CT - 2010- 010 THE COMPETITION TRIBUNAL IN THE MATTER OF THE COMPETITION ACT, R.S. 1985, C. C-34, AS AMENDED;
AND IN THE MATTER OF AN APPLICATION BY THE COMMISSIONER OF COMPETITION PURSUANT TO SECTION 76 OF THE COMPETITION ACT;
AND IN THE MATTER OF CERTAIN AGREEMENTS OR ARRANGEMENTS IMPLEMENTED OR ENFORCED BY VISA CANADA CORPORATION AND MASTERCARD INTERNATIONAL INCORPORATED.
BETWEEN: THE COMMISSIONER OF COMPETITION Applicant -and-VISA CANADA CORPORATION and MASTERCARD INTERNATIONAL INCORPORATED
Respondents RESPONSE OF MASTERCARD INTERNATIONAL INCORPORATED PART I- OVERVIEW OF RESPONSE 1. The application by the Commissioner of Competition (the "Commissioner") in this matter is misconceived, both as a matter of law and as a matter of economics. It seeks to employ the price maintenance provision of the Competition Act to conduct which is not price maintenance. It also misunderstands the business of MasterCard International Incorporated ("MasterCard") and the nature of the market in which MasterCard operates, as well as the nature of MasterCard's Operating Rules (the "Operating Rules"), and as a result seeks an outcome which would both injure consumers and lessen competition.
- 2 -2. The Application is misconceived in law in that MasterCard's Operating Rules, and in particular its Honour all Cards, Non-Discrimination and No Surcharge rules, do not constitute price maintenance. There is simply no agreement, threat or promise to maintain prices charged by another person. Indeed, one of the key Operating Rules which is subject to challenge is the rule which prohibits merchants from adding extra charges to a consumer's bill. That rule is the antithesis of price maintenance. No MasterCard rule, policy or agreement prevents or discourages Acquirers from offering lower prices to merchants, or merchants from offering discounts or lower prices to consumers. Just the contrary.
3. The Operating Rules which the Commissioner challenges in the Application are those which allow the MasterCard system to function as an attractive, efficient and competitive payment mechanism for both consumers and merchants. These rules ensure that merchants who agree to accept MasterCard cards for payment may not pick and choose amongst the MasterCard cards they accept, so consumers can have confidence their MasterCard card will be honoured ("Honour all Cards" rule); prevent consumers who pay for goods and services using a MasterCard card from being surcharged an extra amount of money at the point of sale for using their MasterCard cards ("No Surcharge" rule); and protect the MasterCard brand ("Non-Discrimination" rule). These rules do not require that prices be maintained in any way, and they are not similar, in any respect, to any conduct which has previously been characterized as price maintenance. The Application seeks to stretch the language of section 76 of the Competition Act beyond all precedents, and beyond its legitimate compass.
4. Furthermore, there is no resale of any product supplied by MasterCard. The price maintenance provision of the Competition Act requires a resale relationship. It refers to the person whose price is maintained as "the person's customer or any other person to whom the product comes for resale". No product which MasterCard supplies is resold. The price maintenance provision of the Competition Act is simply inapplicable to these facts.
- 3 -5. The Application also fundamentally misconceives the nature of the market in issue,. and thus is misconceived as a matter of economics. The Application fails to acknowledge that, to be successful, a credit card system must attract and balance the interests of two types of end-users: merchants and consumers. This is referred to as a two sided market. This concept, fundamental to network services such as credit card systems, is entirely ignored in the Application.
6. Merchants must find a credit card attractive to accept - that is, any merchant must decide it is better off accepting the card than not accepting the card as a method of payment. Similarly, consumers must decide that they wish to obtain and use a particular card in making purchases. Without achieving both sufficient merchant acceptance and consumer use, the system will not work. The Application ignores entirely the necessity of balancing the interests of the two sides of the market, focusing exclusively on the interests of merchants. It ignores the interests of card using consumers and, in fact, proposes a remedy that would actually harm consumers. The Application consequently fails to reflect the nature of competition with respect to payments generally, and credit cards in particular.
7. Finally, by way of fundamental flaws, the Application wrongly asserts that MasterCard's challenged Operating Rules have an adverse effect on competition. In fact, the Operating Rules are designed to achieve efficiency and maximize output by appealing effectively to the two necessary constituencies, consumers and merchants. MasterCard' s Operating Rules do not restrict output or create barriers to entry, which would be necessary for injury to competition. Quite the contrary, MasterCard's Operating Rules seek to minimize cost and maximize output - in other words, to maximize competition and the value of the MasterCard network to its users.
- 4 -PART II- GROUNDS AND MATERIAL FACTS ON WHICH THE APPLICATION IS OPPOSED
(a) Response to the Allegations 8. MasterCard denies all allegations in the Commissioner's Statement of Grounds and Material Facts, except as expressly admitted herein.
(b) Payments in Canada (i) The History of MasterCard in Canada 9. The history of MasterCard in Canada is instructive. MasterCard came to Canada in 1973 as MasterCharge. At that time various other credit cards, including a wide array of merchant issued or "store" cards, American Express ("Amex"), Diners Club, enRoute and Visa, (or, as it was then referred to, Chargex) were all in the marketplace.
10. When Visa came to Canada in 1968 it did so as an association of four of Canada's five largest banks: Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia, and Toronto-Dominion Bank. Those banks were not permitted by their Visa arrangements to issue MasterCard cards, and consequently when MasterCard came to Canada it had available to it only one of Canada's five largest banks, Bank of Montreal. Bank of Montreal became the first major issuer of MasterCard cards in Canada and has been the largest issuer of such cards, a status which it retains today. Other issuers, such as National Bank, National Trust, Canada Trust and Royal Trust subsequently commenced issuing MasterCard cards.
11. The situation of banks issuing only one or the other of Visa or MasterCard cards is referred to as Non-Duality. The Competition Bureau for many years favoured Non-Duality. This remained the approach preferred by the Competition Bureau until November of2008.
12. Since the launch of MasterCard in Canada, and given non-duality, MasterCard has had to seek out new and innovative card issuers in an attempt to compete. Included in this list of issuers are hundreds of small credit unions, foreign based credit card issuers such as
- 5 -Capital One and Bank of America/MBNA, Chase, GE Money Canada, HSBC, Wells Fargo, and also Canadian merchants such as Loblaw/President's Choice, Canadian Tire and, most recently, Walmart.
13. As a result of MasterCard being much the smaller of the two general purpose credit card brands offered in Canada, it has been necessary for MasterCard to compete aggressively for survival. MasterCard has done so, and this, taken with the competitive payments landscape in Canada which is outlined below, has led to a highly competitive situation in Canada, not the reverse as asserted by the Commissioner.
(ii) Payment Options in Canada 14. Use of a MasterCard card is one of many ways for consumers or businesses to pay for goods and services in Canada. A non-comprehensive listing of such methods includes cash, cheques, pre-authorized debit, Interac debit, Interac e-Transfer, money orders, travellers cheques, gift cards, Pay Pal, merchant issued credit cards, and general purpose credit cards, including MasterCard, Visa, Amex, Diners Club and Discover.
