Documentation

THE COMPETITION TRIBUNAL

IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended; IN THE MATTER OF an application by the Commissioner of Competition pursuant to section 76 of the Competition Act;

IN THE MATTER OF certain agreements or arrangements implemented or enforced by Visa Canada Corporation and MasterCard International Incorporated.

B E T W E E N : THE COMMISSIONER OF COMPETITION Applicant - and -

VISA CANADA CORPORATION and MASTERCARD INTERNATIONAL INCORPORATED

Respondents

RESPONSE OF VISA CANADA CORPORATION PART I – OVERVIEW 1. In reliance on section 76 of the Competition Act, the Commissioner of Competition seeks an order prohibiting Visa Canada Corporation (“Visa Canada”) from, inter alia, continuing to implement rules—fundamental to the operation of the Visa business—that prohibit merchants that elect to accept Visa cards from applying a surcharge to customers who pay with a Visa-branded credit card and require merchants that elect to accept Visa branded credit cards to honour all Visa-branded credit cards presented for payment. These rules (collectively, the “Visa Rules”) are pro-consumer and pro-competitive. Section 76 simply has no application to the Visa Rules. Visa Canada does not sell any product to any person or party for resale. The Visa Rules do not by agreement, threat, promise or other like means influence upward or discourage the reduction of the price at which another person supplies, offers to supply or advertises a product. In any event, the Visa Rules have not had, do not have and are not likely to have, an adverse effect on competition in a market. 2. The Commissioner’s Notice of Application (“the Application”) mischaracterizes the nature and purpose of the Visa Rules and the manner in which competition within the Canadian payments

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industry takes place, using self-serving terminology in an attempt to bring the Visa Rules within the purview of section 76. The Application contorts the text and disregards the purpose of section 76. Moreover, by ignoring the two-sided nature of the market in which Visa Canada operates, the Commissioner focuses only on demand for acceptance of Visa cards (ignoring demand for the issuance of Visa cards) and incorrectly argues that the rules restrain competition. 3. The Visa Rules are not “merchant restraints”, as the Commissioner coins them; they are pro-competitive rules that protect Visa cardholders from being subjected to an unexpected surcharge or card decline at the point-of-sale (e.g., a bait and switch). The No Surcharge Rule (“NSR”) prohibits merchants from charging Visa cardholders more, not less, than the advertised price for products when they pay for their purchases using a Visa-branded credit card (“Visa Card”), the opposite of price maintenance. The Honour All Cards Rule (“HACR”) protects cardholders' interests by ensuring that they can use their Visa Card wherever the Visa logo is displayed and promotes competition between and among issuing financial institutions. By protecting the interests of Visa cardholders, the Visa Rules enhance the Visa network for the benefit of all network participants, including merchants, by maximizing output (the volume of transactions), and thus enhancing efficiencies on the network. 4. Although the Commissioner also seeks an order generally prohibiting Visa Canada from impeding or limiting the ability of merchants to engage in any practice that discriminates against or discourages the use of a particular credit card or any other method of payment, Visa Canada has no such rule. Merchants have the ability to decide whether or not they wish to participate in the Visa system by accepting Visa Cards, and many merchants have exercised their option not to participate. Visa Canada denies that steering consumers to other forms of payment will have any effect on the price that acquirers may charge merchants. In any event, the Visa Rules do not impede or constrain the ability of merchants who accept Visa Cards to encourage their customers, by a variety of means including the provision of a discount, to use other forms of payment to complete their purchases, including different types or brands of credit cards, debit, cheques or cash. Merchants can, and do, advertise and charge different prices depending on the method of payment. The Commissioner’s 2

theory of competitive harm is misguided as a matter of law and economics, and is unfounded on the facts. PART II - CONCISE STATEMENT OF GROUNDS UPON WHICH VISA CANADA OPPOSES THE APPLICATION

