MasterCard, an open association comprised of thousands of individual financial institutions large and small, innovates to provide consumers with a wide array of payment options. Consumers have come to expect, and indeed rely on, the assurance that their MasterCard-branded payment cards are universally accepted wherever a MasterCard logo is displayed.

Much of this proliferation in consumer choice is due to the Honor All Cards rule and the principle of guaranteed payment to merchants, which together, are the bedrock of worldwide payments systems. Membership associations MasterCard and Visa have such rules as the cornerstone of their systems, and American Express, Discover and regional ATM systems also have similar rules. The rule provides consumers with the assurance of acceptance that is the foundation of the MasterCard's payment system value for cardholders, merchants and the association's members. This assurance means that the consumer can have confidence that they may use any type of MasterCard-branded card at any merchant who chooses to participate in the MasterCard system.

In October 1996, a group of merchants, led by attorney Lloyd Constantine, filed an antitrust class action lawsuit against both the MasterCard and Visa associations challenging the Honor All Cards rule. The merchants claim that they do not want to accept consumers' MasterCard- or Visa-branded offline, or signature-based debit cards, and that the associations have unlawfully tied acceptance of debit to acceptance of credit.

If the merchants are successful, they could undermine the foundation upon which the successful payments industry is founded and, more importantly, threaten consumers' right to choose how they want to pay for goods and services. Throughout the lawsuit, the merchants have asserted many untruths about MasterCard, the payments industry and the overall issues in the case. This document sets the record straight.

Myth: MasterCard and Visa are the only payment systems that have an Honor All Cards rule.

Fact:Virtually all payment card systems, including American Express and Discover, and the regional ATM networks, have similar rules. These rules are the cornerstone of the payment card system and account for its tremendous success, both with consumers and merchants. The Honor All Cards rule benefits consumers, who are able to use their cards at almost 24 million acceptance locations, member financial institutions, which are able to offer customers branded cards with worldwide, guaranteed acceptance, and merchants, who are able to attract customers who expect to be able to use all cards bearing the MasterCard logo.

Myth: The Honor All Cards rule is anti-competitive.

Fact: The Honor All Cards rule, which enables MasterCard and its thousands of member financial institutions to continue to innovate and offer a wide variety of payment card programs to consumers, is pro-competitive. 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.

Myth: The Honor All Cards rule harms merchants.

Fact: Merchants benefit from the Honor All Cards rule and the competition and innovation it has helped foster. The rule, which helps banks issue cards to customers by assuring them universal acceptance, has been instrumental in increasing the number of customers and sales, thus making merchants more profitable. Many merchants now promote the use of debit cards because debit has generated incremental sales. This is a key reason why numerous merchants have participated in MasterCard- and Visa-branded debit card promotions.

Myth: The Honor All Cards rule harms consumers.

Fact: The Honor All Cards rule benefits consumers by giving them the flexibility to choose among a variety of payment options without worrying about whether their particular card might be accepted. MasterCard's Honor All Cards rule is the bedrock of MasterCard's success with consumers as it ensures that a consumer can rely on any card with the MasterCard logo regardless of which bank issues it, if an issuer has partnered with an airline or other co-branded program, or whether the card accesses a credit line or a demand deposit account.

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.

Myth: The Honor All Cards rule is unnecessary for the growth and continued success of the payments industry.

Fact: The cornerstone of the entire payment card industry is the Honor All Cards rule, which is designed to ensure universal acceptance for all MasterCard consumers by requiring that merchants who agree to participate in the MasterCard system accept all cards bearing the MasterCard logo. This rule, which is pro-competitive, benefits consumers, merchants and MasterCard's members and, together with the principle of guaranteed payment to merchants, are the foundations of the highly successful payments industry.

The 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.

Myth: MasterCard and Visa are using market power to force merchants that accept MasterCard- and Visa-branded credit cards to also accept MasterCard- and Visa-branded debit cards.

Fact: Approximately two-thirds of all transactions in the United States are made with cash and checks, not payment cards. MasterCard transactions account for approximately five percent of all payment transactions. MasterCard and Visa transactions combined only account for 15 percent of all transactions. With such a minimal share of payment transactions, MasterCard alone—or even combined with Visa—does not have the ability to force merchants to accept their debit cards as claimed by the merchants. Merchants are free to choose not to participate in the MasterCard system, just as they are free not to participate in Visa, American Express and Discover systems.

Myth: Merchants don't have a choice of what method of payment to accept from their customers.

Fact: Merchants are free under MasterCard's rules to accept any form of payment in addition to MasterCard. They can accept Visa, American Express, Discover; their own proprietary cards, 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 other forms of payment.

Merchants also have choices when it comes to debit cards. A merchant who prefers PIN-based debit transactions can install PIN-pads to process transactions with a PIN, and can 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 or Maestro network at a lower cost to the merchant.

However, if the customer chooses not to enter a PIN, and uses a MasterCard branded-card with offline capability, the merchant should honor that choice. The customer ultimately should decide which form of payment to use.

Myth: MasterCard rules prohibit merchants from steering customers to use on-line PIN-based debit instead of offline signature-based debit transactions.