15. In addition to these established forms of payment, many new payment methods are developing, often based on technological developments such as smart phones. These include Bill me Later, Obopay, Bill Monk, Text Pay Me and Zoompass.
16. Canadians use various methods of payment to make purchases which, in 2009, totalled some $954 billion. Of that total, and to focus only on some of the larger payment methods, purchases by cash were approximately $238 billion; purchases by preauthorized debit were approximately $176 billion; purchases by Interac were approximately $171 billion; purchases by cheque were approximately $49 billion; purchases by merchant issued credit cards were approximately $48 billion; purchases by PayPal were approximately $2 billion; and purchases by general purpose credit cards, including MasterCard, Visa and Amex, were approximately $271 billion, of which MasterCard represented some $81.6 billion.
17. In other words, by way of order magnitude, at approximately $81. 6 billion MasterCard represented only 8.5% of the total 2009 personal expenditures of $954 billion reported by
- 6 -Statistics Canada. As is apparent, purchasing goods and services using a MasterCard card is only one of numerous methods of payment, and MasterCard is far from the largest payment method in use in Canada.
18. As indicated in the overview section of this Response, and as will be outlined in greater detail below, both merchants and consumers may select amongst these, and other, methods of making or receiving payment. To compete with these other methods of payment MasterCard must successfully encourage both merchants and consumers to select MasterCard cards for a given transaction.
(iii) Historical Development 19. The first credit cards in Canada were provided by merchants as their own proprietary or "store" cards, used for making purchases in the particular store which issued the card. These cards tended to have high interest rates associated with them. They also tended to have high operating costs for the merchant. These proprietary systems are generally referred to as two party systems, since only two parties are involved, the merchant which issues the card and the consumer.
20. Many merchants, who previously ran their own proprietary card systems (thereby taking on the operating costs of such systems and the bad debt risk associated with such cards) have discontinued their proprietary card arrangements and decided to accept general purpose credit cards. Presumably, the benefits of doing so, and the overall value they receive from accepting MasterCard cards, outweigh the costs for these merchants. That is, the cost to the merchant in order to accept payment by MasterCard, Visa or Amex, for example (often referred to as the "merchant discount"), is less than the cost of operating their own card or similar credit purchase system, considering the value these cards bring to the merchant. Those costs include, of course, both the administrative cost of operating the system, and also the cost of credit losses.
21. As well, some merchants, such as Loblaw and Canadian Tire, have chosen, through affiliates, to themselves issue general purpose credit cards. Other merchants, who do not themselves or through affiliates issue credit cards, have entered into "co-branding"
- 7 agreements with issuers of general purpose credit cards, so that the merchant's name appears on the card. These merchants typically share in the financial benefits of the issuers of those credit cards when the card is used.
22. Many larger merchants could run their own credit card programs. For their smaller competitors, however, this may not be realistic, but the availability of general purpose credit cards, together with other methods of payment, allows these merchants to compete more effectively with larger merchants.
23. Diners Club was the original non-proprietary charge card system. It launched in the United States in the early 1950's and came to Canada thereafter, followed by Amex. Diners Club and Amex are each a "three·· party" system. In three party systems the system operator (Diners or Amex) both issues the cards to consumers and negotiates their acceptance with merchants. The three parties are: the customer, the system (Amex, Diners, etc.), and the merchant.
24. At the time of its launch, Diners had a fairly high merchant discount (being the fee paid by the merchant on each credit card transaction) in the range of 7 per cent. Amex still has the highest merchant discount in Canada. Despite merchant discounts much higher than those complained of in this Application, merchants found, and continue to find in the case of Amex in Canada, that they are better off accepting payment via these cards than not doing so, despite their higher cost.
25. After the launch of three party credit card systems, such as Amex and Diners in the 1950's, so called "four party" credit card systems were launched, first in the United States and then in Canada.
(c) Participants in a Four Party System 26. These so-called four party systems (the four parties being the cardholder, issuer, acquirer and merchant), such as MasterCard and Visa, actually have five principals:
(i) a bank or other entity which issues cards to consumers (the "Issuer");
- 8 -(ii) a bank or other financial entity which agrees to pay the merchant for transactions on the card and make other arrangements necessary for the merchant to be able to accept the card (the "Acquirer");
(iii) the consumer who uses the card; (iv) the merchant who accepts payment for goods and services; and (v) the card system operator (such as MasterCard or Visa). 27. For the system to operate, Issuers must make contractual arrangements with consumers; Acquirers must make contractual arrangements with merchants; and the system operator must establish a set of rules and protocols so that merchants who accept the card know they will be paid, Acquirers who pay merchants know they will be paid, and consumers know how and where they can use the card.
28. The arrangements between consumers and Issuers involve such things as the credit limit the consumer will have, the amount of time the consumer will have to pay the bill before interest is charged (commonly known as the grace period), the minimum payment amount which the consumer must make, the interest rate which the consumer will be charged on unpaid amounts, the amount of the annual fee, if any, the consumer will pay for use of the card, the rewards, points or other benefits the consumer will receive associated with use of the card, cash advance transaction fees, foreign exchange markup rate, over limit fees, etc.
29. Numerous banks and institutions issue credit cards of the same brand (such as MasterCard cards or Visa cards). Each of these issuing institutions competes with the others to make its offering most attractive to consumers using the cards. They do so by offering different features, different interest rates, different (or no) annual fees, different points or rewards, and the like. They compete with one other within the same card system, with issuers of other types of cards, and with other means of payment. In other words, four party payment systems both enhance inter-brand competition and enable intra-brand competition.
- 9 -30. As with Issuers, Acquirers compete with one another for the business of acquiring transactions from merchants. They do so by offering a suite of services to merchants, such as a guarantee of prompt payment, banking and deposit arrangements, deployment of terminals or other technology to accept card payments, implementation and project management services, customer service support, replacement of equipment, flexibility of settlement/deposit arrangements, gift card processing, rewards processing, private label card processing, merchant statements, training and training materials packages. They charge a fee for these services which is negotiated between the merchant and the Acquirer, and over which MasterCard has no control. This fee is typically referred to as the merchant discount because it will typically be paid in the form of a discount off the purchase price. For instance, if a $100 purchase is made at a merchant by credit card, and the merchant and the Acquirer have negotiated a 2% fee or merchant discount, the merchant will be paid $98 by the Acquirer. The Acquirer will make its profit out of the 2% ($2.00) merchant discount. As is the case with Issuers, four-party system Acquirers compete against other acquirers in the same system and against acquirers of other forms of payment.
