Subcommittee on Financial Institutions

Hearing on Competition and Innovation in the Credit Card Industry
at the Consumer and Network Level

10:00 a.m., Thursday, May 25, 2000 - Dirksen 538

Prepared Testimony of Mr. Paul Allen
Executive Vice President & General Counsel
Visa U.S.A., Inc.

Mr. Chairman, Members of the Committee and Subcommittee, my name is Paul Allen, and I am Executive Vice President and General Counsel of Visa U.S.A. Inc. ("Visa"), on whose behalf I submit this statement. Thank you for the opportunity to appear before you today.


This hearing on the subject of competition in the general purpose payment card market arises on the eve of trial in a government antitrust suit against Visa. Specifically, the final pretrial conference and argument on motions for summary judgment are scheduled for June 1 in an antitrust case brought by the United States Department of Justice against Visa and MasterCard in the United States District Court for the Southern District of New York. If the case is not dismissed, opening statements are set for June 7. The Justice Department filed its complaint in this action in October 1998 after a lengthy multi-year investigation.

The payment card industry has, by any measure, provided enormous value to consumers over the 25 or more years of its existence--literally transforming the way in which consumers and merchants pay for goods and services. Since Visa's founding, the number and value of Visa payment transactions has expanded exponentially, while the price of using and accepting a Visa card has fallen for consumers and merchants. Visa has spent billions of dollars to promote its brand and to create a state-of-the-art computer and telecommunications system that enables the use of Visa cards worldwide. At the same time, the mailboxes of consumers have overflowed with competing Visa and MasterCard solicitations. In light of this history, one might have expected that the Antitrust Division--rather than filing a lawsuit against Visa--would have commended Visa for its contributions to consumer welfare, competitive vitality, and innovation.

To make matters even more perplexing, the lawsuit filed by the Antitrust Division under Assistant Attorney General Joel Klein is concededly not about "price" or "restriction of output"--the recognized touchstones against which claims of alleged anticompetitive conduct are tested--and against which Visa's practices have been judged legal by a number of U.S. courts over the years.(1) Instead, relying entirely on novel theories that would significantly expand the Division's ability to superintend competitive industries, and no actual evidence of harm to consumers, the Antitrust Division alleges that the current industry structure impedes innovation and "discriminates" against American Express and Discover.

Why would the Antitrust Division bring this remarkable lawsuit when the payment card industry shows no sign of a "market failure"? It is, of course, no secret that American Express, claiming that it cannot compete with Visa, has long exhorted the Division to bring this action. Thus, Visa finds itself in the position of defending an antitrust suit brought in defense of a supposedly "disadvantaged" competitor, AmEx, which itself is the number one branded card issuer in the United States, immensely profitable and successful, and, by its Chairman's own admission, the financial services firm best positioned in the Internet age. But, this gets ahead of the story.

As we explain below, this lawsuit is ill-advised on a number of grounds: (1) the credit card industry is among the most competitive in American commerce; (2) the Antitrust Division appears to be on a mission to regulate and--in the end--radically restructure a vibrantly competitive industry; (3) the government's requested relief will create an unlevel playing field that favors for-profit, proprietary card issuers such as American Express and Morgan Stanley (the owner of the Discover card) over not-for-profit, open joint ventures such as Visa and the banks that rely on it to compete; and (4) the government's proposed relief would harm rather than benefit consumers.


I. Overview of the Payment Card Industry

Before beginning our discussion of the lawsuit, itself, we provide some context about the payment card industry.

A. The Structure of the Payment Card Industry

Visa (like MasterCard) operates as a not-for-profit membership corporation owned by thousands of diverse financial institutions (including many community banks and credit unions). The Visa association was formed by a group of American banks in the late 1960s to assist its members in issuing general purpose payment cards and signing merchants to accept those cards.(2) Visa is a cooperative or "open" joint venture, meaning that any financial institution (save brand competitors such as AmEx and Discover) may join the Visa association subject only to requirements concerning capital adequacy, compliance with association rules, and the like.

The Visa association performs limited, but essential, functions that complement those of its member banks. It licenses its members to issue Visa branded cards and to sign ("acquire," in the industry parlance) merchants to accept those cards, but does not perform those functions itself. It provides a common set of basic rules essential to the successful operation of the interdependent parts of the system. Visa also enhances the value of the brand and the underlying products and services offered by Visa members through brand advertising and the development of new card products and services. Finally, Visa runs the "railroad"--the telecommunications, processing, authorization, and "settlement" (i.e., settlement of payment obligations among thousands of member banks) infrastructure--that enables the joint venture to function.

