on Brand Development
75. Brand development is an essential aspect of establishing and developing a
general
purpose card network. A network promotes and differentiates its brand in order to attract
consumers, merchants, and banks to use its brand rather than a competing network's brand.
Advertising campaigns, such as Visa's ubiquitous "they don't take American Express"
advertisements, are an important component of network competition because they educate
consumers and merchants about important attributes of the network. In recent years,
advertising
has accounted for approximately a quarter of all expenses for both Visa U.S.A. and
MasterCard's
U.S. region.
Page 21.
76. Because consumers value the ability to use their cards to make purchases
whenever
and wherever they want, a card network must offer widespread merchant acceptance. In
the
United States, virtually all merchants that accept any credit card accept both Visa and
MasterCard. Yet, studies have long shown that consumers wrongly perceive that Visa is
accepted by significantly more merchants than MasterCard.
77. In 1992, MasterCard management was advised by its advertising
consultant that
MasterCard "must name Visa" in its advertisements in order to combat this misperception. As
a
result, MasterCard management proposed that MasterCard institute an advertising
campaign
proclaiming: "No other card is more accepted. Not Visa. Not American Express."
78. Bank representatives on the MasterCard Business Committee objected on
the ground
that this advertisement would harm Visa. MasterCard's U.S. Region President responded
to
these objections by assuring member banks that MasterCard's acceptance claim comparison
to
Visa would be used only if it "did not negatively impact Visa."
79. During the same time period, MasterCard faced a similar perceived
acceptance gap
vis-a-vis Visa in Canada, where duality does not exist. There, MasterCard's Canadian
Region
ran the advertising that was rejected in the United States. It used the tag line "No card is
accepted in more places worldwide than MasterCard. Not Visa. Not American Express."
Within two years, MasterCard's Canadian Region concluded that "the use of this tag line . . .
has
helped improve acceptance imagery as well as reduce the Visa brand awareness advantage."
One
study showed a drop in the perceived acceptance gap in Canada from 15% to 4% during a
one-
year period in which MasterCard named Visa in its advertisements.
Page 22.
80. Notwithstanding the success of this campaign, MasterCard has not named
Visa in a
comparative acceptance advertisement in the United States. Surveys continue to show that
consumers in the United States wrongly perceive that Visa is significantly more widely
accepted
than is MasterCard.
81. Similarly, Visa does not name MasterCard in its U.S. advertising. But, in
the non-dual
Canadian market, Visa has named MasterCard. For example, in one advertisement, Visa
highlighted a Canadian merchant that only accepted Visa. A Visa executive testified that
Visa
management never proposed running the Canadian advertisement in the U.S. "because we
knew
that they [the banks] wouldn't accept it." He further testified that when Visa's U.S.
Marketing
Advisors Committee was shown the advertisement, "their reaction clearly was don't you
show
that in the U.S., on U.S. television."
5.
Duality Has Anticompetitive Effects on
Product Development
82. The overlap in control of Visa and MasterCard constrains each
association's
professional staff and management from proposing competitive initiatives likely to lead
consumers to switch from one brand to the other. In 1991, a Visa executive testified that
member banks opposed Visa initiatives "against MasterCard because they had a vested
interest
on that side too, and this was an ongoing problem in almost everything we did and continue
to
do." He added that Visa's managers "often don't even propose them [competitive
initiatives]
because we know they are unacceptable to members."
83. The anticompetitive effects of duality exceed what can be readily observed
because
many products, services, and innovations that would have emerged in a competitive
environment
Page 23.
were never even considered by the associations or their managements. Nevertheless, there
are
several instances in which the controlling banks have restrained critical competitive
initiatives
developed by the managements of Visa and MasterCard.
a.