31. The role played by the credit card system operator, such as MasterCard or Visa, is to establish, license and promote a well known brand or trademark, so that both the cards and merchant locations which accept the cards can be branded to indicate where consumers can use their cards. It is also, and fundamental, for the system operator to establish a set of rules and protocols to ensure, amongst other things, that Acquirers promptly fund merchant settlement accounts; Issuers settle with Acquirers; and Issuers treat consumers as they promise. The rules and protocols address allocation of risk for non-payment by the card holder, non-delivery of goods or supply of defective goods by the merchant, bankruptcy or insolvency of a party, management of disputed transactions, identification and resolution of instances or sources of fraud, and they ensure that fraudulent or improper transactions can be disputed, amongst other things. The system operator is, in effect, the moderator between Issuer and Acquirer to enforce the defined rules which are in place to balance the system and manage the foregoing, amongst many other things.
- 10 -32. The system operator also typically operates its own electronic system for the authorization, clearing and settlement of transactions between Issuers and Acquirers. MasterCard does so, although MasterCard Issuers and Acquirers are not obliged to use MasterCard's system and can choose to settle independently. Some do. Issuers and Acquirers choose to use MasterCard's system because it is cost effective and efficient. In the event they choose not to use MasterCard's system they clear and settle using their own internal proprietary systems, independent of MasterCard.
(d ) The Interchange Mechanism 33. One of the critical undertakings which MasterCard performs is ensuring, by its rules, that Acquirers pay merchants for goods or services a consumer purchases from the merchant, and that the Acquirer in tum is reimbursed by the Issuer. MasterCard must establish rules requiring payment of those obligations. It does not, however, require that what cardholders or merchants pay for using or accepting MasterCard cards be in any particular amount. Acquirers and Issuers are entirely free to negotiate or otherwise establish fees they charge their respective customers. Moreover, Acquirers and Issuers are free to negotiate on a bilateral basis the terms of settlement of any and all transactions that occur between them.
34. Since Acquirers must pay merchants for goods and services purchased by a consumer using a MasterCard card, they need to know they will be reimbursed by the Issuer who provided the card to the consumer and in what amount. To achieve this goal, MasterCard sets what is referred to as system default interchange fees or rates, meaning that, in the absence of a bilateral agreement between the Issuer and the Acquirer as to settlement terms, which MasterCard's rules explicitly allow, the MasterCard system default interchange rate will apply. Thus, in simple terms, the interchange fee is nothing more than the difference between the amount of the transaction and the settlement amount (what the Issuer pays the Acquirer to settle the transaction). In point of sale transactions, the interchange fee is usually a positive amount, meaning that the settlement amount is less than the transaction amount. In some cases, the interchange rate is zero (which is sometimes referred to as "at par" settlement). It can even be negative, meaning that the
- 11 -Issuer settles the transaction for more than face value (this 1s typical for ATM transactions).
35. MasterCard's rules require Issuers to settle all valid transactions that Acquirers submit. The Issuer and Acquirer each agree that they will participate in the MasterCard system and follow its rules, so even though they may have no contractual relationship between one another the Acquirer knows it will be paid and how much, and the Issuer knows how much it will have to pay. If, merely as an example, MasterCard established a system default interchange rate of 1.5% with respect to a transaction, unless the Issuer and Acquirer have otherwise agreed, then the Issuer pays the Acquirer, with respect to a $100 transaction, the amount of $98.50.
36. It is obvious that some default mechanism to permit Issuers and Acquirers to settle their transactions is required. If they have not negotiated between themselves an amount, then both parties need confidence that the transaction will be honoured at an understood rate. Given the requirement that Issuers settle all valid transactions, there must be an exchange rate at which the transactions can be settled in order for a four party system to work and, given the large number of Issuers and Acquirers, bilateral negotiations cannot be relied upon exclusively. But for the default rate, Acquirers would not be assured of the settlement level and could not commit to pay merchants a pre-agreed amount for transactions. Similarly, Issuers would not know their settlement obligation and could not determine their pricing to cardholders. Absent default interchange rates, the system would not function at all or, at best, would function at a significantly reduced level, with many fewer Issuers and Acquirers, owing to the cost of negotiating numerous bilateral agreements and the ability of large participants to take advantage of or even "freeze out" their smaller competitors.
37 . The need for default interchange fees, which the Competition Bureau has not challenged, is central to the matters in issue in this Application.
38. It is important to note that MasterCard does not receive these interchange monies. These monies are retained by the Issuer. MasterCard charges, as the Application notes, a small
- 12 amount to both Issuers and Acquirers on the value of each transaction which flows between them. MasterCard also charges a fee for use of its electronic settlement network if the Issuers and Acquirers choose to use its network, but MasterCard does not itself make any money on the interchange amounts. MasterCard maximizes its revenues and profits by maximizing the acceptance and use of its cards.
39. Given that MasterCard does not have a financial interest in receiving interchange, but does have a financial interest in the sales volume associated with transactions which are undertaken using MasterCard cards, MasterCard's financial interest, when setting system default interchange rates, is to set them in a way it believes will maximize the acceptance and use of MasterCard cards, as opposed to use of other payment mechanisms, by maximizing the value of MasterCard cards to consumers and merchants. MasterCard would gain nothing, in fact would suffer financial harm, if it were to set interchange fees too high or too low (that is, above or below the output maximizing level).
40. In setting system default interchange rates that maximize the acceptance and use of MasterCard cards and output from the MasterCard system, MasterCard must take into account that it is in competition with other general purpose credit card systems such as Visa and Amex, as well as in competition with debit payment systems (like Interac ), cheques, cash, Pay Pal, and all other forms of payment which might be used. If it sets its interchange fees too high or too low, it will lose business to its competitors.
41. This is a fundamentally important point when considering the matters in issue in this Application. The Commissioner's assertion, in its simplest form, is that MasterCard's Honour all Cards, Non-Discrimination and No Surcharge rules keep interchange rates too high. MasterCard disagrees that those rules do in fact affect Canadian interchange rates but, that issue aside, MasterCard' s goal in establishing the rate of system default interchange is to maximize output and the value of its cards to those who use them. It is illogical to assume that MasterCard would establish rules that undermine or run counter to this fundamental business objective, since to do so would diminish MasterCard's business and revenues, and the value of its cards to those who use them. A competition law challenge to conduct designed to maximize output is, to say the least, very peculiar.
- 13 -( e) The Product Market 42. The Application alleges that the relevant market is the market for "Credit Card Network Services", defined as a network that provides infrastructure and services enabling merchants to obtain authorization, clearance and settlement of transactions. MasterCard certainly provides networks, although to Issuers and Acquirers, not merchants. Credit card network services is a market which the Competition Bureau (although not the Competition Tribunal) has defined for itself in previous instances, but that is not a market relevant to determining the issues in a case such as this, in which MasterCard' s Operating Rules are designed to make it an effective competitor against all other forms of payment.
43. As to the electronic clearing and settlement network which MasterCard operates, Issuers and Acquirers may contract to obtain these network services from MasterCard, or elsewhere. As noted above, MasterCard makes its electronic network available for use by Issuers and Acquirers, but they may settle using other networks.
44. The essence of MasterCard's business is to provide a brand and a system of rules and protocols so that thousands of Issuers and Acquirers, located throughout the world, and which may have no other relationship with one another, can work together to provide an efficient, effective payment mechanism. That is the market which is relevant to this Application - the market for payment services.
