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. Harvey Golub
Chairman & CEO
American Express Company


Mr. Chairman, Chairman Gramm, and members of the Subcommittee, I am Harvey Golub, Chairman and Chief Executive Officer of American Express.

It is a privilege for me to be with you today.

I want to express my thanks for this opportunity to discuss an important issue facing American financial institutions and the American consumer -- the anti-competitive conduct of the two principal card associations -- Visa and MasterCard.

Virtually every bank in the United States belongs to one or both of these associations - and must do so in order to compete in the retail banking business and/or in any aspect of the credit and offline debit card business. Visa and MasterCard hold a 75 percent share of the general-purpose credit and charge card network market and, based on their actions, do not compete with each other. In large part because board members of one serve on the governing committees of the other, they effectively act as a single entity, and have conspired to limit competition in the U.S. card industry.

This conduct has had numerous detrimental effects, including:

The Visa and MasterCard associations have limited competition by adopting bylaws and policies that impose extraordinary limitations on what their member banks may or may not do. Visa allows its member banks to issue MasterCards; MasterCard allows its members to issue Visa cards. Both allow their member Citibank to issue Diners Club cards in the United States. But neither Visa nor MasterCard allow any of its U.S. member banks to issue cards that run on the American Express or Discover networks - the only other two networks of any significance in the United States and the only networks that can compete with Visa and MasterCard.

In other words, what Visa and MasterCard say to their members is - in order to do business with us, you can only work with whom we allow. It's as if Coke and Pepsi got together and told supermarkets in the U.S. they could carry both Coke and Pepsi, but no other soft drink. Coke and Pepsi are so strong in the market the retailers would have no choice but to capitulate. Visa and MasterCard are no different.

As you know, the Department of Justice has filed a case against Visa and MasterCard in Federal Court. That case is about antitrust violations of the Sherman Act; it is about Visa and MasterCard conspiring to limit competition and breaking the law.

But that subject is not what brings me here today. What brings me here today is the public policy interest we all have in breaking down artificial barriers to competition that may harm consumers and undermine our national banking policy.

Last year, at around this time, you passed the Gramm-Leach-Bliley Act. That landmark legislation broke down certain artificial barriers to competition that had existed for decades. It allowed the markets to function and empowered banks to efficiently give their customers the services they demand.

I submit to you that the job is unfinished. There is an area where anticompetitive barriers remain… and that is the credit card industry. And the United States of America is the only place in the world where such barriers still exist.

Outside of the United States Visa and MasterCard do allow banks to issue cards on the American Express network - but only because they were forced to do so. The associations tried to exert their monopoly power overseas, when it became apparent that many banks wanted to issue cards on the American Express network. However, they didn't get away with it.

Now, consumers, businesses and banks overseas have choices that are not available here in the U.S. So, the DOJ's decision to sue was not surprising. Every governmental antitrust authority around the world that studied this matter reached the same conclusion. Every authority around the world that studied this matter prevented Visa and MasterCard from acting on their impulse to limit competition - to limit choice.

This situation in the United States did not arise by accident. Visa passed its restrictive bylaw in 1991, but MasterCard had no such rule - at least until 1996. At that time, I extended an invitation to banks to do business with American Express. My proposal could have represented a tremendous benefit to MasterCard. Think about it - those Visa banks that wanted to freely do business with us or another network would have had to convert their Visa cards to MasterCard. This would have resulted in billions of new dollars flowing through the MasterCard network. It would have been an enormous competitive advantage for MasterCard. But, for some reason, MasterCard did not look on this as a chance to significantly expand its volumes. Within four weeks of my invitation, MasterCard adopted restrictions similar to those of Visa, effectively shutting down what could have been a sizable business opportunity.

What conceivable reason could MasterCard have for turning down business from its members, who would have shifted their Visa volumes to MasterCard?

