Competition Policy and Platform Industries
IDEI, 30 June 2006
Tom Brown
Interchange Redux—A U.S. Perspective
Does Interchange Raise A §1 Issue?
Do not assume that the answer is yes
• Typically invoke §1 given strong prior beliefs about
behavior in the absence of the alleged restraint
– Think a price fix between two competing retailers
– Absent the restraint they set the price dictated by local demand
• No such belief here
– What does a world without interchange look like?
– Don’t bother asking the plaintiffs (their lawyers or their
economists)
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Australian Regulatory Prescription
October 2003
All systems must permit surcharging.
Associations must admit specialized lenders.
Associations must reduce rates ~95 bp to ~55 bp.
Amex and Diner’s can charge whatever they want.
February 2005
Visa must eliminate HAC as to debit and credit.
Visa’s debit IRF may not exceed RBA benchmark.
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Laws Of Nature Still Apply
Every action produces an equal and opposite reaction
Associations disadvantaged
Amex, Diner’s advantaged
Concentrated energy tends to disperse
Cardholder prices increase
Merchants’ costs decline
Issuer revenue decreases
Retail prices unchanged
Merchants’ costs decline
Retailers report higher profits
4
Merchants Are Paying Less Today
At current volumes, RBA has reduced blended cost of acceptance
3.0%
2.5%
2.0%
% MDR
Pre
Post
1.5%
1.0%
Pre
Pre
Post
Post
0.5%
0.0%
Visa et al.
Source: Visa US Analysis; Visa Interchange Group
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Amex et al.
Weighted
No Free Lunch
Merchants’ gain comes at cardholders’ and issuers’ expense
AU$ Millions
$500
$400
$492M
$344M
$295M
$148M
$197M
First Estimate of
Loss Share (Q1 2003)
Second Estimate of
Loss Share (Q1 2004)
$300
$200
$100
$0
Merchant Gain
Cardholder Loss
Source: Chang, et al., Economic Effects of RBA Regulation, 2005.
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Issuer loss
Business Is Shifting
Amex and Diner’s volume has increased 20%
Open Share
Closed Share
89
19
88
18
87
17
86
Open
16
85
15
84
14
83
82
Closed
13
Rate caps
effective
12
81
Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04
Source: Chang, et al., Economic Effects of RBA Regulation, 2005.
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11
Oct-04 Feb-05 Jun-05
Driving Product Innovation
Higher interchange increased competition, lowering merchant costs
US Commercial Product Volume by Network, 1993-2004
$Billions
MDR/IRF Rate
300
3.00%
250
2.50%
200
2.00%
150
1.50%
American Express (CAGR 9.8%)
Visa (CAGR 36.7%)
100
1.00%
50
0.50%
0
0.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
1: Worldwide discount rate Note: 1993-1995 are estimates based on Visa internal analysis
Source: Visa US PIC Analysis; Visa Interchange Group
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2003
2004
These slides do not represent legal advice, and they do not offer
anyone’s views on this subject but my own.
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