The Merchants' Unfounded Antitrust Suit Against MasterCard® and Visa
The SuitIn October 1996, a group of merchants filed an antitrust class action lawsuit against both the MasterCard® and Visa associations claiming that merchants do not want to accept consumers' MasterCard or Visa branded offline, or signature-based, debit cards. These merchants complain that the transaction charges they pay when consumers make MasterCard- or Visa-branded offline debit transactions are higher than those for online, or PIN-based, debit transactions. The merchants' lawsuit is centered on two main issues:
Whether the Honor All Cards rule—the cornerstone of the entire payment card industry, designed to ensure universal acceptance for all MasterCard consumers by requiring that merchants who agree to accept MasterCard accept all cards bearing the MasterCard logo is an unlawful tying together of two distinct "products" by a competitor with "market power." The merchants assert that MasterCard and Visa have "tied" acceptance of debit to acceptance of credit so as to force merchants to accept debit cards at a significantly higher price than they would otherwise pay. This, they claim, is anti-competitive.
Whether MasterCard and Visa have conspired to monopolize the "point-of-sale (POS) debit card market" and suppress the growth of competing regional ATM payment systems, even though these competing payment systems in fact have been growing at rates of over 50 percent a year. The merchants claim that MasterCard's and Visa's conspiracy to monopolize the so-called "POS debit card market" has hindered competition and harmed consumers.
MasterCard's Honor All Cards rule does not affect a tie of two distinct products by a competitor with market power. First, the service MasterCard offers merchants is always the same: guaranteed payment for all transactions made with MasterCard-branded cards. Second, MasterCard does not in any way control any payments "market," however defined. Moreover, the transaction charges merchants pay when accepting MasterCard-branded cards are not higher than they would be without the Honor All Cards rule, but lower.
In fact, the merchants' comparisons between the MasterCard payment system and the regional ATM systems are misguided. MasterCard's payment system provides services, benefits and costs that are different from those the regional ATM systems provide. Consumers benefit from being able to use offline or signature-based debit where they can't enter a PIN number, such as for Internet or mail order transactions, or at any of the millions of merchant locations that do not have the PIN terminals necessary to process PIN-based transactions. In those instances, offline debit transactions are processed over the MasterCard network just as MasterCard credit transactions are.
Among the many value-added benefits of the MasterCard payment system are: enhanced acceptance with 24.6 million acceptance locations around the world,including over 1 million ATMs and other locations where cash can be obtained; fraud liability protection for consumers; broad national and international brand recognition; guaranteed payment for participating merchants; and, rewards programs for consumers.
The regional ATM systems do not offer all of these value-added benefits. For these and other reasons, offline debit transactions, which are processed through the MasterCard payment system, have higher costs than online debit transactions, which are processed through the regional ATM systems.
MasterCard maintains that the merchants' allegations are unfounded and without merit because:
MasterCard's Honor All Cards rule is pro-competitive and benefits consumers, merchants, and MasterCard's members. Universal acceptance and guaranteed payment are the twin foundations of every successful payments system.
MasterCard's Honor All Cards rule is the bedrock of MasterCard's success with consumers, and if it is undermined, a consumer's ability to choose how he or she wants to pay will be undermined; the antitrust laws exist to enhance, not undermine, consumer choice.
Virtually all payment systems have similar Honor All Cards rules.
Under the Honor All Cards rule, merchants retain the ability to request a different form of payment, and the ultimate choice is up to the consumer. The merchants' goal in this lawsuit is to deprive consumers of that choice.
MasterCard operates within the larger payments industry that includes MasterCard, Visa, American Express, Discover, as well as cash, checks, store cards and Internet payment options. Within this broad payments industry, MasterCard transactions account for only five percent of all transactions made, clearly demonstrating that MasterCard does not have power in the market that includes all forms of payment.
Rather than conspire with one another, MasterCard and Visa are fierce competitors. The regional ATM payment systems' growth has been spurred, not suppressed, by existing market conditions, and the merchants' claim that the regional ATM systems have been the victims of a conspiracy or attempt to monopolize is untrue.
In short, the Honor All Cards rule gives consumers the flexibility to choose among a variety of payment options without worrying about whether their particular card might be accepted. Merchants, too, benefit from the Honor All Cards rule, because by increasing the consumer's ability to use additional forms of payment, such as MasterCard debit cards, the Honor All Cards rule in effect increases merchants' sales and profits. Finally, the Honor All Cards rule enables MasterCard, and its thousands of member financial institutions, to continue to innovate and offer a wide variety of payment card programs to consumers. Without the Honor All Cards rule, these programs could not be developed, given the enormous costs of building new payment systems and brands and signing up millions of merchants to participate. Given all of these benefits, MasterCard is confident that the Honor All Cards rule will be upheld as pro-competitive.