When a large, successful entity acts against its own commercial interests, there is always a reason. In this case, MasterCard's reasoning is clear -- it was an attempt to close ranks with Visa and act together to deny banks the choice of doing business with any network other than Visa/MasterCard. It was an example of Visa and MasterCard acting as a single entity operating under the guise of two names.

You will hear from Visa/MasterCard allegations about robust competition. As evidence, they will point to mailboxes stuffed with offers of credit cards. But this argument is limited and flawed. Essentially, consumers get to choose among 31 flavors of ice cream. But if you want sherbet or frozen yogurt, you can't have it. In other words, the offers are variations on a common theme. And their argument deliberately confuses competition among issuers, which is robust, with competition among networks, which is not. As Visa itself said in court during its litigation with Sears, issuer competition, while important, is no substitute for competition among networks. We agree with them on that point.

In the United States, there are essentially five networks - Visa, MasterCard, American Express, Discover and Diners Club. It is at the network level that innovation occurs and new cards are created. Examples include revolving credit cards, charge cards, debit cards, ATM cards, stored value cards, and new smart or chip-based cards. Networks make these cards possible by providing the means for processing and clearing transactions. Networks provide other essential functions. Networks create and promote their brands. They establish requirements for merchants accepting their cards, and they set certain fees for transactions. Bank issuers can only offer products within the boundaries set by networks. Issuers can change their fees or the interest rates they charge, but this is not innovation. If the networks don't innovate, issuers are limited in what they can offer.

American Express has a history of innovation. We were the first network to offer a gold card product... the first to offer a platinum product… and more recently, the first to offer a super premium product - the Centurion Card - and the first to offer a chip-based card - Blue from American Express. We were first on dozens of other innovations that have now become industry standards.

For their part, Visa/MasterCard have played a reactive role, if any at all. They dragged their heels, then introduced cheap imitations of our gold and platinum cards. They've not yet matched the Centurion Card or Blue. Nor have they been quick to introduce new products for the online world.

By contrast again, later this year, American Express will introduce new products that will enable consumers to browse and shop online with virtually complete security and as much privacy as they wish. However, banks won't be able to take advantage of these innovations because the Visa/MasterCard policies prevent them from working with us.

The unfortunate byproduct of these policies is that they limit consumer choice. Many consumers rely on their bank to provide all of their financial services. A significant number of consumers who carry credit cards got them through the bank where they have their primary checking or savings account. Visa/MasterCard know this. By demanding that banks only offer their cards, Visa/MasterCard have created illegal barriers to consumer choice. The associations claim that banks could choose to give up Visa and MasterCard to work with American Express, if our offer was good enough. This is simply untrue, because those same banks would have to convert their entire card portfolio - a very expensive task - and give up the ability to provide their customers a debit or ATM card. Visa/MasterCard know this is essentially impossible for banks to do.

However, if the restrictions were eliminated, banks and consumers would benefit. Here's how it would work:

Is there any doubt that Visa/MasterCard would respond by improving their products and services …… thereby bringing about even more quality and more choice to banks, businesses and consumers? Competition is great. At American Express we welcome it. What then is Visa/MasterCard afraid of? The world Visa/MasterCard has created is anti-choice, anti-consumer and, ironically, anti-bank. And, they have succeeded in maintaining this status quo by threatening and intimidating their bank members.

The penalty for any bank going against the Visa/MasterCard mandates is severe. The associations have made it clear they will throw banks out of their network, disrupting service to customers on their existing cards, preventing banks from serving their customers and potentially causing serious loss of business and revenues. In short, they would put a bank's financial soundness at risk. When American Express first signed an agreement with a major bank in Brazil to issue our products, Visa's Latin American and Caribbean Region president, James Partridge, sent a clear message to the region's banks. He said that any bank that considered issuing American Express branded cards "is playing with fire".