Smart Cards
84. In the 1980s, MasterCard developed and extensively tested smart cards. A
smart card
differs from the cards in widespread use in the United States in that it can store information on
an
integrated circuit instead of, or in addition to, a magnetic stripe. Integrated circuits are capable
of
storing significantly more information than magnetic stripes. This additional data storage
capacity would enable a card network to enhance its products by, among other things,
storing
cash and personal information such as airline and hotel preferences, identification numbers,
and
medical data. Smart cards would also enable issuers to reduce their costs by providing
superior
fraud and credit risk control.
85. In 1987, MasterCard staff concluded that introducing this product would
give
MasterCard a significant advantage over Visa, and sought board approval to introduce
smart
cards. Bank representatives on the MasterCard Board's Executive Committee refused,
however,
to approve the initiative without Visa's agreement. MasterCard then approached the Visa
Board,
and the two networks hired a consultant to consider whether to introduce this new product
jointly.
86. After several banks represented on Visa's Board of Directors expressed
their
opposition to the introduction of the smart card, Visa notified MasterCard that it would not
introduce the product.
Page 24.
87. MasterCard's Board then refused to permit MasterCard to move forward,
and the
planned development was shelved.
88. After a decade of delay, Visa and MasterCard are now finally testing
separate smart
card options, although with full knowledge of each other's strategic plans.
b.
Commercial
Cards
89. In 1993, Visa staff concluded that prohibiting Visa member banks from
issuing both
Visa and MasterCard commercial cards i.e., corporate cards and other cards issued to
businesses rather than consumers would enable Visa to innovate and differentiate its
commercial products from MasterCard's more effectively than if duality were permitted.
90. Based on Visa management's recommendation, its Board initially adopted
a resolution
that would have required Visa member banks to decide by early 1996 whether to issue Visa
or
MasterCard commercial cards exclusively. Visa then planned to promote its commercial
cards
aggressively and allocated a substantial budget to the initiative.
91. Widespread bank opposition led Visa to reverse its decision and allow
banks to issue
both MasterCard and Visa commercial cards.
92. Soon after the decision to permit banks to issue both associations'
commercial cards,
Visa scaled back its investment in developing commercial card products.
93. Visa's former Executive Vice President of Market Development testified
that "the
amount of money that Visa spent [on the commercial card] was reduced because it became
apparent that it was going to be a dual world."
Page 25..
c.
Secure Transactions Over the Internet
94. The member banks also delayed Visa's introduction of the first system to
provide
secure general purpose card transactions over the Internet and thereby prevented Visa from
gaining a competitive advantage over MasterCard.
95. In October 1995, Visa and Microsoft jointly announced the specifications
for a system
to provide secure transactions over the Internet. Visa intended to use Microsoft encryption
software to implement the announced standard.
96. In a message to member banks, MasterCard stated that it had "no choice
but to
respond competitively" to the Visa-Microsoft alliance and it began to form alliances with
other
software providers.
97. The member banks pressured Visa to abandon its agreement with
Microsoft in favor of
a cooperative effort with MasterCard to develop a standardized approach. Visa complied
with
the banks' wishes.
98. In a 1995 presentation to the Federal Trade Commission on joint ventures,
Visa
International's Executive Vice President and General Counsel blamed duality for the delay
in
introducing the Internet security system. He stated that if "we had our group [of banks]
and
[MasterCard] had their group . . . this thing would be out there already."
99. In 1997, Visa U.S.A.'s President and Chief Executive Officer testified that
this was
yet another case in which Visa "had an opportunity to get out ahead [of MasterCard] and had
to
come back, work again with MasterCard."
Page 26.
100. Also in 1997, Visa U.S.A.'s former Executive Vice President of
Market
Development testified in regard to Internet security that the Visa staff and management
"deserve[d] the opportunity to either prove that we were right or to fail. Standardizing things
too
quickly in new, emerging products and markets, from my experience as a marketing person,
has
the . . . capability of stifling innovation."
B.