The thousands of Visa member banks issue Visa cards in competition with each other, with MasterCard issuers, and with the proprietary brands, American Express and Discover. Each member bank establishes its own fees, finance charges, credit limits, credit standards, and rewards programs (such as airline miles or in-store benefits) for the cards it issues, and determines how many cards it wants to issue. Because of intense competition at the issuing level, member banks compete away (by offering lower fees and rates, better rewards, and so forth) the value associated with the Visa brand and network.(3) In addition to their card-issuing function, member banks acquire merchants for the Visa system and set the terms--including the discount rate--under which merchants agree to accept Visa cards. Thus, the parties to a Visa transaction include (1) the Visa member bank that issued the card, (2) the consumer, (3) the Visa member bank that signed the merchant to accept Visa cards (the acquiring bank), and (4) the merchant. In most cases, the card-issuing bank is different from the merchant-acquiring bank.

American Express and Morgan Stanley's Discover card are the two most important proprietary general purpose payment card brands in the United States. Unlike Visa and MasterCard, American Express and Morgan Stanley are not joint ventures, but are investor-owned, for-profit corporations. They issue all of their respective brands' cards and they alone determine the pricing and other features of those cards. They also perform all of the merchant acquiring for their brands, meaning that they alone determine the price and other terms for merchant acceptance of their cards. This is known as a "closed-loop" system because a single entity maintains the relationship with all merchants accepting the brand's cards. As we explain below, the closed-loop network provides American Express and Discover with important technical advantages over Visa. In addition, because American Express and Discover issue the card and acquire the merchant, the proprietary systems do not need rules governing the operation of their systems. On the other hand, in order for Visa to function properly, thousands of issuing and merchant acquiring banks must cooperate closely and comply with Visa bylaws and operating regulations or the joint venture will cease to function.

B. Competition in the Payment Card Industry Is Intense.

Far from being a candidate for radical restructuring, the payment card industry in the United States is characterized by vibrant competition. As consumers we observe this competition every day. We receive frequent solicitations from payment card issuers for products ranging from credit cards with low introductory interest rates, ATM/debit cards offered by the banks with which we have depository relationships, to the new card known as Blue from American Express. We can use our payment cards in new and varied ways as well--including paying remotely at a gas pump and charging tolls, groceries, subway tokens, and even taxes.

As a matter of economic theory, the pass-through, open structure of the Visa and MasterCard associations guarantees intense competition. Some 8,000 different issuers compete--including more than 60 on a national basis--for cardholders' business by offering a myriad of different card features. Almost no other industry in America offers consumers this much choice. Furthermore, no one issuer dominates the market, with the largest accounting for less than 20 percent of payment industry charge volume. The HHI (the index used by the Justice Department to determine the degree to which an industry has a competitive structure) for credit and charge card issuers is 850, well within the range considered to be fully competitive.

The open nature of the Visa and MasterCard associations, in particular, drives competition in the payment card industry. Any qualified financial institution can join Visa and use the Visa acceptance mark and "railroad" described above. Entry into this industry is remarkably easy. Consumers have benefited greatly from the associations' open structures as relatively recent issuers like First USA, Capital One and Providian entered the market with low priced cards, specially tailored products, and value added features. Because the Gramm-Leach-Bliley Act increases the ability of non-bank financial firms (e.g., insurance and brokerage companies) to issue payment cards, we fully expect that more entry will take place in the future. Issuers that don't succeed also have an easy way out--they can sell their portfolios to other issuers--at a premium, no less. With a large number of competitors and free entry and exit, the payment card industry is about as close to the atomistically competitive industry we learned about in Economics 101 as we ever find in the real world.

Of course, this intense competition would not necessarily benefit consumers if the card associations were charging their members high fees for belonging to the systems and retaining these fees as profits. The structure of the associations guarantees that this cannot happen. The associations operate on a not-for-profit, pass-through basis. Roughly speaking, Visa determines how much it costs to operate the system (including investments in new technologies) on an annual basis. It charges members volume-based fees to recover those costs. Two of the world's leading economists--Professor Jerry Hausman from MIT and Professor Jean Tirole from the University of Toulouse--have shown that, as a matter of economic theory, the pass-through nature of the associations, together with the manner in which they collect fees from their members, guarantees that they will operate efficiently.(4)

Empirical observation confirms what economic theory suggests. Consumers have benefited enormously from the high level of competition in the payment card industry:

Industry output has increased substantially over time. The purchase volume on all payment cards (credit, charge, online and offline debit cards) increased at an annual rate of 12 percent in the 1980s and 13 percent in the 1990s (in real terms).

The prices that consumers pay for credit cards has declined by 20 percent after adjusting for inflation between 1984 and 1999 (this is based on an index that takes into account all of the costs of holding and using a card).