5. Visa Canada opposes the Application on three principal grounds. 6. First, although paragraph 76(1)(a) of the Act requires that the product sold by a person described in subsection 76(3) be resold by another person, Visa Canada does not sell any product identified by the Commissioner to a customer or any other person for resale or otherwise. Rather, the products (services) that Visa Canada sells to its customers, acquiring financial institutions ("Acquirers") and card issuing financial institutions ("Issuers"), are different from the products (services) that Acquirers sell to their customers, retailers or merchants. Paragraph 76(1)(a) is not engaged by the facts as alleged by the Commissioner. 7. Second, in the alternative, the Visa Rules do not, by agreement, threat, promise or any like means, influence upward or discourage the reduction of the price at which another person sells a product in Canada. The Visa Rules impose no constraints or restraints on the price that Acquirers charge merchants for their services, nor do the Visa Rules influence upward or discourage the reduction of the price at which merchants sell products to their customers. 8. Third, in the further alternative, the Visa Rules have not had, do not have, and are not likely to have an adverse effect on competition in any market. PART III - RESPONSE TO GROUNDS AND MATERIAL FACTS SET OUT IN THE APPLICATION 9. Visa Canada denies each and every allegation in the Commissioner’s Statement of Grounds and Material Facts and puts the Commissioner to the strict proof thereof, except as expressly admitted herein.

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PART IV - STATEMENT OF MATERIAL FACTS UPON WHICH VISA CANADA RELIES A. Visa Canada 10. Visa Canada is an unlimited liability company formed by amalgamation under the laws of Nova Scotia pursuant to the Companies Act, R.S.N.S. 1989, c.81 as amended, with offices in Toronto, Ontario. It is a subsidiary of Visa Inc., a Delaware corporation with its principal place of business in San Francisco, California. 11. Visa Canada is not a financial institution. Unlike financial institutions, Visa Canada does not issue credit cards, extend credit, or set fees for merchants or consumers. Visa Canada does not charge merchants fees and derives absolutely no revenue from the interchange fees exchanged between Issuers and Acquirers. Rather, Visa Canada’s principal source of revenue is fees paid by its financial institution customers—Issuers and Acquirers—with which it contracts for use of the “VISA” brand, authorization, clearing and settlement of transactions over the Visa network and related services which Visa Canada provides to them. As such, Visa Canada’s revenue is primarily derived from the volume and dollar value of payment transactions that occur over the Visa network. B. Industry Background (i) Credit Cards 12. Visa Canada is in general agreement with the description of the credit card industry set out in paragraphs 21, 22, 24, 25, 26 and 28 of the Application. However, credit cards compete with all forms of payment including, but not limited to, card-based forms of payment, including credit cards, charge cards, debit cards, prepaid cards, merchant charge accounts and private label cards; paper-based forms of payment, including cash, personal cheques, government cheques, travellers cheques, and money orders; mobile forms of payments, including payments through text messaging, mobile applications, and web browsers; and other electronic forms of payment not typically tied to a payment card or similar device, including online payment services, wire transfers and electronic benefits transfers. Visa Canada estimates that transactions over the Visa network account for only 4

approximately 18 percent of consumer spending in Canada and less than one percent of business-to-business spending in Canada. (ii) Processing of Credit Card Transactions 13. Visa Canada fundamentally disagrees with the Commissioner’s description of the products and services supplied by Visa Canada and the fees associated with those services. 14. Visa Canada operates an electronic payment system network in Canada (the “Visa Network”) and provides a range of services to the Issuers and Acquirers with whom it contracts (“Visa Network Services”). In operating its electronic payment system network Visa Canada maintains a set of operating rules to ensure that the payment system is able to perform its core functions efficiently and effectively. These protocols address, among other things, prompt funding for settlement, risk of non-payment, transaction disputes, and fraud identification. 15. Visa Canada provides authorization, clearing and settlement services to Issuers and Acquirers over the Visa Network. “Authorization” involves obtaining confirmation for the Acquirer that the Issuer approves the transaction initiated by the cardholder’s presentation of a Visa Card for payment. The transmittal of transaction information from the Acquirer to the Issuer and back to the Acquirer occurs over the Visa Network. 16. “Clearing and settlement” involve the calculation of fees and amount owed for a transaction and calculation of the net position of financial institutions for all transactions processed over the Visa Network over a period of time. The Acquirer transmits the transaction data over the Visa Network, which is routed to the Issuer, and the Issuer transfers the funds over the Visa Network to the Acquirer. Funds are not transferred for each transaction. At the end of the day, the settlement process determines the net position of all financial institution clients. Authorization, clearing and settlement are services provided by Visa Canada to Issuers and Acquirers; they are not services provided by Visa Canada to merchants or by Acquirers to merchants.