45. MasterCard competes to maximize the amount of goods and services purchased on MasterCard cards, as opposed to all other methods of purchase. When a consumer is purchasing goods or services, it is MasterCard's goal that such consumer be able and wish to use her MasterCard card to do so rather than a Visa card, an Amex card, an Interac card, a cheque, cash, a store card, Pay Pal or any other form of payment. MasterCard's rules are accordingly designed to make MasterCard sufficiently attractive, to both consumers and merchants, that it will win more transactions as against all other payment forms. It is, therefore, the payments market that is relevant to this inquiry.
46. The Application seeks to distinguish credit cards from other methods of payment by noting that, for some consumers for some purchases, they seek not only a method of
- 14 -payment, but also credit. As the Application notes, some consumers, when making purchases, simply want payment services - cash, cheque, debit or credit cards, amongst others, all work well. Other consumers need not only payment services but credit services - that is, they want to borrow money for a period of time as well as effect the payment. For those consumers and with respect to those particular transactions for those consumers, a payment mechanism which offers credit facilities will be preferred for that transaction. Obvious choices therefore would be a general purpose credit card (such as MasterCard, Visa or Amex) or a store issued credit card. Other options may be a line of credit or overdraft from the consumer's financial institution, combined with payment by cash, cheque, debit or the like. In many cases this may be a more financially attractive approach for a consumer wishing to make the payment and also have credit extended.
47. No doubt there are some consumers in some situations who will find credit cards to be their preferred method of payment for some transactions, but this is not how markets are defined for competition law purposes. Markets are defined on the basis of whether there is sufficient competition across the range of demand. Clearly, MasterCard does compete across a range of demand for transactions against all forms of payment. That is what motivates and disciplines its activities, and therefore that is the proper market in which to analyze MasterCard's actions.
48. Indeed, the Application itself makes this point, arguing that MasterCard's Operating Rules prevent merchants from encouraging consumers to use lower cost methods of payment, which the Application asserts is something other than credit cards.
49. While the Application's market definition is not correct, as it fails to consider the key competitive pressures facing MasterCard, whether the market is analyzed in terms of all payment methods, or only credit card payments, or focuses very narrowly on credit card network services, it ultimately does not matter. MasterCard's Operating Rules do not constitute price maintenance, nor do they adversely affect competition, however the market is defined. What is critical, however, when examining the legitimacy of MasterCard's rules, is to recognize the market situation in which MasterCard operates, the forms of payment available to consumer and merchants, and MasterCard's need to
- 15 compete and gain acceptance both from consumers and from merchants in order to be successful.
50. In any case, and even accepting the market, as defined by the Application, as credit card network services, which is not admitted but denied, MasterCard's share of that alleged market is well below 35 percent. It does not enjoy market power in that alleged market, nor does section 76 of the Competition Act contain provisions with respect to conduct engaged in by multiple actors.
(f) Balancing the Consumer and the Merchant Demand 51. As noted above, MasterCard makes its money on the volume of commerce transacted with MasterCard cards, and therefore its financial interest is to maximize that volume. Tools which it uses to do so include having a well recognized brand, advertising and promoting that brand effectively, providing good customer service to both Issuers and Acquirers, having effective Operating Rules and providing a stable, effective, reliable network to process all transactions accurately and quickly, amongst others.
52. A key to maximizing use of MasterCard cards is to properly balance consumer and merchant demand for them. In order to be used to the maximum possible extent MasterCard cards must be widely and conveniently accepted at merchants in Canada, on the one hand, and must be widely held and used by consumers in Canada, on the other.
53. Merchants will not accept MasterCard cards unless a number of factors obtain. One is that a meaningful number of consumers must want to pay with MasterCard cards. Another is that the costs of accepting MasterCard cards must be acceptable (that is, the merchant makes more money accepting the card than not accepting the card). If very few consumers wish to pay using MasterCard cards very few merchants will be interested in accepting the card. If the costs of acceptance of MasterCard cards are too high, merchants will not accept them.
54. Looking at the other side of the coin, consumers will not acquire or use MasterCard cards unless the Issuer of the card makes it financially attractive to them, in competition with
- 16 other payment mechanisms (including rival credit cards), and unless the card is widely and conveniently accepted by merchants. If few merchants accept MasterCard cards, or if it is inconvenient or problematic to use, few, if any, consumers will wish to use their MasterCard card to pay for goods and services because it is less useful to them than other forms of payment.
55. Consequently, to be successful MasterCard has to achieve both widespread consumer demand for use of its card and widespread merchant acceptance of its card. It has to achieve and maintain an optimal balance between the two.
56. One of the principal ways MasterCard achieves this balance is by setting system default interchange at rates which allow Issuers of the card to make it attractive to consumers, and Acquirers to negotiate merchant discounts that are attractive to merchants. In other words, consumers must perceive a benefit in using MasterCard cards as compared with other cards and forms of payment and merchants must be better off accepting MasterCard cards than not accepting them.
57. This is an important and delicate balance. To undertake this balance it is necessary to recognize that not all consumers or all merchants are the same. Some consumers spend more and demand greater benefits and rewards for using their card. It should be noted that these are the consumers particularly aggressively targeted by Arnex, which tends to offer both the richest rewards in Canada and also has the highest merchant discounts in Canada.
58. These same consumers tend to spend more when they buy at merchants, and are therefore attractive customers for merchants. No doubt, all other things being equal, merchants would prefer these consumers made the same or higher level of purchases in their stores using the method of payment which costs the merchant the least. But all other things are not equal, and if high spending consumers cannot receive attractive benefits from using their MasterCard cards, they will use other methods of payment, such as Arnex, which give them more benefits and which are typically more expensive for merchants to accept;
- 17 or of course they may choose to use Visa cards, debit cards, cash or other methods of payment, particularly if they get a discount for doing so.
59. Another key issue for consumers is the ease and confidence associated with using their MasterCard card. This, like other attributes associated with the card, including payment period, interest rates, fees, rebates and rewards, is important to consumers. If they are uncertain when shopping at a merchant which displays the MasterCard logo whether their particular card will be accepted or not, or they face some sort of hassle when they present their card, they will be disinclined to use it. Similarly, if they are surcharged (that is, required to pay a charge over and above the posted price for the right to pay by card) or fear they may be surcharged when they use their MasterCard card, this will also affect their willingness to use it.
60. MasterCard, as a protection for consumers using its cards, but also for the sake of its own business in seeking to maximize the attractiveness and use of MasterCard cards, wants to minimize negatives for consumers when using MasterCard cards. That is the reason for its Honour all Cards, No Surcharge and Non-Discrimination rules.
(g) Merchant Steering and Discounting 61. Merchants who agree to accept payment by MasterCard card are, contrary to the allegations in the Application, free to effectively encourage consumers to pay for goods and services by various other payment options so long as they do not do so in ways which unduly damage or undermine the MasterCard brand proposition to consumer interests. MasterCard has never prohibited merchants from offering a discount when consumers pay by cash or cheque. MasterCard rules also permit merchants to offer a discount for any form of payment, including payment using another credit card system.
