Payment cards have antitrust issues concerning issuance and governance by the government. Visa and MasterCard play an essential role in facilitating the smooth economic flow of money. The antitrust division of the U.S. Department of Justice (DOJ) introduced a lawsuit against Visa and MasterCard networks in 1998, claiming that the issuance and governance of the payment card network were uncompetitive. The DOJ won the issuance restriction but failed in governance. The issuers of Visa and MasterCard insisted that the practice is pro-competitive and beneficial to both banks and individuals. Commercial banks operate multiple networks to cater for diverse customers participating in banking activities. This is a summary of how payment cards operate, with regards to Visa and MasterCard associations.
The payment cards offered by banks are categorized into charge, debit, and credit cards, where they act as payment mechanisms. The use of a payment card depends on whether the receiving merchant accepts payments from the card network. A charge card performs payments that do not include ancillary services such as rental car and travel insurance expenditures. The American Express charge card has been used to pay for purchases without credit. The credit card is used to make payments and borrow money at the same time. The card users borrow money repeatedly while enjoying set borrowing limits, mainly determined by the user’s creditworthiness. A debit card is usually linked to a cardholder’s checking account from which payments and purchases are made. The costs incurred when paying through a debit card are debited into the bank account linked to the card. An example of a debit card is the ATM used to make payments by swiping through a reader. The use of debit cards in the USA has significantly increased, with sources indicating an annual growth rate of 21 percent in 2006. The cards must contain a logo that identifies the network in use.
Payment networks consist of users, merchants receiving money, processing systems, and governing policies. A network is considered a two-sided platform involving cardholders and merchants who impact its size. The acceptance by merchants significantly influences the number of users who register network cards, causing expansion challenges in other regions of the world. The activities performed in a transaction network include cards issuance, registration, and transactions processing. The closure and opening affect processes in a way that any bank willing to operate in the network must abide by the rules and policies. Both Visa and MasterCard foundations are open, allowing any bank to join, as long as it is willing to cooperate and comply with the network’s standards. The banks benefit from annual fees charged to card users and transaction fees.
In a purchase transaction, the receiving merchant takes about 98 percent of the total amount. The rest is the merchant’s discount, which includes the fee charged by the network and interchange fees paid to the acquiring and issuing banks. The interchange charges are meant to offset the risks of processing payments. Many banks worldwide operate with both Visa and MasterCard, resulting in overlapping governance caused by membership overlap, commonly known as duality. The issuance and governance dualities refer to the provision of both Visa and MasterCard and shared governance for both associations. The DOJ was interested in governance duality, addressing issues such as the need for networks, redundancy, and the consequences of eliminating one network. The U.S. government claimed that the governance duality causes harm to users by reducing competition intensity between Visa and MasterCard.
The competition between payment networks is assessed through merchant discount, advertising, and innovative capabilities. The objective behind the competition is network expansion and broader usage of cards. Payment organizations promote expansion through incentive interchanges, discounts, and promotional programs. The anti-competitive impacts of issuance restrictions led to reduced diversification of products offerings and networks, therefore reducing consumer welfare. Another anti-competitive effect is the limited ability to issue offline debit cards. The pro-competitive effects include free-riding by members. The court defined that the exclusionary rules restrict competition between payment networks, therefore harming card users by denying them exposure to innovative and a variety of products. The court order required Visa’s Bylaw 2.10 (e) and MasterCard’s competitive programs policy to be repealed and enjoined further prohibitions by issuers’ ability to issue payment cards on other networks.
The regulation of money transfers between individuals and organizations is regulated by payment networks through performing economic transactions. Visa and MasterCard foundations are the world’s leading networks in money transfer. Commercial banks issue payment cards to account holders to facilitate convenience in money transfers. The court ruled that Visa and MasterCard associations must retain duality and remove issuance restrictions because they were anti-competitive in money transfer. The use of payment cards has increased worldwide, resulting in the emergence of other networks such as American Express. People often use bank cards to avoid carrying cash and to transact internationally. The differences between networks include transaction charges, time convenience, and operating merchants. Government regulations are necessary to protect customers from exploitation and to control the bank operations.