Visa
and MasterCard Restrain Competition From Other Networks
and Prohibit Certain Forms of Competition Among Their Member
Banks
101. In addition to restraining network competition between themselves, Visa
and
MasterCard on behalf of and in collaboration with their governing banks have adopted
and
maintained rules and policies that prohibit all member banks from doing business with
other
general purpose card networks such as American Express and Discover/Novus. These
rules
restrain competition (a) between the bank-controlled Visa and MasterCard networks and
the
general purpose card networks not so controlled, and (b) among the Visa and MasterCard
member banks.
102. Prior to the mid-1980s, Visa and MasterCard did not compete directly
with other
networks. At that time, other general purpose card networks, such as American Express,
issued
charge cards intended primarily for use in the travel and entertainment sectors. In contrast,
Visa
and MasterCard cards were targeted for use in the general retail sector.
103. By the mid-1980s, Visa and MasterCard had expanded into travel and
entertainment;
American Express had expanded into the retail sector; and Sears had entered the network
market
with the Discover network, now called Novus. These changes brought the bank-controlled
Visa
and MasterCard networks into direct competition with American Express and
Discover/Novus.
Page 27.
104. Visa and MasterCard on behalf of and in collaboration with their
governing banks
responded to this competitive threat by adopting rules that lessened the ability of those
networks to compete effectively (a) with Visa and MasterCard in the network market and
(b)
with the associations' member banks in the downstream card-issuing and card-acceptance
markets.
105. Visa and MasterCard both exempt each other and the Citicorp-owned
Diners Club
network from these exclusionary rules, enforcing them only against American Express and
Discover/Novus.
106. By adopting and maintaining these discriminatory exclusionary rules,
Visa and
MasterCard preserve and extend their jointly held market power. As MasterCard explained to
its
members in a 1991 document discussing competition among Visa, MasterCard, American
Express, and Discover: "[Visa and MasterCard form] a segment of the credit card market[,] . . .
a
market where MasterCard and Visa together are fighting to maintain their dominance .
. . and
minimize incursion of non-bank or competitive quasi-bank products." (Emphasis in
the
original).
1.
Visa and
MasterCard Impede the Ability of
Other
Networks to Convince Merchants to Accept Their Cards
107. One difficulty that a network faces in convincing merchants to accept its
cards is that
merchants strongly prefer to use a single card acceptance terminal to process transactions for
all
brands of general purpose cards. Processing transactions involves transmitting transaction
data
from a merchant's terminal to a central computer that directs the information to the
appropriate
Page 28.
card network for authorization and settlement. Visa and MasterCard permit banks to
process
transactions for both networks through a single merchant terminal, enhancing the ability of
both
networks to convince merchants to accept their cards.
108. In the mid-1980s, Visa, MasterCard, and their member banks used their
control of
merchant terminals to hinder American Express's and Discover/Novus's efforts to build
merchant bases.
109. In response to these practices, American Express and Discover/Novus
developed
their own card acceptance terminals capable of handling all card transactions. American
Express
and Discover/Novus then entered into agreements with a few Visa and MasterCard
member
banks that were willing to permit American Express and Discover/Novus to process those
banks'
Visa and MasterCard transactions through terminals that accepted all card brands.
110. Other banks complained to Visa and MasterCard about these agreements,
and the
associations then adopted new regulations that prohibited any member bank from
permitting
American Express or Discover/Novus to process Visa and MasterCard transactions. These
regulations which were an exception to the existing rules that permitted the banks to
contract
with third-party processors substantially hindered American Express's and
Discover/Novus's
ability to persuade merchants to accept their cards.
111. Eventually, because of strong merchant demand for a single terminal,
Visa and
MasterCard agreed to modify their regulations to permit banks to link their processing services
to
American Express and Discover/Novus. Under the modified regulations, any network
could
place a terminal with a merchant as long as all transactions on the terminal that involved
another
network's cards were diverted to that other network for processing.
Page 29.
112. American Express then began to divert transactions in accordance with
the modified
Visa and MasterCard regulations and, by offering card acceptance services at low prices,
American Express placed terminals with a number of merchants.