62. Merchants are entirely free to provide discounts to consumers for use of the merchant's preferred form of payment, whether that be cash, cheque, debit, other systems' credit cards or any other form of payment, and of course some merchants do so. Canadian Tire has been a leader in this, with its Canadian Tire money, for many, many years.
- 18 -63. Further, merchants are entirely free to publicize their cash discounts and their preferences as to payment. They are free to run promotions or other events to encourage use of alternative payment methods. Signage, advertising and statements such as "We prefer cash", "We prefer Interac", "We prefer Visa", "Please pay by cash/InteracNisa", "X% cash/Visa/Interac discount" are all permissible, and some merchants employ them.
64. The allegation that merchants do not have the ability to steer consumers to preferred payment methods is simply not true. Merchants just cannot surcharge consumers or engage in practices that could lead the consumer to believe that paying by MasterCard is problematic or that her MasterCard is not willingly accepted.
65. Of course, while merchants are free to offe r discounts if consumers use alternative payment methods, they may not wish to do so. While there is a cost associated with using credit cards, as with other methods of payment, credit cards bring benefits to merchants as well, including a guarantee of payment, prompt payment, no credit risk, and a consumer who may purchase more. Cash and other forms of payment come with their own costs, such as handling, depositing, shrinkage, dishonouring, counterfeiting, delays at the check-out, etc. Debit cards too have costs and, insofar as consumers use cash or debit, they may not spend as much with a particular merchant as they would using credit cards.
66. Merchants might prefer the best of both worlds. They might prefer that consumers use a credit card so the credit risk does not fall on the merchant, they have a quick efficient check-out, no risk of cash shrinkage and a maximum volume of purchases because a consumer can draw on funds he or she may not have in his or her bank account today. But, in addition to these benefits, the merchant, when it has the opportunity to do so, may wish to surcharge consumers making credit card payments, and thereby reap not only the benefits of credit card acceptance but a share of the consumers' benefit for using that payment method. This would not be fair to consumers, and is nothing less than a form of free-riding on the MasterCard system which damages the system and reduces its value for all other users.
- 19 -67. Alternatively, other merchants might wish to encourage the consumer to believe that it accepts credit cards when in fact it is reluctant to do so, and so it may advertise MasterCard card acceptance but impose a surcharge that effectively discourages use (a kind of "bait and switch"). This also unfair to consumers (if not unlawfully misleading) and is harmful to the MasterCard brand.
(h) The Operating Rules are Efficiency Enhancing and Protect Consumers - They are not Price Maintenance
68. As noted above, MasterCard's Operating Rules, and in particular its Honour all Cards, No Surcharge and Non-Discrimination rules, do not constitute price maintenance. They do not require prices, by anyone, to be maintained. They do not encourage price maintenance. They are designed to and do benefit consumers and promote competitiveness and efficiency, thereby making the MasterCard system more attractive, both to consumers and to merchants. They are also designed to expand output, and the share of total purchases made using a MasterCard card.
69. The Honour all Cards rule provides that if a merchant agrees to accept MasterCard credit cards they cannot pick and choose amongst them. This is absolutely fundamental for any payment system. Consumers need to know, if they carry a MasterCard card, that it will be honoured when they present it for payment at a merchant that advertises acceptance. From the consumer's point of view, this is one of the most important card features since having a card dishonoured is not only an embarrassment, but often a serious . . mconvemence. 70. It is also critical for the viability and efficiency of the MasterCard system that cards issued by entities such as small credit unions, foreign banks, new entrants, or competitors (a President's Choice MasterCard card used at a Sobeys's store, for instance) be honoured when presented. The MasterCard system could cease to function if Issuers and/or Acquirers were not required to honour each others' cards. The Honour all Cards rule creates value for the MasterCard brand and ensures the viability of the MasterCard system.
- 20 -71. The need for consumers to have confidence their MasterCard credit card will be honoured is true whether the issue arises at the end of a restaurant meal which has already been consumed, or midway through a shopping expedition. In either case, if they cannot use their MasterCard credit cards, consumers will have a very negative experience.
72. This is obviously bad for consumers. It is obviously equally bad for MasterCard. Not only does MasterCard lose the particular transaction, the consumer now does not have confidence that she can use her card where she thought she could. The consumer must have confidence that her card will be accepted for payment. This is its fundamental role. Without such confidence the consumer will not be inclined to make purchases using her MasterCard card. She will not be as inclined to carry a MasterCard card at all. This will fundamentally undermine consumer confidence in the payment mechanism which MasterCard offers and destroy the value of the MasterCard brand.
73. The Honour all Cards rule also promotes innovation and entry by small, new and innovative card issuers, and promotes the provision of a variety of competing card types and features. Small, new or innovative issuers who offer an attractive product to consumers would have no confidence that the card they issued to consumers would be honoured without the Honour all Cards rule. With the rule, however, those with a better consumer offering can enter into competition. Indeed, this is one of the material advantages, for competition, of a four party credit card system. It can recruit smaller innovative participants so that a novel or superior offering can start small. This is only true, however, if such entrants can be assured that their cards will be honoured when presented.
74. It is worth noting that virtually all payment systems - large or small, and with or without alleged market power - including Amex - require universal acceptance in the markets and segments in which they operate. It is also worth noting that nowhere in the world has an antitrust authority required that MasterCard repeal its rule that if a merchant accepts any MasterCard credit cards, it must accept all MasterCard credit cards. The reason, as noted above, is that the Honour all Cards rule is an efficiency enhancing and consumer protective rule which, if undermined, would not only frustrate or anger consumers, but
- 21 fundamentally undermine the effectiveness of MasterCard cards as a payment mechanism. It is not an artefact of market power.
75. With regard to the No Surcharge rule, it is on its face clearly protective of consumer interests. It prohibits the consumer being asked to pay an additional amount above the advertised or posted price for a purchase using their MasterCard card. Insofar as that would negatively affect use of MasterCard cards the rule protects the system from such II1Jury.
76. The No Surcharge rule also prevents merchants from effectively not honouring all cards, by surcharging them excessively, so it supports the Honour all Cards rule.
77. The No Surcharge rule prevents those merchants from free riding on the benefits of the MasterCard system, by extracting the value for themselves in the form of a surcharge. It also prevents bait and switch behaviour with consumers, who believe they will get the benefits associated with use of their MasterCard card, but do not.
78. The equivalent of a No Surcharge rule is found in many payment systems, large and small, with or without alleged market power. It is not a rule which results from or leads to anti-competitive conduct, but rather is driven by efficiency considerations.
79. Finally, MasterCard's Non-Discrimination rule is designed to protect the value of the MasterCard brand by prohibiting conduct that would lead a consumer to believe that the merchant is either unwilling to accept MasterCard cards despite advertising that it does accept them or that the merchant is unwilling to accept the consumer's MasterCard card. This would include behaviour that amounts to brand disparagement or that effectively prevents a consumer from using his or her MasterCard card. In effect, it is a corollary of the Honour all Cards rule.