If the merchants are successful in this suit, they will have the power to deny consumers the ability to pay for purchases with their chosen MasterCard-branded card. If the merchants prevail and gain the ability to refuse to accept offline debit, it opens the door for them to discriminate against a consumer's right to choose his or her preferred method of payment. As a consequence, the benefits of universal acceptance will be completely undermined and consumers will suffer by being deprived of choice and their right to select how they want to pay. This is antithetical to the antitrust laws, which exist to protect consumers and guarantee consumers the broadest possible range of choices available through full and unfettered competition.
MasterCard and Visa are open membership associations, made up of thousands of financial institutions—from large multinational banks to small town credit unions—that issue many types of payment cards to their customers. These financial institutions are responsible for defining the payment relationship and establishing payment terms with the customers to whom they issue cards, by, for example, determining the interest rates and fees customers pay, as well as other competitive features of those cards.
When consumers use a credit card, they receive a monthly statement from their card issuer describing the charges incurred through the purchase of various products and services. The charges can be settled immediately, or paid out over a period of time. When consumers choose to use a MasterCard- or Visa-branded debit card, the amount of the sale is generally deducted directly from the consumer's demand deposit account. Depending on the type of card the financial institution has issued the cardholder, the funds can be deducted immediately, after a few days, or even at the end of the month for certain accounts.
Financial institutions rely on the universal acceptance of MasterCard- and Visa-branded cards in order to issue MasterCard- and Visa-branded cards to consumers. Without universal acceptance, financial institutions would not have made available MasterCard and Visa payment cards to their customers.
Today, consumers can choose from a variety of payment methods, including cash, check, and payment cards. When choosing MasterCard- or Visa-branded cards, consumers rely on the assurance that their cards will be accepted universally wherever the MasterCard or Visa logos are displayed.
Because virtually all MasterCard-branded debit cards carry PIN-debit functionality, consumers generally have the ability to use their MasterCard-branded debit card in two ways—online with a PIN, or offline with a signature. When used with a signature, the transaction is processed through the MasterCard network as a MasterCard transaction; when used with a PIN number, the transaction is processed through a regional ATM system's network. This provides optimal choices for consumers using MasterCard-branded debit cards.
Merchants, too, have choices when it comes to debit cards. A retailer who prefers PIN-based debit transactions can install PIN-pads to process transactions with a PIN, and can even ask customers to enter their PIN numbers. In that case, if the customer chooses to enter a PIN, the transaction is processed as an online debit transaction, which travels over a regional ATM system's network at a lower cost to the merchant.
The merchants' claim that this cannot be done because debit and credit cards cannot be distinguished is without merit. Credit cards and debit cards are distinguishable. In fact, a 1996 Wal-Mart training video, which was shown in a November 2000 hearing in the litigation, teaches Wal-Mart's clerks how to easily identify credit and debit cards and how to encourage customers to pay for their purchases by using PIN numbers rather than using signatures.
Furthermore, contrary to the merchants' complaint, nothing in MasterCard's rules prohibits them from encouraging customers to use online debit; they must, however, accept offline debit if that is the consumer's choice.
MasterCard: An Open Association of Financial Institutions Large and Small
MasterCard is an open membership corporation of tens of thousands of individual financial institutions that compete vigorously to attract new business and consumers, to issue cards and to contract with merchants for card acceptance. MasterCard does not issue cards, nor sign up merchants to accept cards. The financial institutions, independently and in competition with one another, sign up merchants, issue cards, set fees, and determine the interest rate consumers are charged in connection with their cards. Financial institutions have the responsibility for defining the payment relationship with their customers, and determine the interest rates, fees, and other competitive features of cards.
MasterCard establishes the rules that govern the transactions conducted through its network, and operates the system that makes those transactions possible. Member financial institutions and merchants that choose to participate in the MasterCard payment system through their acquiring banks are connected to MasterCard's network, which allows for the fast, secure and guaranteed interchange of transactions between banks and merchants no matter where they occur throughout the world. Merchants that sign up to accept MasterCard choose to do so by contracting with the acquiring financial institution, which belongs to the open association's payment system. Through that contract, they agree to the Honor All Cards rule.
The Honor All Cards Rule Increases Choice for Consumers
The Honor All Cards rule is the foundation without which a worldwide payment system such as MasterCard could not exist. Both open associations, MasterCard and Visa, as well as closed-loop proprietary card issuers American Express and Discover, have similar rules, as do the regional ATM systems. The rule provides consumers with the assurance of acceptance that is the foundation of the MasterCard payment system's value for merchants, cardholders and the association's members. The assurance of acceptance means that the consumer can have confidence that he or she may use any type of MasterCard-branded card at a retailer that chooses to participate in the MasterCard system. Merchants that opt to participate in the system receive guaranteed payment, regardless of what type of MasterCard-branded card is presented or even if the cardholder fails to pay his or her bill.
