Over the last 12 years, we have spent a great deal of our professional lives prosecuting antitrust cases against Visa and MasterCard.
First, we represented a class of merchants in a case that produced a settlement worth more than $3 billion in cash, as well as injunctive relief that was valued by the courts at $25 billion to $87 billion. This case concerned Visa/MasterCard's "honor all cards" rules that forced merchants to accept Visa/MasterCard debit transactions at inflated prices.
Second, and most recently, we represented Discover Financial Services in its lawsuit against Visa and MasterCard for damages stemming from their rules that precluded banks from issuing Discover Network cards. This case was recently settled for $2.75 billion.
In fighting these complex cases, we have learned a thing or two about payment networks. To put that knowledge to good use, we make two observations that we hope will benefit U.S. financial institutions. At a time when short-term thinking has contributed to the current credit crisis, we hope this advice will resonate, particularly as banks assess the inevitable settlement proposals in the ongoing litigation over their historic interchange setting.
Banks need to take a long-term view of economics. Through Visa and MasterCard, banks have spent hundreds of millions of dollars defending practices that may have been in their short-term best interest but which were ultimately self-defeating. These practices were not only not in banks' long-run best interests but also not in their customers' interests.
Elementary economics shows that marketwide output, and profits, are maximized when resources are allocated in the most efficient way. The Visa and MasterCard rules that we fought against caused markets to perform inefficiently. For example, in a world without the exclusionary rules that prevented banks from issuing Discover or American Express cards, banks could have reached new customers by segmenting their portfolios through the unique attributes associated with the Discover or American Express networks, such as their widely recognized brands.
If they had done so, banks would have increased their profitability and delivered more choices to consumers.
Moreover, in a world where merchants were not forced to accept Visa/MasterCard debit transactions, signature debit interchange would have been priced more competitively — that is, probably at levels comparable with PIN debit rates. Though this would, in the short run, have reduced banks' revenue, the disadvantage would have been outweighed by the benefits of a more efficient PIN debit system.
The efficiency gain also would have put more money in consumers' pockets because merchants typically pass along higher debit interchange rates in the form of higher-priced goods and services. This hidden tax on U.S. consumption is especially problematic because it is regressive: It requires the cash customer — the very customer most exposed to the current economic dislocation — to subsidize the perks associated with higher-priced payment cards.
Accordingly, we believe that Visa, MasterCard, and their member/customer banks — in evaluating network policies — should focus more on their long-term effects
Banks need to evaluate payment system policies independently. In litigating against Visa and MasterCard, we came to believe that many banks did not rely on independent counsel to evaluate or sanction the practices at issue. In fact, in the "honor all cards" litigation, it was our distinct sense that banks wholly entrusted the case to Visa and MasterCard. We believe this was a mistake.
Antitrust issues are usually not amenable to black-or-white formulations. Instead, antitrust law calls for a nuanced and constantly evolving evaluation that must adapt to changes in the industry, as well as judicial and economic scholarship. Practices, such as exclusive dealing, that are benign when adopted by companies lacking market power can raise serious antitrust issues when enforced by companies that have achieved dominance.
From our perspective, the actions of Visa and MasterCard during the past decade betrayed a lack of appreciation for the limits that antitrust law puts on dominant firms and on their collective action through joint ventures. The result has been about $10 billion of damage awards to date (including the Visa Check, American Express, and Discover settlements) that were largely, if not completely, underwritten by the banks.
We strongly recommend that banks in future treat any legal advice from Visa/MasterCard counsel with appropriate scrutiny. This is not to say that Visa and MasterCard are not represented by well-schooled and honest counsel. They most certainly are.
However, the complexities associated with antitrust analysis move us to urge that banks use independent counsel to determine whether the counsel provided by the card associations is consistent with evolving precedent. Moreover, we believe that banks should factor in Visa and MasterCard's dominant positions as they analyze the antitrust issues raised by the associations' conduct. Doing so could potentially avoid mammoth litigation that causes dislocations for all concerned.