80. The Non-Discrimination rule does not prevent merchants from encouraging the use of other payment mechanisms by offering discounts for other payment mechanisms, by signage or advertising or by otherwise communicating a preference for payment by other methods. In other words, the rule does not prohibit merchants from positively steering
- 22-consumers to other payment methods. Rather, it prevents merchants from penalizing consumers who wish to pay with a MasterCard card, or making payment with a MasterCard card difficult.
81. This rule is particularly relevant for MasterCard, by far the smaller of the two brands of general purpose credit cards in Canada, and one that relies more heavily on issuance by smaller institutions. MasterCard has every right to protect itself and its smaller issuers against merchant disparagement or discrimination that a competitor or others might wish to encourage.
(i) MasterCard is not Engaged in Price Maintenance 82. As noted above, MasterCard has absolutely no Operating Rules, or any other agreement, arrangement, or threat of any kind to maintain any other person's prices. It makes no agreement, arrangement, threat or suggestion to Acquirers as to what they charge merchants for acquiring services, and it in no way discourages or prohibits merchants from offering discounts or lowering their prices.
83. Indeed, quite the contrary. The No Surcharge rule, the principal rule in issue, expressly prohibits merchants from charging extra, but leaves them entirely free to charge less if they wish to do so. The other two rules are the Non-Discrimination rule and the Honour all Cards rule, neither of which prohibit merchants from offering lower prices. None of these rules purports to maintain prices, attempts to maintain prices or has ever before been alleged to be a price maintenance agreement. Indeed, it would be a rule which prohibited discounts, not a rule which prohibited surcharges, which might be argued to constitute price maintenance (albeit, incorrectly, given that nothing MasterCard provides is resold). But there is no such rule.
84. The Application alleges, in paragraph 69, that in the absence of MasterCard's Operating Rules, prices paid by merchants in Canada for credit card network services would have been substantially lower. MasterCard denies this, as a factual matter, but in addition it is misconceived in two respects. Firstly, merchants do not purchase credit card network services. Merchants do not purchase anything from MasterCard. Merchants purchase a
- 23 suite of acquiring services from Acquirers. Secondly, the Application does not allege that MasterCard's Operating Rules require or encourage Acquirers to maintain their price for acquiring services. Rather it is alleged that MasterCard's Operating Rules somehow protect interchange rates from being lower than they otherwise would be. Even if this were the case, and MasterCard disputes that it is, the Application entirely overlooks the two-sided nature of the payments market. To the extent any rule or practice impacts price on one side of the market, it will likely impact price on the other side as well, but in the opposite direction. Hence, if the rules somehow result in higher prices to MasterCard merchants, they necessarily imply lower prices to MasterCard cardholders. Picking winners and losers, merchants and consumers, is not the role of the Competition Act.
85. Interchange is an input cost for Acquirers. They have to pay interchange on some or all of their transactions (in some cases the Issuer and Acquirer may be the same person, in which case it is an "on us" transaction and no interchange applies), together with the other costs they incur, and they charge a price to their customers (merchants) presumably designed to cover their costs.
86. The theory articulated in the Application is that if merchants add a surcharge to MasterCard transactions, or refuse to accept some MasterCard transactions (recalling that they are entirely free to choose not to accept MasterCard transactions at all, and are entirely free to discount for transactions by other payment methods if they wish to) this would put pressure on MasterCard to lower its interchange rates in Canada, which would lower costs to Acquirers and therefore Acquirers would lower their prices to merchants. The Commissioner's argument must then also be that increasing the price of an input product constitutes price maintenance, because it will likely increase the cost of an output product. Not surprisingly, such a relationship has never been found, or even previously been alleged, to constitute price maintenance. Of course, the Application is silent on the impact surcharging would have on prices consumers pay for payment services under this theory - if it did lead to lower interchange and lower merchant prices, it would also lead to higher costs for consumer credit card holders.
- 24-87. However, MasterCard does not agree with the basic premise of the Application that surcharging or not honouring all cards would have the effect of lowering Canadian interchange rates. With respect to surcharging, MasterCard believes that the effect it would have in Canada would be to allow certain merchants to surcharge certain consumers in certain situations, to the detriment of those consumers. With respect to Honour all Cards, MasterCard believes that the repeal of this rule could fundamentally undermine, and perhaps destroy the MasterCard system. As a much smaller competitor to Visa, MasterCard is particularly vulnerable in this respect. But MasterCard does not believe these actions would have a generalized effect of lowering interchange which, as noted above, is set in an attempt to maximize the volume of transactions on MasterCard cards, and the value of MasterCard cards to their users, by balancing the system.
88. Neither does MasterCard accept the Application's assumption that employing credit cards which incur acceptance costs raises consumer prices. Firstly, all forms of payment involve a level of cost, and bring benefits. Secondly, benefits to cardholders effectively reduces their cost of purchase. This is a price reduction to them, and can also make demand facing a merchant more elastic, which would encourage the merchant to price more aggressively to profit maximize. As well, merchants who accept credit cards have determined that they are more profitable doing so than not, and if they face competitive conditions this will result in lower prices. In any case, if the Application were correct that accepting credit cards raises consumer prices with no commensurate benefit to the merchant, few merchants would elect to accept credit cards and instead would offer their products and services at lower prices and thereby win business from card accepting merchants.
89. If, however, repeal of these Operating Rules did have the effect oflowering interchange, that would result in a less efficient system and less output, because the interchange rate is now set at a rate designed to maximize output. The "success" of the Commissioner's theory would be to reduce efficiency, lessen output, and weaken competition (e.g., between four party and three party systems like Amex), which is not a proper goal of competition law.
- 25 -90. In addition to the general logical inapplicability of the price maintenance law to the conduct in issue, there is a statutory reason why the provision simply does not apply here. There is no product supplied by MasterCard which is "resold" to anyone else. The Application seeks to finesse this point by stating that "Visa and MasterCard supply Credit Card Network Services indirectly to merchants through Acquirers". But this is simply not the case. MasterCard supplies a suite of services to Acquirers including brand marketing, product development, and network/processing solutions. Acquirers supply a different suite of services to merchants, such as a guarantee of prompt payment, banking and deposit arrangements, deployment of terminals or other technology to accept card payments, implementation and project management services, customer service support, replacement of equipment, flexibility of settlement/deposit arrangements, gift card processing, rewards processing, private label card processing, merchant statements, training and training material packages. Nothing is "resold" as the statute requires.
G) There is no adverse effect on competition 91. MasterCard's Operating Rules, and in particular the Honour all Cards, No Surcharge and Non-Discrimination rules, do not constitute, in law, or under any recognized theory, price maintenance. Notwithstanding the foregoing, and assuming for the purpose of this section of the Response only, that MasterCard's Operating Rules do constitute price maintenance, which is not admitted but is expressly denied, they are still not challengeable under section 76 of the Competition Act as they do not lead to an adverse effect on competition.