113. This prompted several Visa and MasterCard member banks to again
complain about
American Express's pricing practices to Visa and MasterCard.
114. In response, Visa and MasterCard adopted additional rules effectively
requiring
merchants to pay a higher fee for Visa and MasterCard transactions if they used a card
acceptance terminal placed by American Express. According to Visa's Executive Vice
President
and General Counsel, these discriminatory fees were adopted to "make it more difficult for
Amex
to price our [member bank] acquirers out of the marketplace" and remained in effect until at
least
1991.
2.
Visa and MasterCard Impede
the Ability of Other Networks to Provide Cash Advances
115. A valuable feature of any general purpose card network is the ability to
provide
cardholders with convenient access to cash advances, most importantly through automated
teller
machines ("ATMs").
116. Visa and MasterCard each own one of the two worldwide ATM
networks, Plus and
Cirrus respectively.
117. Visa's rules permit member banks that issue MasterCard cards to use the
Plus system
to provide cash advances on MasterCard cards.
118. Similarly, MasterCard's rules permit member banks that issue Visa cards
to use the
Cirrus system to provide cash advances on Visa cards.
Page 30.
119. As a result, any member bank can enable its cardholders to use general
purpose cards
to obtain cash advances worldwide at over 200,000 locations.
120. To obtain access to these ATMs, a bank merely needs to agree to pay a
fee to the
ATM operator whenever one of its cardholders obtains a cash advance, and to agree to
accept
cards issued by Cirrus or Plus member banks at its own ATMs.
121. Visa stated in its 1988 Corporate Strategic Plan that "[t]he successful
consolidation
of regional ATM switches into a unified, bank-owned and operated national network will
deprive
Discover and American Express of the opportunity to chip away at a major strategic
advantage
by the banking industry through the progressive creation of a national network of their
own."
122. Visa and MasterCard will not permit American Express and
Discover/Novus to use
Cirrus or Plus to provide cash access to their cardholders.
123. As a direct result of Visa's and MasterCard's exclusionary practices,
American
Express and Discover/Novus have had to negotiate individually with scores of regional
ATM
networks and banks to secure ATM access for their cardholders, often at access prices
higher
than those paid by member banks.
124. The cash access networks that American Express and Discover have
assembled
through these individual negotiations are smaller, more geographically uneven, and more
costly
to maintain than those that Visa and MasterCard make available to each other's member
banks.
3.
Visa
and MasterCard Impede the Ability of Other Networks to Contract with Issuers
125. In the last few years, American Express and Discover/Novus have
attempted to
expand their networks by convincing other entities, including banks, to issue cards on their
Page 31.
networks. In the United States, those efforts have been stymied by Visa and MasterCard
rules
that prohibit all member banks from issuing cards on the American Express and
Discover/Novus
networks.
a.
Visa Adopts Bylaw 2.10(e)
126. In 1991, Visa U.S.A's Board of Directors adopted Bylaw 2.10(e), which
states that
"the membership of any member shall automatically terminate in the event it, or its parent,
subsidiary or affiliate, issues, directly or indirectly, Discover Cards or American Express
Cards,
or any other card deemed competitive by the Board of Directors."
127. Visa has asserted that it adopted Bylaw 2.10(e) to prevent
Discover/Novus and
American Express from becoming card-issuing members of Visa by acquiring member banks,
as
Discover attempted to do in 1990. As written, however, the bylaw also prohibits all
independently owned Visa member banks from issuing cards on the American Express or
Discover/Novus networks.
128. Bylaw 2.10(e) prohibits Visa's member banks from issuing cards on any
network
that is "deemed competitive" by Visa's Board. But Visa's Board has not deemed
MasterCard to
be a competitor, and Visa's member banks may thus issue cards without restriction on the
MasterCard network. The bylaw applies only to American Express and Discover/Novus,
the
networks not controlled by the member banks.
