The recent Justice Department suit against Electronic Payment Services Inc. was its first enforcement action involving payment systems in about 20 years. Does the suit signal increased federal antitrust scrutiny of payment systems? The answer is unequivocal yes.
Antitrust enforcement in the Justice Department is generally on the upswing under the Clinton administration. Newly appointed Assistant Attorney General Anne Bingaman has promised to revitalize antitrust enforcement.
Under her brief stewardship she has secured significant increases in the division's budget and staffing, hired serveral seasoned antitrust trial lawyers, and refocused the division's enforcement resources away from localized criminal price-fixing, and toward monopolization and other civil antitrust violations.
Sending a Signal
First impressions count for a lot, even for an enforcement agency. So it is notable that the first civil antitrust case filed in the new administration was the EPS case, involving the contractual practices within the country's largest automated teller machine network.
The department alleged that EPS had engaged in monopolistic and exclusionary practices, which caused noncompetitive prices for ATM processing. Network issues are particularly complex, especially when viewed under the prism of the antitrust laws.
This challenge represents a willingness to grapple with thorny economic arguments and seek fairly extensive relief. But most important, it represents a renewed interest in payment systems by the Justice Department.
In Ms. Bingaman's words, the action "demonstrates the department's commitment ... to insuring that this important industry is open to competition."
Payment Systems Development
A bit of historical perspective is in order. During the 1970s the Justice Department played an important role in the development of payment systems, in terms of litigation, regulatory advocacy, and business advice.
It sued two automated clearing house associations seeking access for thrifts, participated extensively in proceedings before the National Commission on Electronic Funds Transfer and other regulatory agencies, announced a challenge to the formation of an ATM network because it was "too large," and declined to approve National BankAmericard's proposed anti-duality rule.
From the perspective of credit card and ATM networks, the Justice Department was perhaps a critical player in the development of competition policy.
'More the Better'
During the Reagan-Bush administrations, the department could hardly be perceived on the enforcement agency radar. No enforcement actions were taken or even hinted at.
The department was silent as tremendous consolidation among ATM networks occurred. The department's apparently laissez faire attitude was based on concept known as the "economnics of ubiquity" which loosely translated means, "the more the better." Under this concept the merger between ATM systems seemed pro-competitive because it increased the number of cardholders and ATMs in a network, improving accessibility for consumers.
Eventually, the state attorneys general stepped into the breach. In 1990, they sued to enjoin the Visa- MasterCard point of sale joint venture, Entree, which had reportedly been given a green light at the Department. Visa and MasterCard eventually agreed to abandon Entree and have since entered with separate POS networks.
Now that the department has returned as cop on the beat, it is prudent for payment systems to reassess practice which may have been based on relatively lax antitrust enforcement. What are the practices that deserve special scrutiny:
Pricing is always one of the msot sensitive areas from an antitrust perspective. Two practices that deserve special attention are interchange fees and surcharge prohibitions.
Although credit card interchange fees survived an antitrust challenge in the mid-1980s, that precedent may be revisited. Representatives of the State Attorneys General have said as much. If interchange fees inhibit competition in merchant discounts, consumers may be harmed.
Moreover, the fact that there is far more diversity and competition among POS interchange fees may suggest a competitive problem.
Limited Prohibitions
Many ATM networks and some POS networks prohibit their members from surcharging consumers for transactions at their terminals. Although an absolute prohibition on surcharging was struck down in an arbitration involving the Pulse ATM networks, many networks have adopted more limited prohibitions.
These prohibitions may receive more careful scrutiny where there is evidence that they adversely effect consumer welfare.
Finally, one area that probably will not receive a lot a scrutiny is credit card interest rates. Although a recent General Accounting Office report suggests that competitive developments in this area need to be carefully monitored, interest rates have fallen so precipitously, and the number of low rate issuers seems to have increased so dramatically, that any competitive problems appear to have been corrected by the market.
In the 1980s, the department permitted widespread consolidation among ATM networks. It indicated that it would not challenge the merger of shared ATM networks based on size alone, focusing more on the "economies of ubiquity" and the resulting consumer benefits achievable by widespread sharing of ATMs.
Robert Litan, the deputy assistant attorney general, has said that the department is revisiting that assumption. He suggested that the department is not convinced that ATM networks are natural monopolies. Rather than taking a doctrinal view in favor of ATM mergers, Mr. Litan has suggested that these mergers will receive greater scrutiny and that the networks would carry a significant burden of proof.
Greater Scrutiny
What does this mean? Far more payment systems mergers will be subject to careful evaluation and investigation. In these matters, the parties cannot expect generalized economic theory to overcome comeptitive concerns. This is especially true where there is or could be head to head competition between the merging networks.
One important issue in determining the competitive effect of a merger is the alternatives available to the banks in the market. For example, merging networks might argue that national networks provide a competitive alternative. Since national networks have implemented ATM duality, in many areas these networks offer a degree of coverage comparable to regional networks.
This type of argument is unlikely to be successful with the department, however: the Competitive Impact Statement in the EPS case noted that national ATM networks are "by design networks of the last resort" and thus the Department defined the market as "regional ATM network access."
Similarly, where the merging network have implemented exclusivity rules, which prohibit members from forming or affiliating with competitive problems may be exacerbated. Because of these exclusivity rules, member institutions will be unable to enter into alternative arrangements, for example, forming a new network.
In this situation, the threat that the network can increase prices after the merger seems particularly pronounced. On the other hand, the absence of exclusivity restrictions may be seen as a plus factor for approving the merger.
Justification
Even where competitive problems appear, the parties may attempt to justify the merger based on efficiencies which outweigh any anti-competitive effects. However, merging parties can no longer rely on theoretical arguments and the "economics ubiquity." Rather, the parties should have concrete evidence of real efficiencies which will lead to lower prices for consumers in order to persuade the Department that a merger is procompetitive.
Of course, there is a certain degree of irony in this more intensive scrutiny of mergers. One reason why EPS (actually its predecessor MAC) was able to obtain monopoly power was because it acquired without Justice Department objection several other ATM networks. One of these acquisitions was unsuccessfully challenged in a private antitrust suit). Had the department been more aggressive in scrutinizing these acquisitions, it might have avoided the competitive problem it sought to remedy last month.
Finally, there is the question of duality among credit card issuers. Many economic commentators have noted that duality has been bad for consumers, by reducing the incentives for the two card associations to compete, in terms interchange fees, particularly critical of the "corrosive effect of duality."
Both MasterCard and Visa have been reconsidering whether duality is in their best interest. The department or the state attorney's general may also inquire whether it is in the best interest of consumers.