Competition has spurred innovation and improved product offerings. Issuers offer cardholders better and more varied features and benefits (e.g., affinity programs, rewards, rebates, and travel benefits). Payment cards are more convenient to use than ever before thanks to dramatic increases in merchant acceptance due, in part, to faster and cheaper processing technology. Improved technology has reduced the time at point of sale needed to complete a card transaction from minutes to seconds.

Of course, Visa strives to help its members make money. But, as economic theory would predict, bank card issuers as a group earn about a competitive rate of return after adjusting for the risk of lending. A recent study by Professor Stewart Myers--the author of the leading textbook on corporate finance--confirmed this, as does data reported by the Federal Reserve Board. The average historical rate of return on credit card operations reported by banks in the Federal Reserve Board's Functional Cost Analysis is virtually identical to rates of return on other types of consumer lending.(5) Ironically, the Justice Department's lawsuit comes at a time when profit pressures are intense, causing many banks to exit the payment card industry entirely because they are unable to earn sufficient returns. As one industry analyst recently has explained:

A second wave of consolidation picked up in the late 1990s, spurred by intense marketing campaigns and pricing competition (primarily from monolines), which drove down industry profitability. . . . As competition increased and profit margins eroded, many issuers that had not differentiated themselves decided to exit the credit card business.(6)

Lastly, the Federal Reserve's annual report on the profitability of the credit card operations of depository institutions and competition within the industry always has noted the intense level of competition in the payment card industry.(7)

In short, the Committee should be concerned that, in this highly competitive market, the proposed medicine of government intervention very likely will do the patient far more harm than good. "To the extent possible, public policy should be guided by a general reliance on the marketplace, and government should avoid policies that stifle innovation."(8)

IV. The Department of Justice Lawsuit

Now let's turn to the Justice Department's upcoming trial against Visa and MasterCard in Federal District Court in New York.

A. A Little History

Until the mid 1980s, Visa and MasterCard members were the only issuers of general purpose credit cards in the U.S. Under a longstanding industry practice known as "duality,"(9) Visa members were permitted to issue and acquire for the MasterCard system (and vice versa). In 1985, Sears Roebuck & Co. changed the competitive landscape when it began marketing a new general purpose credit card called Discover.(10) At about the same time, AmEx decided to enter the credit card business with its Optima card after years of selling only charge cards.

Then, in 1989, Sears decided that it wanted to be a card-issuing member of Visa in addition to issuing Discover on its own. Visa rejected that request and enacted Bylaw 2.06, which provides that issuers of Discover and AmEx cards are not eligible to apply for Visa membership. After Visa prevented Sears' attempt to take advantage of a loophole in Bylaw 2.06, Sears went to court claiming that Visa's Bylaw 2.06 violated the antitrust laws by depriving consumers of the benefits of its proposed new card products which it intended to market through the valuable Visa association and brand.

At the same time, Visa closed the loophole in Bylaw 2.06 that Sears had attempted to exploit, by adopting Bylaw 2.10(e), which provides that no member of the Visa association may issue Discover or American Express cards. Thus, both Bylaw 2.06 and Bylaw 2.10(e) raise the same issues about system separation and the need to preserve loyalty and cohesiveness among Visa's owner-members.

At trial, Visa defended the legality of its bylaws on the ground that, in light of the intensity of competition in the issuance of general purpose payment cards, the inability of Sears to offer a new credit card to consumers under the Visa brand could not injure consumer welfare. Visa further asserted that its bylaws were procompetitive because they helped preserve the cohesiveness of the Visa joint venture by preventing a blurring of system-level competition between the Visa and Discover brands. Sears, of course, denied that it had any interest in reducing system-level competition, although Philip Purcell--then Chairman of Discover and now CEO of Morgan Stanley--testified that by becoming a member of Visa, Sears hoped to prevent Visa from taking steps against Sears as a competitor:

Q. And is your testimony here that by becoming a member of VISA you would have the opportunity to perhaps limit their exercise of these kinds of marketplace activities against Discover?

A. What I believe I said was that by becoming a member of VISA it is much harder to discriminate against us with some of these kinds of activities and that would be preferable.(11)

After a verdict for Sears in the trial court, Visa's arguments prevailed on appeal in the Tenth Circuit, which held that Visa's bylaws did not violate the antitrust laws because they did not prevent Sears from issuing its new credit card under the Discover brand and, more important, did not harm consumers. SCFC ILC, Inc. v. Visa USA, Inc., 36 F.3d 958, 971-72 (10th Cir. 1994).

In 1996, long after Visa had adopted Bylaw 2.10(e), AmEx decided to change its longstanding business model in which it was the sole issuer and acquirer for AmEx branded cards. In a speech in May of that year at the Credit Card Forum in Atlanta, Harvey Golub, American Express' CEO, stated that AmEx had decided to "open its network" to Visa and MasterCard member banks and was prepared to license "a small number" of those banks to use the AmEx brand in issuing payment cards. At the same time, because it believed that Bylaw 2.10(e) was an impediment to its new "open network" strategy, AmEx began working feverishly--and ultimately successfully--to persuade the Antitrust Division to investigate Visa and bring the present lawsuit.

