Comments on Hearings on Global Competition and Innovation
Before the Federal Trade Commission
American Express Travel Related Services Company, Inc. ("American Express") is pleased to submit the following comments in connection with the Federal Trade Commission's Hearings on Global Competition and Innovation. We commend the Commission for conducting these hearings in light of the many significant changes that are affecting the way that commerce is conducted as we move into the 21st century.
As a global financial services company which is heavily dependent on rapidly developing technology, American Express has a great interest in antitrust enforcement that ensures that our industry is free to thrive, unfettered by restrictions established by the vast bankcard joint ventures that dominate our industry and threaten to stifle competition and innovation. We, therefore, share many of the concerns already expressed to the Commission in the testimony of the representative of Dean Witter, Discover & Co. ("Dean Witter"). Specifically, as more fully described below, we are deeply concerned by Visa initiatives to restrict intersystem competition in the global general purpose credit and charge card network market ("charge card market") by foreclosing competitive networks' access to all bank participants in Visa which make up virtually all potential charge card issuers. Global general purpose credit and charge card networks are referred to interchangeably as "charge card networks" and "networks."
American Express has been engaged in operating a proprietary charge card network for nearly 40 years, initially by offering consumers charge cards which are accepted at a global network of merchants, then by expanding the customer base to provide the same services to business customers, and more recently by issuing revolving credit cards which permit consumers to extend payment for their purchases.
Charge Card Networks
In order to place our comments in context, it is important to explain first that competition in the charge card market takes place on two levels: (1) between charge card networks, referred to interchangeably as "intersystem", "interbrand" or "network" competition, and (2) between charge card issuers within a given network, referred to as "intrasystem" competition. The following comments relate specifically to the importance of removing impediments to effective intersystem competition between charge card networks.
A charge card network must perform certain critical functions. It must, either directly or through others ("card issuers"), place cards in the hands of people ("cardholders") who will use the cards to purchase goods and services; it must arrange for merchant locations to accept those cards; and it must connect the merchant and the card issuer so that the merchant receives payment and the cardholder, in turn, is billed for the purchase and pays the card issuer. In order to convince cardholders to carry and use cards, the network must have a critical mass of merchants that will accept the cards and, in order to persuade merchants to be willing to accept a card, the merchant must be convinced that a sufficient number of customers will want to use that card. (The Commission has already heard this fact of life in the industry referred to as a "chicken and egg" syndrome.) In addition, networks are responsible for the technological services required to link merchants and issuers, including providing electronic authorization and financial settlement functions. In light of the huge investment in technology and systems capacity required to operate a charge card network, the greater the usage of that network by cardholders and merchants, the greater the efficiencies and economies of scale realized. Finally, and very importantly, networks are responsible for promoting the brand under which they operate.
Each of the major charge card networks performs the network functions described above. The skill with which they do so differentiates them from their rivals and provides an opportunity for competition and enhancement of consumer welfare. By seeking to improve their networks' functions, they are able to attract consumers to utilize cards bearing their respective brands. Intersystem competition takes place with respect to technology, extent of merchant networks, advertising and network-related product innovation.
There are very few charge card network competitors in the charge card market. Globally, the significant charge card networks are Visa, MasterCard, Diners Club (which is owned and operated by Citicorp, a member of both Visa and MasterCard), Japanese Credit Bureau ("JCB") and American Express. Diners Club and JCB have a greater presence outside of the United States. The NOVUS network (the proprietary network owned by Dean Witter) does not currently operate on a global basis (its cards are issued in the United States and are accepted at merchant locations in the United States, U.S. Virgin Islands, Canada and Mexico) but certainly could logically be viewed as a potential entrant.
When viewed properly for antitrust purposes -- from an intersystem or network perspective -- the charge card market is highly concentrated, dominated by two industry-wide global joint ventures, Visa and MasterCard. The members of the two joint ventures are virtually identical and, by their own admission, in many respects they do not engage in intersystem competition. Together, by virtue of sheer size (their aggregate market share, measured by the dollar volume of purchases with their cards, exceeds 75% in the United States and is over 80% worldwide(1)), and importance as a revenue stream to their members, they totally dominate the global marketplace. There is virtually no retail bank in the world that is not a member of one or the other joint venture and the vast majority are members of both. Historically, Visa and MasterCard have both been open to virtually all comers (including, over the past several years, industrial companies which own banking operations, such as General Electric and Ford Motor Company).(2)
In the United States, American Express is currently the sole issuer of American Express Cards and all merchant contractual relationships are directly with American Express. The resulting "closed loop network" makes American Express quite different from the Visa and MasterCard networks in which, for any given charge card transaction, the merchant relationship and the cardholder relationship may reside with different banks. Utilizing the benefits of this "closed loop network", American Express is able to match merchants with their cardholder customers and to make offers to cardholders that, based on prior behavior, the cardholder is likely to find attractive. In the business customer context, the "closed loop network" enables American Express to provide business customers with the ability to track and manage their business spending. These and other attributes, including the high regard in which our brand is held around the world and our global network of travel offices which are part of our charge card network infrastructure, providing emergency card replacement and check cashing services to cardholders, make the American Express network distinctive and attractive to other issuers both in the U.S. and overseas.