129. By 1994, American Express and Discover/Novus had begun to pursue a
number of
competitive initiatives to strengthen their networks, including arrangements with certain banks
in
Page 32.
the United States to issue cards on the American Express or Discover/Novus networks in
addition to the Visa and MasterCard networks.
130. Visa U.S.A.'s Bylaw 2.10(e) has effectively precluded member banks in
this country
from issuing American Express or Discover cards.
b.
MasterCard
Adopts Competitive Programs Policy
131. In May 1996, American Express, through its Chairman, publicly
announced its
intention to contract with banks to issue American Express cards. Unlike Visa, MasterCard
at
that time had no rule that prohibited its member banks from issuing cards on other networks.
American Express thus focused its efforts on banks that primarily issued MasterCard.
132. Many banks expressed interest in American Express's proposal and,
within a month,
discussions commenced between American Express and a number of banks. MasterCard
learned
of some of these negotiations.
133. At its June 1996 meeting, the MasterCard U.S. Board adopted a policy
that mirrored
the Visa bylaw. MasterCard's policy on "competitive programs" provides that:
With the exception of participation by members in Visa, which is
essentially owned
by the same member entities, and [Diners Club and JCB],
members of MasterCard
may not participate either as issuers or acquirers in competitive
general purpose card
programs.
At the meeting in which MasterCard adopted the policy, the board considered the American
Express proposal to partner with member banks and concluded that the newly adopted
policy
would prohibit member banks from issuing American Express cards.
Page 33.
c.
The
Exclusionary Rules Restrain Competition in the United States
134. Following adoption of the MasterCard policy, those banks that had been
negotiating
with American Express terminated the discussions. The banks were not interested in
issuing
American Express cards if doing so would require them to forfeit their right to issue
both Visa
and MasterCard, the two dominant general purpose card brands.
135. In addition, Visa's Bylaw 2.10(e) and MasterCard's competitive programs
policy
would prohibit a bank that issued American Express or Discover cards from accessing the
wide
array of other Visa or MasterCard products and services, including the Plus and Cirrus
ATM
systems and the associations' point-of-sale debit cards that can be used to make purchases
from
merchants with funds deducted directly from the cardholder's bank account.
136. In these ways, the rules raise the cost to a member bank of issuing
American Express
or Discover/Novus credit cards to prohibitively high levels and make it practically impossible
for
American Express and Discover/Novus to convince banks the most experienced and
skilled
card issuers and the only entities that hold the demand deposit accounts of most consumers
to
issue cards on their networks.
137. The current presidents of both Visa U.S.A. and MasterCard's U.S.
Region have said
that, were it not for the exclusionary rules, some of their member banks in the United
States
would issue American Express cards.
Page 34.
138. In addition, in 1997, the former Chairman of MasterCard International
and then Chief
Executive Officer of a bank that was among the top ten general purpose card issuers,
testified
that eliminating Visa's and MasterCard's exclusionary rules in the United States "would
force
MasterCard and Visa to compete more intensely for the affection of the members."
139. This increased competition between the networks for banks' card-issuing
resources
as well as competition among the banks to offer additional card brands would spur the
development and implementation of higher quality and lower priced network products and
services.
140. In addition, consumer choice would be enhanced by eliminating the
exclusionary
rules. Consumers would have access to new general purpose cards that would combine the
network attributes of American Express or Discover/Novus with the card-issuing attributes
of
individual banks. For example, a consumer would have the option of obtaining American
Express and Discover/Novus network cards from an institution that also offers other
banking
products such as a demand deposit checking account or a Visa or MasterCard card.
141. Finally, eliminating the exclusionary rules would benefit consumers by
enhancing the
competitive effectiveness of Visa's and MasterCard's smaller network competitors, thereby
enabling those networks to compete more vigorously against Visa and MasterCard. For
example,
Visa U.S.A.'s former Executive Vice President of Market Development testified in 1997
that
issuing through banks would help a competitive network to obtain additional volume and
thereby
realize lower costs and "better economies of scale."