B. An Overview of the Justice Department's Claims

The Justice Department makes two claims against Visa and MasterCard. First, the government claims that the associations' practice of "dual governance" violates the antitrust laws because it has diminished innovation--even though Visa has led the payment card industry from paper to electronics in two decades. Second, the government alleges that Visa's Bylaw 2.10(e) and a similar MasterCard policy are illegal because they impede competition by "discriminating" against AmEx and Discover. Unlike in conventional antitrust actions, the government does not claim that Visa's practices have artificially raised prices--indeed, that would not have been logical given the intense competition among Visa issuers and since AmEx's products have always been the highest priced payment option for consumers and merchants. Nor does the government claim that Visa has restricted output in the traditional sense--again, this would have been impossible given the impressive array of choices available to U.S. consumers and the fact that Visa does not restrict the number of its members or their output. Rather, the Antitrust Division argues that consumers are denied the choice of an AmEx or Discover card issued by a bank--without specifying why this is important to consumers when they can get such cards directly from AmEx and Morgan Stanley (along with thousands of product choices from Visa and MasterCard issuers). As noted above, the Tenth Circuit already found that this same sort of "output restriction" did not violate the antitrust laws.

In short, the government is seeking to radically restructure an entire industry based on the untested theory that "things could be better," i.e., some other industry structure could have resulted in more innovation and consumers might benefit in some unspecified way if Visa and MasterCard members were allowed to issue American Express and Discover cards. The principal architect of the government's restructuring theory is Michael Katz--a U.C. Berkeley professor and former economist at the Federal Communications Commission working under Reed Hundt--who has no prior experience in the payment card industry.

A few comments about each of the government's claims. The first claim--that "dual governance" is illegal because it diminishes innovation--attacks the longstanding practice of duality and, in particular, the practice whereby a bank that sits on Visa's Board of Directors also may have a large MasterCard portfolio. The government has not uncovered any evidence suggesting that consumers have been deprived of any significant payment card innovation as a result of dual governance (or duality generally). Instead, the government relies entirely on unsubstantiated theory in attacking a decades-long industry practice which the Antitrust Division itself has sanctioned from the beginning.(12) Moreover, the idea of drawing a distinction between "dual issuance" and "dual governance," as the Antitrust Division now does, did not emerge until very recently. Visa was puzzled by this, because it is a wholly contrived and artificial differentiation which fails to correspond to the way in which the payment card industry actually functions. Of course, having been persuaded by American Express' arguments, it was necessary for the government to fashion a proposed remedy that purportedly would increase system separation (the dual governance claim) while at the same time allow Visa and MasterCard member banks to issue cards on competing systems (the Bylaw 2.10(e) claim).

The Antitrust Division's second claim wholly adopts AmEx's theory that the associations' exclusivity rules "discriminate" against other brands, and that eliminating the rules would make AmEx and Discover stronger competitors and provide consumers with new payment card products to choose from. The complaint ignores the fact that AmEx never would have permitted U.S. banks to issue cards on its system until very recently (and Discover has never said it would). Nonetheless, the Antitrust Division alleges that AmEx and Discover need the issuing expertise and distribution reach of Visa member banks to attract new customers and merchants to their systems and to avoid being closed out of new and growing segments of the market.

Both of these claims founder on a complete lack of supporting evidence.(13) Visa has been a driving force--along with its members and many third parties--behind a remarkable amount of innovation in the payment card industry over the years, while the government cannot cite a single innovation that would have been introduced but for "dual governance." As to American Express and Discover, their success as issuers, which we discuss further below, utterly belies the government's claim that Bylaw 2.10(e) "disadvantages" them from competing.

C. Eliminating Bylaw 2.10(e) Will Harm Consumers.

In seeking to abolish Bylaw 2.10(e), the Justice Department disregards the important, procompetitive reasons that led Visa to adopt the bylaw in the first place. Like all joint ventures, Visa must enact rules and bylaws in order to function effectively. And, as a joint venture, Visa's survival depends on the loyalty of its individual owner-members to the association as a whole. There is nothing unusual about loyalty rules such as Bylaw 2.10(e). We find such rules in many business settings. Members of a law firm can't go out and practice law by themselves, let alone with some other firm. Manufacturers routinely insist that their distributors not carry competing products. In seeking to eliminate Visa's loyalty rule, the Antitrust Division purports to be leveling the playing field, but in fact would be disadvantaging open joint ventures like Visa. For-profit, proprietary systems never need to worry about the loyalty of their separate business units--because they are all one company--and they can pick and choose whom they do business with. Visa, on the other hand, licenses its brand to all institutions, now in excess of 8,500, that satisfy its open membership standards.