92. The Commissioner must prove it is probable that MasterCard's Operating Rules constitute price maintenance, and that such price maintenance has caused, is causing or will cause an adverse effect on competition in a market. It is not possible to show this because it is not the case.
93. MasterCard's Operating Rules do not create, enhance or preserve MasterCard's market power. They do not raise barriers to entry, nor raise the cost of rivals. They are efficiency enhancing and consumer protection rules, designed to make MasterCard an
- 26 attractive form of payment and a more effective competitor. In other words, they promote competition on the merits.
94. Even if these rules have the incidental consequence of, to some minimal degree, reducing pressure merchants in Canada might put on MasterCard to reduce interchange (with which proposition MasterCard does not agree), an increase or reduction of interchange has nothing to do with the level of competition in the payments market (although it will affect MasterCard's competitiveness and efficiency). Interchange is a transfer within a two-sided market. To the extent merchants benefit from an interchange fee reduction, consumer cardholders lose. Whether as a result MasterCard is more or less competitive depends on whether its interchange fees were set at the output maximizing level before the change. But the nature or intensity of competition between MasterCard and its many competitors will be otherwise unaffected.
95. The Application examines the question entirely from the perspective of a merchant. Whether the Operating Rules keep interchange rates, and therefore, arguably, merchant discounts, higher than they would otherwise be, is not a relevant question with respect to adverse effect on competition. Such rates are not a proxy for competition, particularly in a two sided market such as that for payment services and credit cards in which the cost of the service must be shared by merchants and cardholders such that a gain to merchants is a loss to consumers. Nor is it appropriate for the Competition Bureau to substitute its judgment of the optimal level ofMasterCard's interchange fees for those of MasterCard.
96. As outlined above, MasterCard's Operating Rules are specifically designed to protect consumer interests, to increase the efficiency of the MasterCard system and to maximize use and value of MasterCard cards and maximize output. Competing to maximize output does not constitute a diminution of competition; rather, it constitutes the very essence of competition. Similarly, maximizing the efficiency of the MasterCard system constitutes competition on the merits.
- 27 -(k) The Tribunal Should Decline to Make an Order 97. Even if the Tribunal concludes that MasterCard's Operating Rules constitute pnce maintenance which has led to an adverse effect on competition, none of which is admitted by MasterCard but is expressly denied, the Tribunal should decline to make an Order in this case.
98. The Tribunal has clear discretion not to make an Order under section 76, even if it finds that the elements of price maintenance have been demonstrated. In the present case an Order ought not be made for a number reasons, including:
(a) The reasons the Operating Rules were adopted by MasterCard has nothing to do with price maintenance, rather they relate to the efficient operation of the MasterCard system and to consumer protection, and are necessary for MasterCard to remain a viable and competitive payment system.
(b) The repeal of the No Surcharge rule is unlikely to have a meaningful effect on interchange rates or merchant discounts, but it is likely to give rise to injury to the usefulness and ease of use of MasterCard cards, injury to consumers by merchants with situational market power, and a diversion of consumers to Amex and other forms of payment, if they work as envisioned in the Application. If it did have a meaningful effect on interchange rates, however, the result would be negative for consumers, for competition and for efficiency.
(c ) Repeal of the Honour all Cards rule is likely to have some of the same consequences as noted above, but would also undermine the basic effectiveness of MasterCard as a payment device, and as a result has the potential to destroy the MasterCard system.
(d) Repeal of the Non-Discrimination rule will likely have similar consequences as to do so would permit disparagement of the MasterCard brand and undermine the Honour all Cards rule.
- 28 -( e) It is fundamentally inappropriate for the Commissioner to challenge, and for the Tribunal to prohibit, MasterCard Operating Rules while its competitors, such as Amex, employ the same rules and will be competitively advantaged by the Order sought by the Commissioner.
(f) The remedy sought by the Commissioner, if the Commissioner's theory of the case is correct, would decrease the efficiency, competitiveness and value to consumers of the MasterCard network.
(g) The recently promulgated Code of Conduct for the Credit and Debit Card Industry in Canada (the "Code")," to which MasterCard subscribes, which is not yet fully in force, was designed to address the same concerns as outlined in this Application by, amongst other things, ensuring that merchants are fully aware of the costs associated with accepting credit and debit card payments and providing merchants with increased pricing flexibility to encourage the consumer to choose the lowest priced payment option. The Code does so by requiring that interchange rates be easily available to merchants, both on websites and monthly statements; requiring that merchants receive ninety (90) days notice of any increase in fees or any new fees; providing that merchants may cancel contracts without penalty when fees are increased; requiring that merchants which accept credit card payments from a particular network not be obliged to accept debit card payments from the same network; and requiring that merchants be allowed to provide differential discounting for different methods of payment among the different payment card networks, amongst other things. In other words, the Code specifically addresses the same concerns as this Application purports to address, but, despite lobbying efforts by merchants, does not challenge the Honour all Cards or No Surcharge rules. The fact that the Government specifically declined to prohibit such rules when invited to do so, preferring the approach noted above, indicates that there are good public policy reasons for not prohibiting the Honour all Cards and No Surcharge rules.
- 29 -(h) Further, the fact that the Code was not fully in force when the Commissioner brought this Application, and indeed is not yet fully in force, is evidence that any Application in this regard by the Commissioner is, amongst other things, significantly premature, since the Code has been given no opportunity to work.
99. For all of the above reasons, and even ifthe Tribunal finds that all of the elements of the price maintenance provision have been met, it should decline to make an Order in this case.
PART III - CONCLUSION 100. MasterCard's Operating Rules have been developed over time to carefully balance the various interests at play and make the MasterCard system competitive and work efficiently. They do this, and they maximize output from the system - a system which represents less than 10% of consumer payments in Canada, which no one is mandated to use, and which anyone who chooses to use does so because they believe they are better off doing so than not. Repealing these Operating Rules would damage the MasterCard system. It would decrease its output. In the case of the Honour all Cards rules, its repeal might destroy the system. In summary and in conclusion:
(a) The market in which MasterCard operates is a two-sided market, and exclusive focus on only one side, the merchant interests, results in a fundamental misunderstanding of the actual competitive dynamic.
(b) This Application and the remedies sought by the Commissioner, are favourable, if at all, only to merchants, and likely only to some merchants, not to consumers.
(c ) In fact, the remedy sought by the Commissioner would harm consumers and undermine competition.
(d ) MasterCard does not receive the interchange fees which are a focus of this Application; rather, MasterCard's financial interest is in the sales volume associated with transactions using MasterCard cards. Interchange rates are set, therefore, to maximize output.
- 30 -( e) The Honour all Cards rule about which the Application also complains is absolutely fundamental - consumers need to know that their MasterCard will be honoured when they present it for payment at a merchant that advertises acceptance. Otherwise, MasterCard loses its utility as a payment mechanism.