142. Without ubiquitous merchant acceptance of its cards, a card network
cannot compete
fully and effectively with Visa and MasterCard. To ensure ubiquitous acceptance throughout
the
Page 35.
United States, a card network needs a substantial market share. Without issuance by some
Visa
and MasterCard member banks, a network could not, as a practical matter, maintain the
necessary minimum market share.
143. Visa's internal documents reveal that allowing competitive networks to
issue cards
through Visa member banks would increase competition. For example, Visa documents
state
that the member banks are a "huge and effective distribution network;" that "through
partnerships
with Visa member banks" competitor networks would "threaten to rapidly erode [Visa's
merchant] acceptance advantage;" and banks issuing a competitor's cards "would strengthen
[the
competitor's] other products - commercial cards, travelers's cheques, stored value cards."
144. MasterCard's internal documents similarly acknowledge the importance
of banks to
the effectiveness of competition from other networks. For example, MasterCard documents
state
that member banks possess "powerful distribution channel capabilities for new products"
and
that, by issuing through banks, competitor networks would "obviously build[ ] revenue . . .
to
reinvest back into the business, probably continuing to open up new acceptance channels
that
they do not perceive Visa or MasterCard to be dominating."
d.
Competition Has Increased
Outside the U.S. Where the Exclusionary Rules Do Not Apply
145. In 1996, both Visa and MasterCard responded to American Express's
worldwide
effort to convince banks to issue cards on the American Express network. Both
associations
considered whether to adopt a worldwide rule mirroring Visa U.S.A.'s Bylaw 2.10(e)
that
would prohibit member banks from issuing cards on the American Express and Novus
networks.
Page 36.
Visa's management concluded that Visa could compete effectively without an exclusionary
rule
and told Visa's International Board member banks that it was "not necessary" to prohibit
banks
from issuing competitive cards. MasterCard's management reached a similar conclusion,
and
both international boards then delegated authority to each region to decide for itself whether
to
prohibit member banks from issuing cards on the American Express and Discover/Novus
networks.
146. Aside from the United States and Canada, where each bank may issue
only one
card brand no Visa or MasterCard regional board has adopted a rule prohibiting banks
from
issuing other networks' cards. In several countries where the rule has been considered,
competition authorities have objected to the rule and expressed concern that such a rule
would
have anticompetitive effects.
147. In more than a dozen foreign countries, American Express has
successfully
contracted with Visa and MasterCard member banks to also issue cards on the American
Express
network. In many of these countries, Visa and MasterCard have responded by introducing
new
products and services.
148. For example, Visa International's European Region implemented an
aggressive set of
competitive initiatives shortly after its regional board rejected an exclusionary rule analogous
to
Bylaw 2.10(e). These initiatives included product enhancements, increased network support
for
the Visa Gold card and co-branding deals, and improved merchant services.
149. MasterCard responded in a similar fashion after Puerto Rico's largest
bank, Banco
Popular, decided to issue American Express cards. Puerto Rico is part of MasterCard's
Latin
American Region, which rejected a strict prohibition on banks issuing American Express cards.
Page 37.
After Banco Popular informed MasterCard of the bank's deal with American Express, the
President of MasterCard's Latin America/Caribbean Region told a Banco Popular executive
"that
MasterCard will strive (try even harder) to be competitive by improving the service and
attention
provided to Banco Popular in order to assure that [the bank] continue[s] the expansion of
[its]
MasterCard business."
4.
Visa and MasterCard Impede Other Networks'
Ability to Provide New General Purpose
Card Products
150. Visa Bylaw 2.10(e) and the MasterCard competitive programs policy also
reduce
network competition in developing new general purpose card products.