AmEx's current "network" strategy implicates the same cohesiveness and loyalty concerns posed by Sears' earlier desire to become a member of the Visa system. If American Express is able to selectively enter into contracts with certain Visa banks to issue American Express branded cards, it could materially destabilize the Visa joint venture. A joint venture, or association, form of industrial organization is inherently fragile because it only partially joins the operations of independent businesses which otherwise compete with one another. Bylaw 2.10(e) is meant to guard against such destabilization.

This is not a hypothetical concern. AmEx, as an investor-owned company, answers to its shareholders and only pursues initiatives designed to increase its profits. Why, then, would AmEx want to "open" its already successful system to select competitors? The answer lies in Mr. Golub's remarkably candid 1996 Credit Card Forum speech in which he makes clear--echoing Mr. Purcell's testimony quoted above--that his goal in inviting select Visa member banks to issue AmEx cards is to weaken Visa and undermine its ability to compete. In that speech Mr. Golub exhorted banks to question their dedication to Visa in a number of ways. First, he asked banks to "look closely at Visa's advertising attacks on American Express' merchant coverage." Visa's ". . . And they don't take American Express" campaign and Olympics sponsorship had long been a thorn in Mr. Golub's side.(14) Even though Mr. Golub conceded that Visa's advertisements "raised the visibility of the Visa brand [and] may have attracted new customers," his objective, if Bylaw 2.10(e) is eliminated, is to convince AmEx's partner banks to stop supporting Visa advertising directed at American Express.

Second, Mr. Golub suggested that banks should no longer support Visa's efforts to promote "co-brand" programs with third parties such as airlines and charities. Such programs are important sources of industry growth and provide valuable product enhancements for consumers. Mr. Golub would question, for example, "how it is in my interest as a card-issuing bank for Visa to advertise individual airline cobranded programs." AmEx, Discover, Visa, and MasterCard (and their members) compete intensely for important co-brand relationships, such as airline mileage cards. AmEx beat out Visa banks to win the Delta Airlines relationship, while Bank One's First USA unit issues co-branded United Airlines Visa cards. (Discover has a co-brand card with Universal Studios.) AmEx and Discover would benefit immensely--at Visa's and consumers' expense--if Mr. Golub successfully convinced key Visa banks that it was no longer in their individual interest for the Visa association to invest in new co-brand programs.

Third, Mr. Golub told the banks that they should ask "how it is in my interest to have merchants push American Express to lower merchant rates as they did for years in the late 1980s and early 1990s." Once again, a little background: AmEx has long been the high-priced card to the consumer and merchant alike. For years, its business model has depended heavily upon revenues from merchants for AmEx card acceptance because, until the success with Optima, AmEx cards did not have a revolving line of credit and therefore earned no finance charge revenue. Further, in the late 1980s and 1990s, competition from Visa forced AmEx to lower its merchant discount rates in order to close the gap between it and Visa in merchant acceptance locations, a gap spotlighted in Visa's ". . . And they don't take American Express" advertising campaign. Thus, in his Credit Card Forum speech, Mr. Golub was criticizing Visa for being too competitive, because it was forcing AmEx to lower its rates to merchants; and he was appealing to the owners of the Visa joint venture to halt this trend! Even today, Mr. Golub wants to maintain AmEx's premium merchant discount rate and would "like to see the premium increase."(15)

Lastly, Mr. Golub told Visa member banks that they should "question how it is in [their] interest for the association to fund the development and sales of corporate and purchasing card systems, travelers cheques, Visa Travel Money, and now home banking." Of course, these are businesses in which American Express already had--or hoped to have--a dominant market share. Take the corporate card market. Visa has spent millions of dollars developing a platform for corporate cards to compete with American Express, which has a leading 60 percent share of the market.(16) Yet, if Bylaw 2.10(e) were eliminated, the select group of banks that American Express might choose to allow to issue corporate cards on its system would have no incentive to invest in Visa's corporate card capabilities. To the contrary, it would be in their interest--although not in the interest of Visa members as a whole or consumers--not to fund any Visa initiatives that would help the association compete with American Express in corporate cards. This potential to undermine Visa's ability to innovate would cut across any Visa program that AmEx wants to stifle. This, clearly, is what Mr. Golub had in mind when he invited banks to issue cards on the AmEx system in 1996.

What it all boils down to is simply this: American Express, like Discover years earlier, has a corporate interest in weakening the competitive vitality of the Visa joint venture.(17) If successful, this would benefit both of those firms but harm consumers.

