October 7, 2011
The complaint alleged that Visa and MasterCard engaged in anticompetitive practices in at least two ways: through their “duality” and exclusionary rules.
Obviously, both of these terms require some explanation for anyone not well-versed in the workings of credit card networks.
“Duality” refers to the situation of joint ownership between bank members of Visa and MasterCard.
That explanation itself, though, may require further clarification.
Visa and MasterCard are organized as open joint ventures, owned by the numerous banking institutions that are members of the networks.
MasterCard is owned by its approximately 25,000-member banks, and Visa was then-owned by its approximately 14,000-member banks.
Many of Visa’s members are also members of the MasterCard network, and vice versa.
This becomes a problem because a significant portion of each network’s governing board (analogous to a corporation’s board of directors) was also on the other network’s governing board.
This led to several competition-inhibiting results.
First, the two boards shared all information with one another, and were thus fully aware of each other’s operations.
In addition, the two boards operated to ensure that neither took action that could put the other at any kind of competitive disadvantage, even if doing so was patently against the respective network’s best interests.
The Justice Department gives several actual examples of this occurring, one of the most notable of which is the delay in rolling out secure transactions over the Internet.
In October 1995, Visa and Microsoft announced the specifications for a system to provide secure transactions over the Internet.
According to the complaint, the member banks pressured Visa to abandon its agreement with Microsoft in favor of a cooperative effort with MasterCard to develop a standardized approach, and Visa subsequently complied with the banks’ wishes.
“Exclusionary rules” refer to the rules that were adopted by Visa and MasterCard’s respective boards that prohibit member banks from doing business with other credit card networks – such as Discover or American Express – deemed to be “competitive.”
Notably, Visa’s rules did not apply to MasterCard, and vice versa.
After a long legal battle that ended with the Supreme Court’s refusal to hear the case in October 2004, Visa and MasterCard were left with an appellate court decision that affirmed a lower court decision which held that duality didn’t violate the Sherman Act, but exclusionary rules did.
The parties were barred from enforcing any such rule going forward, which MasterCard complied with immediately, and Visa followed suit after a 2007 ruling (brought by MasterCard) ordered it to do so.
Unfortunately for the networks, this wouldn’t be the last time they face an antitrust suit.
In October 2010, the Justice Department, along with the attorney generals from 16 states, filed a complaint against Visa, MasterCard, and American Express.
The complaint alleged that the three networks prohibited merchants who accepted their credit cards from offering customers a discount for using cash or a credit card that is less costly to the merchant, in violation of the Sherman Act.
Luckily for them, though, the suit was short-lived: Visa and MasterCard agreed to a settlement addressing Justice Department concerns (American Express did not agree to the settlement, however).
With the passage of Dodd-Frank last summer (which was the driving force behind the debit card rate cap imposed this summer), it’s likely that Visa and MasterCard still have not yet seen the end of government action against them.