151. These products which will retain the core characteristics of ubiquitous
acceptance
and deferred payment options will integrate additional functionalities such as debit and
stored
value. A strategy document presented to the MasterCard Executive Committee explained
that
"[b]y utilizing a multi-application operating system, our members also have the ability to use
the
chip technology to create relationship cards' allowing their customers to have credit, debit
and
stored value resident on a single card with a choice of payment type at the point of sale." In
a
1995 proceeding before the Federal Trade Commission, Visa International's Executive
Vice
President and General Counsel agreed, stating that "[t]he payment engine I foresee is a chip
card
which will have all your relationships on it."
152. As a practical matter, only banks that hold consumers' demand deposit
accounts can
provide this type of general purpose card. Such a card is likely to play a critical role in
network
competition in the future.
Page 38.
153. The associations' rules substantially diminish competing networks' ability
to develop
general purpose card products, including products that incorporate debit or stored value
functionality. For example, a consultant for one bank that was considering whether to
issue
American Express cards reported that American Express "is not positioned to tap into the
burgeoning debit card market" and it "faces an increasing challenge in the rapidly evolving
payment systems industry, factoring in the reach of thousands of Visa/MasterCard issuers."
But
"[w]ith its platform of core deposit relationships," the report concluded, the bank "could
assist
American Express in establishing successful debit card programs."
154. For those reasons, the Visa and MasterCard rules substantially diminish
competition
among networks in the development and issuance of the next generation of general purpose
cards.
VIII.
First
Offense
(Duality Combinations and Conspiracies in Restraint of Trade)
155. Each of the defendants, on behalf of and in collaboration with its
governing banks,
has engaged in a continuing combination and conspiracy to organize and operate its general
purpose card network in a manner that restrains competition among general purpose card
networks in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, as amended.
156. In furtherance of these combinations and conspiracies, each of the
defendants and its
member banks have, inter alia:
b. appointed and elected to its Board of Directors and influential
committees
representatives of banks that have substantial interests in both Visa and
Page 39.
MasterCard,
and therefore have diminished incentives to support competition between
the two
c. allowed banks with substantial interests in competing networks to propose,
recommend,
and vote on competitive decisions, such as advertising, marketing
campaigns, research,
and development; and
d. shared competitively sensitive information, including information about
proposed or
planned investments in new products and services, with banks that
participate in the
governance of competing networks.
157.
These combinations and conspiracies have anticompetitive effects, including:
a. each
defendant failed to engage in competitive advertising that would have informed
consumers about the relative value of different brands of general purpose
credit cards;
b. each defendant reduced or delayed its investments in new general purpose
card
technologies, products, and services, including, among other things,
Internet
technology, smart cards, and commercial cards; and
c. consumers have been deprived of the benefits of free and open competition
among
defendants in the promotion, development, and implementation of new
general purpose
card products and services.
Unless enjoined by this Court, these anticompetitive effects are likely to continue.
158. These combinations and conspiracies are not reasonably necessary to
accomplish any
procompetitive objective.
Page 40.
IX.
Second
Offense
(Exclusionary Rules
Combinations and Conspiracies in Restraint of Trade)
159. Each of the defendants, on behalf of and in collaboration with its
governing banks,
has engaged in a continuing combination and conspiracy to organize and operate its general
purpose card networks in a manner that restrains competition among general purpose card
networks in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, as amended.
160. In furtherance of this combination and conspiracy, each of the defendants
and its
governing banks has adopted rules and policies that disadvantage or exclude rival general
purpose card networks, such as American Express and Discover/Novus, including rules or
policies prohibiting member banks from issuing cards on the American Express or
Discover/Novus networks.
161. These combinations and conspiracies have had anticompetitive effects,
including:
a. consumers have had fewer choices in the characteristics and variety of card
products
that have been made available to them;
b. Visa and MasterCard member banks have been prevented from competing
with one
another with respect to the variety of card brands that they may offer to
consumers;
c. card
networks not owned by banks have been foreclosed from access to an important
channel of distribution; and
d. consumers have been denied the benefits of free and open competition
among general
purpose card networks in the promotion, development, and
implementation of new
general purpose card products and services.