D. American Express and Morgan Stanley Do Not Need Government Intervention in Order to Compete with Visa and MasterCard.

The idea that American Express and Morgan Stanley are so "disadvantaged" that they need the government's help is laughable. American Express and Morgan Stanley are both huge diversified financial services companies with business interests throughout the world. American Express, for example, is the largest issuer of credit and charge cards in the U.S.; it runs the world's largest travel agency business; it is the dominant issuer of travelers cheques; it sells investment products through more than 11,000 American Express Financial Advisors, a unit that now has "become a major source of new business" for American Express cards(18); and it owns a full service bank (with its own Internet bank) that competes with Visa members.(19) American Express and Morgan Stanley are two of the most successful financial services companies in the United States by any measure. They earned record profits in 1999 and are off to even stronger starts in 2000. In short, both American Express and Morgan Stanley have more than enough resources to compete with Visa and MasterCard on a level playing field without government interference that would tilt the field in their favor. While Mr. Golub says to some audiences that American Express "operate[s] this little company trying to serve a few people"--comparing himself to David fighting two Goliaths(20)--the reality, which American Express articulates to other audiences such as financial analysts, is that American Express is one of the largest and most influential financial services companies in the world and one that enjoys important competitive advantages over Visa and MasterCard.

The "poor AmEx" theory which the Antitrust Division remarkably has adopted is utterly belied by the fact that the company owns and operates the largest, and one of the most successful, card-issuing businesses in the United States. American Express has fully rebounded from the serious problems it faced in the early 1990s resulting from its narrow focus on affluent charge card holders(21) and its disastrous entry into the revolving credit market. In the last ten years American Express has successfully introduced scores of new products and added hundreds of thousands of new merchants to its system. The company is now the largest issuer of credit and charge cards in the U.S., accounting for nearly 20 percent of all credit and charge card purchases (all MasterCard issuers combined make up only 26 percent of the market).(22)

American Express simply does not need bank issuers on its system to succeed. Like Visa's members, AmEx can solicit prospective customers through direct mail, telemarketing, and the Internet, and can increase its customer base through co-brand relationships, new product introductions, or any other means of its choosing. For example, after turning down co-brand deals with American Airlines and AT&T,(23) AmEx now maintains a flagship co-brand relationship with Delta Airlines and regularly signs new co-brand partners. In 1999, AmEx began issuing co-branded cards to customers of Fidelity Investments and Costco.(24) American Express also can, and does, launch successful new card products without help from Visa members. Demand for its Blue card--the first widely available smart card in the U.S.--has exceeded AmEx's expectations and industry observers estimate that AmEx will have issued three million Blue cards by the end of this year.(25) And, what of the 11,000 American Express Financial Advisors who are now a "major source of new business" for AmEx cards? Or the thousands of American Express travel offices that are outlets for AmEx cards? Or the hundred-odd business accounting firms that AmEx has purchased and that will be yet another distribution channel for AmEx cards? These are all powerful card distribution channels to which Visa does not have access.

To refute AmEx's claim that Bylaw 2.10(e) gives Visa an "unfair" competitive advantage because consumers prefer to obtain credit cards from the financial institution where they have their checking account, one need look no further than the success of the monoline banks (financial institutions such as MBNA, Capital One, and Providian whose primary business is credit cards). The monolines have succeeded without a meaningful number of consumer demand deposit accounts because they have developed significant expertise in tailoring appealing products to target groups of consumers. AmEx can and does do the same. AmEx also could have developed a significant presence in retail banking if it really believed that were essential to its success as a credit and charge card issuer.(26) It could have put a bank branch in every AmEx travel office if there had been a sound business case to do so. But, rather than viewing AmEx's lack of a physical branch system (and the checking accounts that would come with it) as a disadvantage, Mr. Golub says that "the infrastructure we don't have" is a "huge plus" in the Internet environment.(27) In fact, he hopes that AmEx's strengths in selling consumer financial services on the Internet will enable it to "kill" traditional bricks-and-mortar banks.(28)

American Express also does not need the help of Visa members to build and maintain a competitive level of merchant acceptance for its card products. As a result of lowering its high discount fee and increasing its sales efforts, AmEx has raised its merchant coverage from 70 percent in the early 1990s to more than 95 percent today--virtually at parity with Visa.(29) In the words of Mr. Golub, "the acceptance gap is just not that big."(30) Or, as he recently quipped, "the slogan 'Everywhere you want to be' seems to be losing its luster."(31) Nor is AmEx prevented from closing the small remaining coverage gap, as the example of Discover demonstrates.(32) All AmEx needs to do is lower its merchant discount rate which still is, on average, higher than the amount that merchants pay for Visa or MasterCard transactions. Visa can hardly be blamed for the fact that American Express' premium discount rate makes it more difficult for AmEx to sign up as many merchants as Visa.