Outside the United States, where Visa/MasterCard have not been able to impose their restrictions, consumers and banks have benefited in instance after instance. For example, in Puerto Rico and Portugal, American Express' bank partners have introduced a variety of specially tailored American Express Cards, offering consumers new product choices. In Israel, American Express' bank partner has increased merchant acceptance and offered consumers the first meaningful rewards program in that country. In response, Visa immediately introduced a new rewards product, and consumers benefited from the competition.

By suppressing network competition, Visa/MasterCard have also harmed merchants. Today in the United States, for example, Visa/MasterCard have a complete monopoly in offline debit cards. Only banks can issue cards that directly debit a consumer's bank account - and Visa/MasterCard have all the banks tied up. This monopoly allows Visa/MasterCard to charge merchants anything they want for debit transactions. If there were true network competition, Visa/MasterCard could never get away with the prices they charge for debit transactions. Other networks would fight for the business.

As you may be aware, the overpricing of offline debit is the subject of a class action lawsuit against Visa/MasterCard led by the nation's largest retailers.

Visa/MasterCard try to defend themselves by suggesting that American Express is looking for a "free ride" on the networks that they have established. Let me settle this issue once and for all, for the record, in this Committee. It is a comment that sounds good, but which is devoid of information or content. We have no intention or desire to use their network. We want banks to be able to use our network. Look at the situation in other countries where banks issue American Express Cards… there has been no free riding on the Visa/MasterCard network there, because there is no free riding possible.

Banks should have the opportunity to do business with whomever they choose. They should be able to decide for themselves how to deploy their assets and serve their customers. These are, after all, the assets and customers of the banks -- not Visa's and not MasterCard's.

In truth, the barriers have nothing to do with preventing "free riding" - they are designed only to stifle competition. The only ones being taken for a ride here are consumers and banks - by Visa/MasterCard.

Visa/MasterCard also say that American Express and Discover are going to choose only the largest banks to do business with, and that allowing banks to issue on the American Express or Discover networks would undermine banks' support for Visa/MasterCard. At the same time, they perversely claim that banks do not want to issue American Express cards. If that were the case, why do they need a bylaw preventing something no one wants to do?

American Express wants to talk to all banks about issuing cards on our network. Our door is open. What are Visa/MasterCard afraid of? Why won't they let banks issue the cards that they want?

If Visa/MasterCard provide a more attractive package of services that banks and consumers want, then nothing changes. Banks will stay put. But if American Express provides a better deal, banks will have the choice to issue our cards as well. It is competition that Visa/MasterCard are afraid of, but competition is what our national banking policy should encourage.

Visa/MasterCard have a great deal to answer for. They operate a closed, self-serving, self-perpetuating system. Their operation of this system has harmed consumers, limited banks' ability to conduct their business, gouged merchants in the debit market, and stifled innovation. This is ultimately bad for our economy and for competitiveness in the world market. As far as I have ever seen, these bylaws are not being championed by the leading executives of the banking industry as being in the best interest of consumers. The bylaws instead are simply a mechanism for the associations - not the banks - to maintain their market control.

In summary, the United States has the freest markets and fiercest competition of any economic system in the world. A glaring exception is in the credit card market, where Visa/MasterCard continue to use their dominant market power to create artificial barriers to competition and advantages for themselves, at the expense of consumers. These activities have been banned outside the United States and should be banned here as well.

Our view is that open competition is good for the marketplace and for consumers. Open competition in the United States, however, requires some changes. It requires the end of the network monopoly that Visa/MasterCard currently hold. It does not require the end of Visa or MasterCard - merely the end of their monopolistic, illegal practices. Introducing competition would force the associations to compete for the banks' loyalty and business, rather than holding them by force. I can tell Visa/MasterCard that competition is great. It makes you stronger, sharper, better. Their people may even like the competitive waters - as soon as they learn how to swim.

Mr. Chairman, in conclusion, I want to compliment the Committee on the progress you've made in moving banks toward full competition in a free market. We're here today to move that process one step further. It has been a privilege for me to be with you, and I would be happy to answer any questions that you might have.


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