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Unless enjoined by this Court, these anticompetitive effects are likely to continue.
162. These combinations and conspiracies are not reasonably necessary to
accomplish any
procompetitive objective.
X.
PRAYER FOR
RELIEF
WHEREFORE, the United States prays that final judgment be
entered against each
Defendant declaring, ordering, and adjudging:
1. that Defendants Visa International, Visa U.S.A., and
MasterCard International have
violated Section 1 of the Sherman Act, 15 U.S.C. § 1;
2. that Defendants Visa International, Visa U.S.A., and their
subsidiaries and successors be
permanently enjoined from allowing any bank not dedicated to the Visa brand to exercise a
direct
governance voice in Visa International or Visa U.S.A. including, but not limited to, by (a)
having
a director on the Visa International Board of Directors or the Visa U.S.A. Board of Directors,
or
(b) having a representative on any committee that has decision-making authority or that
directly
advises Visa management, the Visa International Board of Directors, or the Visa U.S.A. Board
of
Directors on matters of competitive significance;
3. that Defendant MasterCard International and its subsidiaries
and successors be
permanently enjoined from allowing any bank not dedicated to the MasterCard brand to
exercise
a direct governance voice in MasterCard International or any MasterCard division or
subsidiary
that operates in the United States, including, but not limited to, by (a) having a director on
the
MasterCard International Board of Directors or the MasterCard U.S. Region Board of
Directors,
or (b) having a representative on any committee that has decision-making authority or
directly
Page 42.
advises MasterCard management, the MasterCard International, Board of Directors, or the
MasterCard U.S. Region Board of Directors on matters of competitive significance;
4. that Defendants Visa International, Visa U.S.A., and their
subsidiaries and successors be
permanently enjoined from permitting access to confidential or competitively sensitive
information by any member bank that has a direct governance voice in another network;
5. that Defendant MasterCard International and its subsidiaries
and successors be
permanently enjoined from permitting access to confidential or competitively sensitive
information by any member bank that has a direct governance voice in another network;
6. that Defendants Visa International and Visa U.S.A. and their
subsidiaries and successors
be permanently enjoined from enforcing Visa U.S.A.'s Bylaw 2.10(e) or any similar bylaw,
rule,
or policy;
7. that Defendant MasterCard International and its subsidiaries
and successors, be
permanently enjoined from enforcing MasterCard U.S. Region's competitive programs policy
or
any similar bylaw, rule, or policy;
8. that the Court grant such other relief as the United States may
request that the Court
deems just and proper; and
9. that the United States recover its costs in this action.
Page 43.
Dated: October 7, 1998
_________/s/_________________ _____________/s/____________
JOEL I. KLEIN (JK3481) STEVEN SEMERARO (SS8817)
Assistant Attorney General
________/s/_________________ ____________/s/_____________
JOHN M. NANNES (JN4148) KURT
SHAFFERT (KS4333)
Deputy Assistant Attorney General
__________/s/_______________ ___________/s/______________
REBECCA P. DICK (RD5481) SCOTT A. SCHEELE (SS0496)
Director, Civil Non-Merger Enforcement
_________/s/________________ ____________/s/_____________
M. J. MOLTENBREY (MM4814) JEFFREY I. STEGER (JS7416)
Chief, Civil Task Force
________/s/_________________ ___________/s/______________
SUSAN L. EDELHEIT (SE8020) SEAN T. FOX (SF8664)
Ass't Chief, Civil Task Force
________/s/_________________ ____________/s/______________
MELVIN A. SCHWARZ (MS8604) AHMED TAHA
(AT8157)
Special Counsel for Civil Enforcement Attorneys, Civil
Task Force
United
States
Department of Justice
Antitrust Division - Suite 300
325
Seventh Street, N.W.
Washington, D.C. 20004
202/616-5935
202/514-7308 (fax)
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