In fact, outside the United States, a number of banks have shown an interest and agreed to enter into strategic partnerships with American Express to issue American Express cards and operate the merchant network. As a result of bank alliances whereby banks issue American Express cards in such countries as South Africa, Israel, Japan, Spain, Greece and Portugal, we have been able to serve our worldwide customer base in a cost-efficient manner and our partner banks have had increased opportunities to provide more valuable products and services to their customers, thereby enhancing their customer relationships and their own profits. These banks have, during the course of our partnership, also been issuers or affiliated with issuers of Visa or MasterCard cards or both. It is part of American Express' global strategy to continue to pursue bank partnerships in all countries in which these kinds of arrangements make sense for American Express either because it is more efficient in a particular country to operate the card service through a local financial institution or in order to generate additional cards and transactions to take advantage of network externalities essential to make our network efficient and competitive.
Visa's Expulsionary Bylaw
We have just learned that Visa International now wishes to put a stop to banks' freedom to engage in these strategic alliances with American Express. It is our understanding that, at the March 1996 meeting of the Visa International Board of Directors, a bylaw similar to one already in effect in the United States (we will refer to both the U.S. bylaw and the proposed bylaw as the "expulsionary bylaw(s)") will be presented for consideration. In the United States, unfettered by U.S. antitrust enforcement, Visa U.S.A. has a bylaw (Bylaw 2.10(e)(3)) which provides that any member who wishes to participate, even indirectly, in the issuance of a card in conjunction with American Express or Discover will automatically be expelled. Visa is willing to permit bank participants to issue cards of some other systems -- MasterCard (with whom, by its own admission, Visa does not truly compete), Diners Club (which is owned and operated by Citicorp, the largest Visa card issuer in the U.S.) and JCB (which has a very small presence in the U.S.). However, Visa's expulsionary bylaw prohibits bank participants in its network from dealing with the only two intersystem competitors it fears: American Express and Discover.
If an expulsionary bylaw is adopted on a global basis, the result will be to close a marketplace outside the United States that has always been open for competition to take place on the merits, and to remove the freedom the banks currently have to choose those products and services they wish to offer to their customers. Such a move will also have a very real impact in the United States in that there will be fewer international visitors using American Express cards for transactions at merchants in the United States and fewer places for U.S. cardholders to use the card when they travel outside the United States.
The experience of American Express outside of the United States, where banks, absent an expulsionary bylaw, have been free to participate in both the Visa and American Express networks, has been that banks are very receptive to opportunities to maximize their own efficiencies and satisfy the needs of current and potential customers by offering a range of credit and charge card products, including American Express Cards. For example, the chairman of Bank Hapoalim, the largest bank in Israel which, in early 1995, entered into an arrangement to issue local currency American Express Cards and sell acceptance to its network of merchants, described his bank's interest in establishing a relationship with American Express as follows: "This alliance fits with the bank's strategy of increasing its market share among affluent households and business segments within the Israeli marketplace." He also believes that "the new American Express card will integrate with an additional system of ??prestigious financial products that the Bank markets, and will be complementary to them. In the same way as the Bank markets a range of savings plans, in the future it will be marketing a range of credit cards."
And even in this environment in which banks are free to choose to offer their customers a variety of card products and services without restriction, Visa has been able to amass a huge market share. The bold strike of imposing an expulsionary bylaw on this environment is extreme and shocking because of its blatantly anticompetitive nature and potential impact and the absence of any shred of procompetitive justification.
Whether analyzed as a horizontal agreement or a vertical agreement, for it certainly has elements of both(4), the legal significance of Visa's expulsionary bylaw is clear: the effect is to restrict intersystem competition by foreclosing competitive networks' access to virtually all distributors. In one sense, the expulsionary bylaw is a horizontal agreement among competitors that none of them will compete with the others by participating in another network. As a horizontal agreement to impose a vertical restraint which is not ancillary to the purposes of the joint venture and has no efficiency justification, the expulsionary bylaw should be illegal per se. When analyzed as a vertical agreement to deal exclusively with Visa, the result is no different. The restraint is imposed by a joint venture to which virtually every distributor belongs and which has substantial market power. The vertical restraint has the horizontal effect on intersystem competition of raising additional barriers to entry in the highly concentrated charge card market thereby preserving and expanding Visa's dominant position.