What is more, AmEx enjoys a number of important competitive advantages that Visa cannot readily match. Because it operates a "closed loop" system, AmEx has system-wide information about all of its corporate cardholders' spending, which Mr. Golub described as a "market advantage not easily matched by our competitors."(33) The most important consequence of AmEx's closed-loop system is that AmEx is able to dominate the vital commercial card market. AmEx can match customer data with merchant data to provide more robust expense tracking and data analysis than Visa and MasterCard typically have been able to provide. At the same time, the premium discount rate helps to maintain the profitability of AmEx's commercial card products, which provide fewer revolving credit opportunities than consumer cards. As a result, AmEx enjoys a strong 60 percent market share in the huge corporate and small business card markets--selling corporate cards to 70 percent of the Fortune 500.(34)

Finally, AmEx is well positioned to remain a payment card industry leader, particularly in the burgeoning e-commerce field. Mr. Golub and other AmEx executives have repeatedly said that they believe that AmEx's key attributes--its strong brand name and closed-loop capabilities--will become more important in the e-commerce world. According to one industry observer, AmEx is the "best positioned--by a wide margin--to enable e-commerce."(35) To leverage these strengths, AmEx spent $250 million in 1999 to develop its e-commerce capabilities and made strategic equity investments of $71 million in e-commerce companies.(36) AmEx hopes to become one of a few hosts that ultimately will enable trillions of dollars of business-to-business e-commerce.


In sum, government intervention in and restructuring of the payment card industry is unwarranted and inappropriate because the industry already is highly competitive--and consumers have benefited immensely from that intense level of competition. The remedy the Antitrust Division is seeking would create an unlevel playing field--to consumers' detriment--between open joint ventures like Visa, on one hand, and proprietary systems like American Express, on the other. Nonetheless, the Antitrust Division has decided that it can design a "better mousetrap" of payment card industry competition. The Antitrust Division has failed to appreciate the fundamental lesson that--given the chance--markets work better than regulation.

Visa is not alone in making this point. In a May 1997 speech, Federal Reserve Chairman Alan Greenspan urged government policymakers to "be cautious when attempting to anticipate the future path of innovation or the effects new regulations may have on innovation," and went on to observe that "[t]his concern is particularly relevant to the financial sector."(37) Later, in testimony before Congress, Chairman Greenspan observed that "there ought to be a higher degree of humility involved" by policymakers in making antitrust judgments today.(38) Put in simpler terms, "If it ain't broke, don't fix it." Or, perhaps, more importantly, "If it ain't broke, don't break it." We hope that the Congress will not make the same mistake as the Antitrust Division by believing that regulators can do a better job than the free market, or restructure well-functioning industries to make them "better."

Thank you.


1 See SCFC ILC, Inc. v. Visa U.S.A., Inc., 36 F.3d 958 (10th Cir. 1994); National Bancard Corp. v. Visa U.S.A., Inc., 779 F.2d 592 (11th Cir. 1986); and Southtrust Corp. v. Plus System, Inc., 913 F. Supp. 1517 (N. D. Ala. 1995).

2 General purpose cards are credit and charge cards that can be used at multiple merchants (in the case of Visa cards, at all merchants displaying the Visa acceptance mark), as distinguished from store cards that only can be used in one merchant's outlets (such as a Macy's card).

3 The fact that Visa's members fiercely compete with each other makes loyalty rules such as Bylaw 2.10(e) necessary for the stability of the association--but more about that later.

4 Jerry A. Hausman, Gregory K. Leonard, and Jean Tirole, "The Impact of Duality on Productive Efficiency and Innovation," unpublished manuscript, July 2, 1999.

5 Data from the Federal Reserve Board's Functional Cost Analysis, reported in "The Profitability of Credit Card Operations of Depository Institutions," August 1997, prepared by the Board of Governors of the Federal Reserve System.

6 Deutsche Banc Alex. Brown, Credit Card Quarterly, November 29, 1999.

7 See "The Profitability of Credit Card Operations of Depository Institutions," an annual report by the Board of Governors of the Federal Reserve System, submitted to the Congress pursuant to section 8 of the Fair Credit and Charge Card Disclosure Act of 1988.

8 Testimony of James D. Kamihachi, Senior Deputy Comptroller for Economic and Policy Analysis, Office of the Comptroller of the Currency, before the Subcommittee on Capital Markets, Securities and Government-Sponsored Enterprises of the Committee on Banking and Financial Services of the U.S. House of Representatives, March 25, 1999, prepared remarks at p. 3.

9 We discuss duality and the government's "dual governance" claim later at pp. 10-11.

10 Sears later established Dean Witter, Discover as an independent company and eventually spun off its interest in that company. Dean Witter, Discover later merged with Morgan Stanley to form Morgan Stanley Dean Witter, the present owner of the Discover card.