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17. Acquirers, in competition with one another, provide an array of services to merchants (either directly or through agent processors) (“Merchant Services”) including the sale, lease, deployment and servicing of point-of-sale hardware and software, the submission of transactions for settlement, the preparation of statements or reports, the processing of charge-backs and other exception items, the provision of customer service to merchants, and the assurance to merchants that they will receive payment in respect of the payment card transactions they accept. Acquirers charge merchants a fee for the services they provide (“Merchant Service Fees”). 18. Issuers market and issue Visa Cards to cardholders and manage the relationship with cardholders including the provision of credit, cardholder benefits and monthly statements (“Issuer Services”). In addition to the provision of cardholder benefits, the arrangements between Issuers and cardholders include provisions for bill payment, credit limits, the provision of a grace period, minimum payment amount, the interest rate applicable to unpaid amounts, and cardholder fees (if any). Issuers, in competition with one another, offer cardholders different benefits, service levels, interest rates, fees and other features through the issuance of different types of cards. Issuers bear the risk of the payment of credit card charges incurred by cardholders. Other key functions provided by Issuers include the resolution of charge-backs, and protection and replacement for lost cards. 19. Issuers and Acquirers provide their services to cardholders and merchants, respectively, pursuant to contractual arrangements to which Visa Canada is not a party. 20. Visa Canada does not agree with the description of a typical credit card transaction set out in paragraph 39 of the Application, except to the extent that the diagram demonstrates that Acquirers provide a set of Merchant Services to merchants that are separate and distinct from the Visa Network Services that Visa Canada provides to Issuers and Acquirers. 21. At paragraph 11 of the Application, the Commissioner makes much of the difference between the cost of accepting credit cards for payment as compared with the costs associated with other forms of payment. The existence and magnitude of any cost difference would reflect the 6

different value that market participants place on these forms of payment in light of the differences in their respective features, some of which the Commissioner identifies (the Commissioner goes so far as to contend that credit cards are in a separate market from other forms of payment). In any event, even assuming such cost differences exist, they raise no issue under section 76 of the Act. Moreover, any such differences do not suggest that credit cards are not part of the same relevant market as other payment methods. 22. As with other tax-deductible costs that merchants incur in the operation of their businesses (e.g., the costs of goods, rent, labour, advertising, etc.), costs for Merchant Services presumably have to be covered in the prices that merchants charge if they hope to make a profit (although as discussed below, that does not mean that Merchant Service Fees increase prices for consumers). In respect of all such expenses, each merchant must decide whether the benefits outweigh the costs and whether the expense will ultimately contribute to the overall success and profitability of the merchant’s business. Contrary to the Commissioner’s assertion, for example in paragraph 84 of the Application, merchants are free to elect not to accept credit cards generally, or Visa Cards in particular, and many merchants do so. The fact that many (but by no means all) merchants accept credit cards (including Visa Cards) speaks to the fact that, for those merchants, the benefits of doing so outweigh the costs. 23. At paragraph 5 of the Commissioner's Concise Statement of Economic Theory, the Commissioner contends that "the use by a merchant's customer of other methods of payment, such as cash or debit, usually results in lower costs for the merchant." However, other forms of payment (such as cash, cheques, debit or other methods of payment) are not necessarily “lower cost” forms of payment (for the merchant alone, leaving aside the cardholder) as compared to Visa Cards, when the benefits to merchants of accepting Visa Cards (e.g., increased sales, the ability to extend immediate credit for a purchase, guarantee of payment, etc.) are taken into account. In addition, other forms of payment have costs associated with them that credit cards do not, for instance, collection costs involved with cheques, risk of cheque fraud, cost of cash theft and personnel costs 7