Fact: Absolutely not. A merchant 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 or through Maestro, MasterCard's global online debit network. A 1996 Wal-Mart training video, which was shown in a November 2000 hearing in the litigation, teaches Wal-Mart's clerks to encourage customers to pay for their purchases by using PIN numbers rather than using signatures.

Myth: Merchants contract with MasterCard to accept MasterCard-branded payment cards.

Fact:No. MasterCard does not issue cards, nor sign up merchants to accept cards. The merchants contract with acquiring banks that are members of the MasterCard association for MasterCard's services. The MasterCard system benefits merchants because it provides them with guaranteed payment and fraud protection on all MasterCard-branded cards, including debit and credit. MasterCard's member 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.

Merchants can choose not to accept MasterCard-branded cards at all. However, if a merchant signs up with an acquiring financial institution to accept MasterCard, the merchant must agree to honor all cards bearing a MasterCard logo. Visa, American Express and Discover, as well as the ATM regional networks, have similar rules.

Myth: MasterCard and Visa have conspired with each other to stifle competition and harm consumers.

Fact: Far from conspiring with one another, MasterCard and Visa compete vigorously every day for the hearts and minds of consumers. Competition in the payments industry is fierce, and MasterCard competes directly with all forms of payment: Visa, American Express and Discover as well as with cash and check.

Moreover, the intensely competitive payments industry has led to innovative developments, all to the benefit of consumers. These benefits include the development of a variety of popular cards such as cards with low fees, 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 might not have been launched without the assurances guaranteed by the Honor All Cards rule.

Myth: MasterCard and Visa have conspired to monopolize the "point-of-sale (POS) debit card market," harming competing regional ATM payment systems.

Fact: Rather than conspiring with one another, MasterCard and Visa are fierce competitors. As Judge Barbara S. Jones noted in her ruling upholding dual governance in the Department of Justice lawsuit: "The competition between Visa and MasterCard has been fierce... This competition, and the willingness of member banks to shift share from one association to the other, directly contradicts plaintiff's theory on dual governance." It is precisely this intense competition that has created the existing competitive conditions in the payments industry, which has helped spur the growth of the regional ATM payment systems', not suppress it, as the merchants' claim. 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 at over 50 percent annually over the last eight years, far exceeding expectations. Moreover, there is no "POS debit card market," as consumers readily can, and do, substitute cash, check, credit, or other forms of payment.

Myth: MasterCard would like to see online debit eliminated.

Fact: That's not the case at all. In 1992, MasterCard launched Maestro, an online debit program. Maestro is now the world's leading online debit program, with more than 511.1 million 511.1 million cards issued globally.

Myth: There is no difference for consumers or merchants between the MasterCard system and the regional ATM networks' systems; therefore, the price for offline debit transactions should be the same as for online debit transactions.

Fact: 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 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:

• Acceptance at almost 24 million acceptance locations around the world;
• Enhanced 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 the same package of 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.

Myth: Offline signature-based, and online PIN-based debit transactions are the same.

Fact: Consumers generally have the ability to use their MasterCard-branded debit card in two ways—online with a PIN, or offline with a signature. However, 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 or through Maestro, MasterCard's global online debit network. This provides optimal choices for consumers using MasterCard-branded debit cards. While the consumer generally can use the MasterCard-branded debit card online or offline, the consumer can get additional benefits, like points towards airline mileage, by using it offline. Consumers also can use their offline cards with merchants that have elected not to install the necessary equipment required to accept online cards or that do not have the ability to accept PIN-based transactions, such as Internet and catalogue merchants.

Myth: This litigation could impact MasterCard's future viability.

Fact: While it is not currently possible to estimate the impact, if any, that the ultimate resolution of this litigation will have on MasterCard's operations or financials, as our defense will show, this case is without merit. Instead of hurting MasterCard, this litigation has the potential to harm consumers, who, if the plaintiffs have their way, will lose the ability to choose the payment method that best meets their needs.

Myth: If the Second Circuit Court of Appeals upholds Judge Barbara Jones' ruling against MasterCard and Visa regarding the associations' respective Competitive Programs Policy (CPP) and rule 2.10e, many of the issues in the merchant case will already be decided.

Fact: One significant issue in the DOJ case that relates to the merchant case is Judge Jones' finding that MasterCard and Visa vigorously compete against one another. Plaintiffs assert that the DOJ decision disposes of virtually all of the issues in their case, and that MasterCard and Visa should be prevented from taking different legal positions from what Judge Jones found. Instead, it is Judge Jones' decision on dual governance, which the DOJ did not appeal, that demonstrates that MasterCard and Visa have helped foster a competitive environment that is pro-consumer, providing the public with an extraordinary range of options. Since MasterCard and Visa are fierce competitors, the plaintiffs' assertion that together MasterCard and Visa control a payments market—however defined—is untrue. Without proof that either MasterCard or Visa alone—or even jointly—monopolize the general-purpose credit card market, plaintiffs' assertion that MasterCard and Visa have tied off-line debit card acceptance to credit card acceptance, falls flat.