11 Testimony of Philip Purcell, SCFC ILC, Inc. v. Visa USA, Inc. trial transcript at p. 267:2-8.

12 Visa originally prohibited duality and did not permit its members to issue MasterCard products. However, after being sued by one of its members on the ground that Visa's exclusivity rule violated the antitrust laws, Visa asked the Antitrust Division for a Business Review Letter supporting a Visa rule prohibiting duality. After the Antitrust Division issued an equivocal letter that did not support Visa's policy of exclusivity, Visa repealed its existing anti-duality rules and allowed banks to become owner-members in both the Visa and MasterCard systems. Very quickly most Visa members joined the MasterCard association and vice versa.

13 Having found no evidence to support its claims about harm to competition in the United States, the Justice Department now alleges that consumers in some other countries have benefited from banks there issuing payment cards on American Express' system. However, the government has not been able to identify any concrete evidence that consumers in those countries have benefited in any way--much less that they have access to card features or benefits that American consumers do not already enjoy.

14 One writer commented that Visa's commercials depicting merchants that don't take American Express are like "fingernails forever scratching on a blackboard" to Mr. Golub. (Stephen Solomon, "American Express Applies for a New Line of Credit," New York Times Magazine, July 30, 1995, at p. 34.)

15 Q&A session following February 2, 2000 Financial Community Presentation.

16 See discussion below at p. 19.

17 The aggressiveness of American Express in pursuing firms it deems competitive threats has been the subject of at least one unflattering book.

18 "Nearly one third" of the American Express Financial Advisors' clients are AmEx cardholders "who have become a major source of new business." American Express Company 1999 Annual Report, p. 10.

19 In this section we focus primarily on American Express since Morgan Stanley's Discover unit has not publicly "opened" its system to Visa members nor announced any formal strategy to allow select Visa members to issue Discover cards in the event Bylaw 2.10(e) were eliminated.

20  South China Morning Post, November 15, 1999, at p. 8.

21 Recall the AmEx campaign, "Membership has its privileges."

22 The Nilson Report, March 2000, at p.1.

23 One commentator called AmEx's rejection of American Airline's overtures "arguably one of the worst [decisions] in the history of American business." (Stephen Solomon, "American Express Applies for a New Line of Credit," New York Times Magazine, July 30, 1995, at p. 34.)

24 The Costco relationship is notable because, in addition to giving AmEx access to a large source of potential new cardholders, AmEx's contract with Costco provides that it will be the only credit or charge card brand accepted at Costco stores (Costco does not accept Visa or MasterCard and ended its relationship with Discover pursuant to its contract with AmEx).

25 "In Pursuit of E-volution," Cards International, April 27, 2000 (quoting a Warburg Dillon Read analyst).

26 AmEx has long owned a bank, Centurion Bank, and recently launched an Internet bank, Membership Banking, to compete with banks in providing financial services products to consumers. Membership B@nking offers a broad range of checking and savings account products, as well as debit cards that can be used at thousands of merchants and 94 percent of all ATMs in the U.S.

27 August 4, 1999 Financial Community Presentation, p. 35.

28 Q&A following August 4, 1999 Financial Community Presentation.

29 AmEx measures merchant coverage as the percentage of the purchases that a cardholder wishes to make using a credit or charge card that can be paid for on an American Express card.

30 April 12, 1999 Faulkner & Gray Credit Card Forum speech, prepared remarks at p.2.

31 February 2, 2000 Financial Community Presentation, p. 9.

32 Morgan Stanley's Discover unit, which charges merchants much less than AmEx, has been able to achieve greater merchant coverage than AmEx despite its much smaller market share. Indeed, a senior executive of Discover was recently quoted as saying that Discover's goal is "numerical parity with Visa/MasterCard by the end of this year." (CardFAX, March 24, 2000.)

33 August 4, 1999 Financial Community Presentation, p. 32.

34 PaineWebber, Credit Card Industry Picture Book, May 1999, p. 88; March 13, 2000 AmExpress release.

35 Morgan Stanley Dean Witter, "The Internet Credit Card Report: A Primer on the Industry and its Role in E-Commerce," July 20, 1999, at p. 2-2.

36 August 4, 1999 Financial Community Presentation, p. 9.

37 Remarks of Chairman Alan Greenspan at the Conference on Bank Structure and Competition of the Federal Reserve Bank of Chicago, Chicago, Illinois, May 1, 1997, prepared remarks at p. 6.

38 Transcript of testimony of Chairman Alan Greenspan before the Committee on the Judiciary, U.S. Senate, June 16, 1998.

Home | Menu | Links | Info | Chairman's Page