in counting and accounting for cash. 24. The Commissioner also suggests that it is a cause for concern that the costs for Merchant Services are typically passed on by merchants to all customers, even those who use other forms of payment (for example, in paragraph 4 of the Application). There is no requirement of law, policy or commercial practice that the costs associated with any particular Merchant Service be borne only by a certain subset of customers. For example, merchant costs of providing free parking are “passed on” to all consumers, even those that take public transportation. The costs associated with accepting cash for payment—including security expenses, slower checkout lines (and thus greater labour expense) and loss from theft—are “passed on” to consumers that pay for goods with a credit card. In any event, whether the costs associated with accepting credit cards are borne by some customers and not others raises no issue and is irrelevant to the application of section 76 in this matter. 25. Contrary to the Commissioner's assertion at paragraph 4 of the Application, it is also incorrect to assume that costs for payment card acceptance translate into higher prices for consumers. The services provided by payment networks expand output and facilitate competition among retailers, thereby leading to increased inter-merchant competition which helps lower prices for consumers. (iii) Visa Canada Operates in a Two-Sided Market 26. The Commissioner’s description of the credit card industry ignores a fundamental aspect of the manner in which credit card payment systems operate: they operate in a two-sided market. The existence of the Visa Network depends on a sufficient number of cardholders who use Visa Cards and a sufficient number of merchants who will accept them. Unlike a traditional one-sided market, where the supplier need only concern itself with demand from a single customer group, Visa Canada must meet the demands of both sets of its customers (Issuers and Acquirers) on either side of the market in order to succeed. For the Visa Network to operate effectively, Visa Canada must offer Issuers sufficient incentives to provide Visa Cards to consumers and encourage cardholders to 8

decide to use them at the point-of-sale, and it must offer Acquirers sufficient incentives to negotiate with and enlist merchants who will accept Visa Cards. Simply stated, merchants will not accept a credit card unless there are enough cardholders who use it and consumers will not use a credit card unless there are enough merchants who accept it. 27. The two-sided nature of the market in which Visa Canada operates is key to understanding the role that interchange plays in the Visa payment system. Visa sets and makes available a set of default interchange rates for use by Acquirers and Issuers within the Visa system. On a typical purchase transaction, interchange flows from Acquirers to Issuers, reflecting the value that Issuers provide. On credit transaction cash advances, interchange flows the other way, from Issuers to Acquirers. 28. As already stated, Visa earns its revenue primarily from Visa Network Service Fees paid by Issuers and Acquirers, based on the number and value of transactions over the Visa Network. Visa Canada does not derive any revenue from interchange fees; it seeks to enhance its revenue by promoting increased system volume. Visa Canada promotes volume growth through a wide range of activities, including by setting default interchange rates that provide incentives for Issuers to issue Visa Cards to cardholders and for Acquirers to encourage their merchants to accept them. Where lower interchange fees would lead to increased merchant acceptance without reducing card issuance and cardholder usage, Visa Canada has every incentive to suggest lower default interchange rates as this would maximize system volume and thus Visa Canada’s revenues. 29. Interchange is not a “price” that Visa Canada has any commercial interest in seeking to maximize; rather, interchange is a tool that Visa Canada uses to balance demand on both sides of the two-sided market in which it operates in order to maximize overall system output and the efficiencies resulting therefrom. Visa's interest in setting default interchange rates is to maintain the balance of the system. If interchange rates are set too high, merchants will stop accepting cards. If interchange rates are set too low, Issuers will be undercompensated for the value they deliver to