In the United States, Visa's enormous market power has enabled it to create an overwhelming disincentive for its members to develop competing proprietary networks of their own or to participate in either the American Express or in the NOVUS network. The price of foregoing the lucrative Visa membership is simply too high.(5) As a result, American Express, NOVUS or any new entrant is foreclosed from significant new issuers in the United States. All of them are already members of Visa, and none of them can risk expulsion from Visa.
Indeed, there have been no new network entrants in the United States since 1985 when Dean Witter launched the Discover Card, the forerunner to the NOVUS network.(6) To begin with, barriers to entry in the charge card market are already high since the initial financial investment required to create a proprietary network is enormous and because of the "chicken and egg" network externalities. When faced with the prospect of creating a new network that a Visa member may join only on pain of expulsion from Visa, would-be competitors would certainly find the cost of the proprietary approach altogether too great.(7)
As for the existing networks, the effect of Visa's anticompetitive expulsionary bylaw is to severely limit the ability of the American Express and NOVUS networks to increase transaction volume, thereby reducing the ability of these two networks to reduce network costs, expand merchant coverage and offer more benefits and services to other bank issuers -- who could enhance value to cardholders.
And Visa can make no countervailing efficiency or other procompetitive justification for this restriction. It is clear that Visa cannot justify an expulsionary bylaw as necessary to promote the joint venture's efficiencies. We are unaware of any evidence that banks which issue both Visa cards and American Express cards outside the United States have failed to pursue their obligations to Visa. Furthermore, there is no "free-riding" issue here such as Visa argued in opposition to Dean Witter's efforts to join Visa: American Express does not seek Visa membership or to take advantage of the Visa brand in any way. Nor can the bylaw be defended as a form of procompetitive exclusivity: First, virtually every bank is a Visa participant; and second, Visa long ago compromised such an argument by allowing Visa banks to issue MasterCard cards, Diners Club cards and JCB cards. Given the very nature of charge card networks and network externalities, the interests of intersystem competition can best be served by giving banks the freedom to choose to offer their customers the products and services of more than one charge card network, thereby enhancing efficiencies created by increasing the number of transactions flowing through the various networks.
As a result of the expulsionary bylaw, the interests of intersystem competition and consumer welfare in the United States have been, and will continue to be, weakened. There is every reason to believe that the same will be true outside the United States, with additional negative effects on competition within the United States, should the expulsionary bylaw be adopted by Visa International.
American Express believes that antitrust enforcement is now required in order to ensure that competition in the charge card market can take place on a level playing field without anticompetitive Visa bylaws. We seek to preserve the freedom of each bank to choose those products and services it finds best suited to the needs of its customers and to its ability to compete most effectively. We are eager to engage in a fair fight on the merits for alliances with banks interested in offering their customers attractive products and services through the American Express network.
January 24, 1996
(1) The Statement of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust issued jointly by the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission on September 22, 1994 provide that exclusivity arrangements in joint ventures with share greater than 20% will receive heightened scrutiny.
(2) The only entities currently excluded from joining are those already engaged in intersystem competition with Visa and MasterCard; however, JCB members in Japan have been permitted to issue Visa cards as well. Visa U.S.A. Bylaw 2.06; Visa International Bylaw 2.12(b).
(3) Visa U.S.A.'s Bylaw 2.10(e) provides for automatic expulsion of any member if that member "or its parent, subsidiary or affiliates issues, directly or indirectly, Discover Cards, American Express Cards or any other card deemed competitive by the Board of Directors".
(4) Although Visa is structurally a horizontal joint venture, the bylaws are adopted by a Board of Directors made up of a small number of joint venture members and imposed vertically on all members in connection with their distribution of products and services bearing the Visa brand.
(6) When the Discover Card was launched, it had the enormous advantage of a ready-made potential customer base of millions of Sears charge cardholders, an advantage few other new entrants are likely to have.
"Unlike the thousands of competing issuers, there has never been more than a handful of systems competitors. Moreover, there is a nearly complete overlap in ownership between VISA and its early intersystem rival, MasterCharge (now MasterCard). While new system-level entry is possible, as Discover itself attests, there is considerable doubt that others will consider it prudent, given the costs involved and the emerging potential of home computers to effect consumer financial transactions."
Respondent's Brief in Opposition at 5, MountainWest Financial Corp. v. Visa U.S.A. Inc. (S.Ct. No. 94-179).