The Honor All Cards rule ensures that a consumer can rely on any card with the MasterCard logo regardless of which bank issues it, what airline or co-branded program the issuer has partnered with, or whether the card accesses a credit line or a demand deposit account. Because of this rule, a consumer can rely on the fact that a merchant displaying the MasterCard logo, anywhere in the world, will accept his or her card. MasterCard's promise of universal acceptance—the very feature the merchants are trying to undo—is essential to consumers. Undermining the Honor All Cards rule throws open the door to discriminating against other choices consumers make about utilizing a variety of MasterCard payment cards; if merchants can reject offline debit, they could choose to reject cards from certain financial institutions or countries, or those affiliated with a specific organization.
Beyond universal acceptance, the Honor All Cards rule has benefited cardholders by giving MasterCard the ability to offer consumers a number of innovative branded payment programs, such as the first ever no-fee-for-life AT&T co-branded card. The rule has enabled thousands of MasterCard issuers to provide different payment options to their customers by issuing a variety of cards, such as cards with low fees, with no fees, with fixed or variable rates, and with cash rebates, airline miles or credit towards buying gasoline or even purchasing a car. Many of these programs and features would not have been launched without the assurances guaranteed by the Honor all Cards rule.
The Honor All Cards Rule Benefits Merchants
Just as the Honor All Cards rule increases consumer choice and ensures universal acceptance, it also benefits merchants by, among other things, increasing sales and profits. A merchant that agrees to participate in the MasterCard payment system agrees to accept all MasterCard cards and, in turn, when handed a MasterCard card, is guaranteed payment regardless of whether the cardholder actually pays.
Of course, merchants are free under MasterCard's rules to accept any form of payment in addition to MasterCard. They can accept Visa, American Express, Discover as well as cash and check. Of these payment options, some have higher costs than those associated with offline debit, while some have lower costs. Moreover, some payment forms have higher risks than debit or credit, which the merchant must assume. Merchants are also free to express a preference for other forms of payment, or to offer discounts for certain forms of payment.
Just as consumers have choices when it comes to different forms of payment, merchants too have choices about what to accept. They are free not to participate in the MasterCard or Visa networks or to accept American Express cards or even checks. However, if they sign up to accept MasterCard, they must agree to honor all cards bearing a MasterCard logo. Just as the current payments system affords choices to consumers, it affords choices—coupled with significant benefits—to the merchant.
Merchants benefit from the Honor All Cards rule and the competition and innovation it has helped foster, which has resulted in an increased number of customers and sales, thus making merchants more profitable. Due to competition in the payments industry, which led to increased use of debit cards, merchants have seen sales and profits increase. In fact, many merchants promote the use of debit cards because debit has generated more business profits, which is why numerous merchants have participated in promotions of Visa and MasterCard debit cards.
Competition in the Payments Industry
Competition in the payments industry is fierce. MasterCard competes every day with all forms of payment: Visa, American Express, Discover as well as with cash and checks. Competition has led to innovative developments in the payment system, all to the benefit of consumers.
Approximately two-thirds of all transactions in the United States are made with cash and checks, not payment cards. Recent estimates indicate that MasterCard transactions account for approximately five percent of all transactions made. Even Visa and MasterCard transactions combined only account for approximately 15 percent of all transactions. With such a minimal share of the payments market, MasterCard alone—or even combined with Visa—does not have the ability to force merchants to accept their debit cards as claimed by the plaintiffs in this suit.
The merchants' claim that MasterCard has restricted the growth of the regional networks is unfounded. In fact, regional networks—the supposed victims of the anti-competitive behavior—are not parties to this lawsuit, and have readily acknowledged the benefits received from increased competition in the payments industry as well as MasterCard's and Visa's promotion of debit cards. Far from hindering competition in the growth of debit cards, executives of the regional networks have stated that the growth of offline debit has helped the growth of the online debit systems. Online debit has grown an average of 50 percent annually over the last eight years, far exceeding expectations.
The Honor All Cards rule ensures consumer choice and is pro-competitive. The facts of this case are clear: the merchants' suit isn't about consumer harm, but rather it is about depriving consumers of the benefits of the Honor All Cards Rule, and hence the full range of choices in payment options. If the merchants prevail, the victory will be for the plaintiffs' lawyers and the losers will be consumers and a competitive industry.
Antitrust laws are meant to protect the consumer by ensuring competition. Competition and choice are the very underpinnings of this industry, which benefits consumers. Yet, the merchants seek to deprive consumers of the very choice MasterCard has innovated to ensure.
Undoing the Honor All Cards rule, the very foundation of the payment card system, is anti-competitive and will deprive consumers of what is today the broadest choice of payment options available anywhere in the world.