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their cardholders, and the features that attract cardholders will be diminished. This in turn reduces cardholder participation and the value of Visa to merchants. 30. When setting default interchange rates, Visa considers a host of factors and sets rates to help promote overall system growth and growth in specific payment segments, and to reflect the value delivered to retailers and cardholders by payment type. Although under the terms of the Visa Operating Regulations, Issuers and Acquirers are free to negotiate bilateral interchange rates, it is considerably more efficient from a system output and system management perspective for Issuers and Acquirers to adhere to the default interchange rate. Where the Issuer and the Acquirer are part of the same corporate entity (or are otherwise related through ownership interests), the default interchange rate is economically irrelevant to the Issuer and Acquirer. This applies in respect of approximately 15 percent of the volume of transactions for which a Visa Card is used. There is nothing in Visa Canada’s contractual relationship with Acquirers that requires them to reflect the default interchange rate in any particular way in the fees that Acquirers negotiate with merchants for Merchant Services. 31. In further recognition of the value of the Visa payment system, a number of merchants have elected to participate in the Visa system by not only accepting Visa Cards, but also jointly issuing with an Issuer a "co-branded" Visa Card. With a typical co-branded card, the merchant shares (along with the Issuer) in the revenue generated by use of the co-branded card. Cardholder benefits associated with co-branded cards may relate to benefits for general usage (e.g., points, miles or cash back) and/or rewards or other benefits associated with doing business with the merchant whose brand appears on the card. Such benefits may be used by merchants as an incentive to shop at their store or to drive repeat sales. C. The Visa Rules 32. The Visa Rules are part of Visa’s Operating Regulations, which are a comprehensive set of rules that govern Visa Canada’s relationships on an international and regional basis with its 10

customers: Issuers and Acquirers. Visa’s Operating Regulations establish a consistent operating framework designed to promote the efficient and effective operation of the Visa Network with a view to ensuring that cardholders and merchants experience a common, convenient, safe and reliable payment experience on a global basis. As such, Visa’s Operating Regulations require Acquirers to obtain merchants’ agreement to abide by the Visa Rules (among others) in their contracts. 33. Both the NSR and the HACR have existed as integral aspects of the Visa payment system since its inception over 40 years ago. The NSR and HACR have existed in Canada since the introduction of the Visa payment system to Canada over 30 years ago. (i) The NSR 34. The NSR states as follows: Visa Merchants agree to accept Visa cards for payment of goods or services without charging any amount over the advertised price as a condition of Visa card acceptance, unless local law requires that Merchants be permitted to engage in such practice.

35. Among its other benefits, the NSR protects consumers by requiring the price at checkout to be no greater than the advertised price while permitting merchants to advertise and charge different prices depending on the method of payment, or otherwise persuading consumers to use other brands or types of credit cards or other forms of payment. The NSR (and the HACR) also lead cardholders to approach Visa-accepting merchants with their cards in hand, with the knowledge that that merchant represents a viable provider of the goods or services they seek to purchase. 36. Surcharging would result in harm to both cardholders who face the charge (in the form of unexpected higher prices) and to the Visa Network and its stakeholders (including merchants) by reducing issuance, acceptance, and use of Visa Cards. As outlined above, given the two-sided nature of payment networks, any detrimental effect on the issuing side has a detrimental effect on the acquiring side. As such, the NSR benefits cardholders, which in turn benefits merchants. In addition, the NSR protects the integrity of the Visa brand for the benefit of all stakeholders of the

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Visa Network. (ii) The HACR 37. The HACR provides as follows in respect of Visa Cards: Visa Merchants may not refuse to accept a Visa product that is properly presented for payment, for example, on the basis that the card is foreign-issued, or co-branded with a competitor’s mark. Merchants may steer customers to an alternative method of payment, such as providing discounts for cash, but may not do so in a confusing manner that denies consumer choice. Merchants may decline to accept a Visa product that is not covered by their acceptance contract, and may also consider whether present circumstances create undue risk.