(f) The No Surcharge rule about which the Application further complains protects consumer interests - consumers should not be asked to pay a higher price simply because they wish to pay using their MasterCard card, and merchants should not be allowed to free-ride on the MasterCard system or use its brand to mislead consumers as to the cost of goods and services.
(g) MasterCard's business activities do not, in law, constitute resale pnce maintenance under the Competition Act because, among other reasons, no product which MasterCard provides is resold by anyone and MasterCard's rules do not establish a minimum price for any goods or services.
(h) No conduct of MasterCard has an adverse effect on competition. PART IV -CONCISE STATEMENT OF ECONOMIC THEORY 101. As set out in Schedule A hereto. PART V - RELIEF SOUGHT 102. MasterCard requests an Order dismissing this Application, with costs payable to MasterCard in an amount to be determined by the Tribunal after hearing submissions from the parties.
- 31 -PART VI - PROCEDURAL MATTERS 103. MasterCard agrees that this Application be heard in English, in the City of Ottawa. Dated at Toronto this 31st day of January, 2011. McMILLAN LLP Brookfield Place 181 Bay Street, Suite 4400 Toronto, Ontario M5J 2T3
Tel: (416) 865-7000 Fax: (4 16) 865-7048 Jeffrey B. Simpson David W. Kent James B. Musgrove Counsel to MasterCard International Incorporated
TO: DAV IES WARD PHILLIPS & VINEBERG LLP 1 First Canadian Place, 44th Floor Toronto, Ontario M5X lBl
Tel: (416) 863-0900 Fax: (416) 863-0871 Kent E. Thompson AdamFanaki Counsel to Commissioner of Competition
AND TO: DEPARTMENT OF JUSTICE CANADA Place de Portage, Phase 1 50 Victoria Street, 22nd floor Gatineau, Quebec KIA OC9
Tel: (819) 953-3903 Fax: (819) 953-9267 William J. Miller Counsel to Commissioner of Competition
- 32 -AND TO: THE REGISTRAR OF THE COMPETITION TRIBUNAL Competition Tribunal Thomas D' Arey McGee Building 90 Sparks Street, Suite 600 Ottawa, Ontario KID 5B4
AND TO: BLAKE, CASSELS & GRAYDON LLP 199 Bay Street Suite 2800, Commerce Court West Toronto, Ontario M5L 1A9
Tel: (416) 863-3735 Fax: (416) 863-2653 Robert Kwinter Counsel to Visa Canada Corporation
SCHEDULE A CONCISE STATEMENT OF ECONOMIC THEORY OF MASTERCARD INTERNATIONAL INCORPORATED
1. MasterCard has established a payment system which is employed by both Issuers and Acquirers. Issuers and Acquirers then enter into contracts with their customers, being consumers and merchants, respectively. MasterCard operates the payment system but does not supply products to either consumers or merchants. MasterCard's payment system must compete with other payment systems as well as with all other forms of payment.
2. MasterCard establishes a set of rules and protocols for Issuers and Acquirers, so that its payments system functions effectively and efficiently in competition with all other forms of payment. MasterCard's No Surcharging, Non-Discrimination and Honour all Cards rules are amongst these rules and protocols. In addition, MasterCard sets interchange fees in order to apportion the cost of the system between Issuers and Acquirers, and thereby balance consumer and merchant demand for the system. In doing so, its goal is to maximize the output of the system (that is, the acceptance and use of its credit cards).
3. MasterCard's rules and protocols are also designed to, among other things, maximize use of MasterCard cards and maximize the total value of the MasterCard payment network to its users.
4. The key economic fact in this case is that MasterCard supplies payment services in a two-sided market. In order for MasterCard to operate efficiently, both merchants and consumers must wish to, respectively, accept and use MasterCard cards and the demand from these two sets of users must be optimally balanced. Interchange is a payment made from Acquirers and Issuers. It is not a product provided to merchants, or to anyone, nor is it a payment to MasterCard. Interchange is a mechanism used to balance the demand on the two sides of the market.
5. Four party payment systems cannot internalize the price mechanisms they need to move incentives among Acquirers and Issuers so as to make the credit card optimally attractive
(ii) and balance the system. Other credit card systems that operate differently, such as Amex, internalize the effect of interchange, but achieve balance of the two sides of the market in the same broad fashion.
6. The Application entirely ignores the two-sided nature of the market in which MasterCard operates, and ignores the interests of consumers in its exclusive focus on the interests of merchants. The Application thus entirely misapprehends the nature of competition in a two-sided payment system, which requires that demand be balanced to maximize the use of the payment system.
7. Interchange is not a price, or a product. Neither "high" interchange nor "low" interchange result from market power. Interchange is a balancing mechanism. Failure to acknowledge, let alone address this fundamental reality leads to the inappropriate challenge brought by the Commissioner to MasterCard' s Operating Rules.
8. MasterCard's Operating Rules, and in particular the Honour all Cards rule and the No Surcharge rule, are designed to protect consumers from facing bait and switch tactics, and to prevent merchants, or some merchants, from free-riding. They are designed to maximize the efficiency and total value of the MasterCard payment network to both sides of the market and are, in effect, another mechanism by which consumer and merchant demand is balanced.
9. To characterize MasterCard's Operating Rules as constituting pnce maintenance is particularly odd, as the key rule in issue, the No Surcharge rule, specifically prohibits increased prices. There is no agreement, threat or promise to maintain prices charged by another person. There is no prohibition on discounting. There is no economic theory of which MasterCard is aware that would characterize any of the MasterCard Operating Rules as price maintenance.
10. MasterCard's Operating Rules are designed to maximize the efficiency and output of the MasterCard system - that is, encourage the greatest possible use of MasterCard cards to make purchases. Its Operating Rules protect the efficiency of the system and they protect consumers using MasterCard cards. They enhance output. They do not create, enhance
(iii) or preserve MasterCard's market power. Indeed, MasterCard does not enjoy market power, either in the market defined by the Application ("credit card network services"), or in the broader market for payment services, which MasterCard submits is the correct market to consider in the case. Challenging efficiency enhancing output maximizing conduct is not appropriate.
CT-2010-010 IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended;
AND IN THE MATTER OF an application by the Commissioner of Competition pursuant to section 76 of the Competition Act;
AND IN THE MATTER OF certain agreements or arrangements implemented or enforced by Visa Canada Corporation and MasterCard International Incorporated.
BETWEEN: THE COMMISSIONER OF COMPETITION Applicant
- and -VISA CANADA CORPORATION and MASTERCARD INTERNATIONAL INCORPORATED Respondents
RESPONSE OF MASTERCARD INTERNATIONAL INCORPORATED
McMILLAN LLP Brookfield Place 181 Bay Street, Suite 4400 Toronto, Ontario M5J2T3
Jeffrey B. Simpson (LSUC No. 20074C) David W. Kent (LSUC No. 23096P) James B. Musgrove (LSUC No. 26300E)
Tel.: (416) 865-7000 Fax: (4 16) 865-7048 Counsel to MasterCard International Incorporated LM - #295045v1