MASTERCARD INTERNATIONAL INC BANKING INQUIRY PRESENTATION Competition Law Analysis of the MasterCard Scheme 18 April 20

1. MASTERCARD INTERNATIONAL INC BANKING INQUIRY PRESENTATIONCompetition Law Analysis of the MasterCard Scheme18 April 2007

2. Overview • Consider application of Competition Act to the MasterCard scheme: • Whether section 4(1)(b) is applicable? • Is MasterCard an association of firms? • Technical Committee’s request to deal with joint venture argument • Key elements of section 4(1)(b) • Price-fixing jurisprudence: • the Supreme Court of Appeal’s Ansac decision • international cases • conclusion

3. Preliminary issues • Unless conduct is specifically proscribed by the law, parties are at liberty to do as they please within the confines of the law • MasterCard is of the view that interchange is not a price. However, given the fact that some competition authorities have looked at it as a price, MasterCard has decided to look at the price fixing provisions of the Competition Act

4. Section 4(1)(b) “(1) An agreement between, or concerted practice by firms, is prohibited if it is between parties in a horizontal relationship [i.e a relationship between competitors] and if- (a)…; or (b) it involves any of the following restrictive horizontal practices: (i) directly or indirectly fixing a purchase or selling price or any other trading condition (ii) dividing markets by allocating customers, suppliers, territories, or specific types of goods or services, or (iii) collusive tendering.”

5. Essential features of section 4(1)(b) • Agreement or concerted practice • Between firms or association of firms • Association of firms argument fell away following MasterCard’s IPO • This was done in part to dispel any existing regulatory perception that MasterCard was the alter ego of the banks • In a horizontal relationship (between competitors)

6. MasterCard not in a horizontal relationship • MasterCard scheme determined by MasterCard independently of banks and without any agreement between MasterCard and customer banks • MasterCard’s setting of default terms not at the instance or request of banks • MasterCard does not constitute an association of banks

7. MasterCard’s governance structure post IPO • MasterCard broadened ownership of its stock to include: • Public investors • A new MasterCard charitable foundation • Former members • Voting shares – Class A Shares: • Public Shareholders – 83% • MasterCard Foundation – 17 % • Former members – 0% • Former members hold 41% of Class B non voting shares • They also hold M class shares which give limited minority protections • No former member can hold class A shares

8. Does MasterCard compete with its customers? • MasterCard does not, at any time, compete with either issuers or acquirers • In particular, MasterCard does not: • issue cards or determine cardholder fees • acquire transactions or determine merchant fees • Some of MasterCard’s competitors are the following: • Visa, American Express, Diners Club and Bankserv

9. Absence of horizontal relationship excludes section 4(1)(b) • The absence of a horizontal relationship excludes a section 4(1)(b) inquiry • An additional argument that excludes the application of Section 4(1)(b) is the joint venture argument made below • The structure of the joint venture argument, which is supported by the Ansac decision, is in line with international jurisprudence • In particular, the structure of Section 4 is consistent with the manner in which some international cases deal with the joint venture argument, especially US cases

10. Joint venture argument: Ansac decision • The competition authorities unanimously believed that section 4(1)(b) created per se prohibitions • Accordingly, no defence was possible to a per se violation • Accordingly, the competition authorities were precluded from considering any efficiency justifications for the conduct in question

11. The Ansac decision • Confirmed that section 4(1)(b) prohibitions constitute per se violations • However, SCA held that competition authorities must still review any relevant evidence in order to characterise or determine whether the conduct in question falls within the ambit of per se prohibitions • “It does not follow that price-fixing has necessarily occurred whenever there is an arrangement between competitors that results in their goods reaching a market at a uniform price.”

12. Observations from the Ansac decision • Competitors may embark upon a legitimate joint venture without transgressing the section 4(1)(b) prohibitions even though they may fix a price • To determine whether the kind of price-fixing proscribed by the Act has occurred, it is necessary to enquire beyond the mere terms of the competitors’ arrangement • The competition authorities must distinguish, in particular, between those price-fixing arrangements that are designed to avoid competition and ancillary price-fixing arrangements which do not

13. The role of US jurisprudence in the Ansac decision • SCA’s decision seems to support the consideration of the efficiency defence in what it calls the purpose and effect analysis of the agreement in question • In particular, the SCA’s decision cites US cases in support of its conclusions • It is therefore necessary to consider some relevant US cases below

14. Broadcast Music Inc v Colombia Broadcasting System Inc (1979) • This case involved the collective licensing of music rights by the ASCAP which facilitated the creation of a product which could not be created individually by the respective authors and composers • The TV industry challenged this on the basis that it constituted price fixing • However, the court held that the blanket licences were neither “plainly anti-competitive”, nor did they “lack… any redeeming virtue”, nor were they a “naked restraint of trade with no purpose except stifling of competition”

15. BMI contd... • Consequently, the court accepted that a blanket licence was not a naked restraint but a “necessary consequence of the integration necessary to achieve these efficiencies, and a necessary consequence of an aggregate license is that its price must be established” • The court also considered that the US Department of Justice had reviewed ASCAP’s blanket licences previously and concluded that they were not per se violations of the Sherman Act • The Court accordingly concluded that: “Not all arrangements among actual or potential competitors that have an impact on price are per se violations of the Sherman Act or even unreasonable restraints… Joint ventures and other cooperative arrangements are also not usually unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all”

16. National Bancard Corporation v VISA USA, Inc (“NaBanco”)(1986) • Whether the method of setting and determining the interchange fee for transactions processed through VISA’s systems constituted prohibited price-fixing The Court followed the BMI decision and held that: • The interchange fee was a mechanism through which VISA could ensure the universality of its card • It was not a price-fixing mechanism designed to eliminate competitors • The interchange fee was “an efficiency creating agreement among members of the joint venture enterprise” (although MasterCard does not concede that post-IPO setting of interchange constitutes an “agreement” with its customers) • That the interchange fee could be viewed as an internal accounting procedure “between joint venturers that shifts a portion of the revenues from the merchant-signing member to the card-issuing member”

17. The recognition of a joint venture type arrangement • The District Court had made the following pertinent remarks: “Thus VISA is a joint venture in that term’s most meaningful sense, ie whether or not composite entities compete with one another in any meaningful sense in the marketplace under examination. Unwarranted emphasis on the formalistic aspects of the relationship of VISA and its members institutions ignores the subtle but more significant interdependency of the members and their indivisibility with VISA” • The Court of Appeals also accepted that the evidence established that: “VISA is a joint venture type enterprise in which the [interchange fee] acts as an internal control mechanism that yields pro-competitive efficiencies that its members could not create acting alone, and helpscreate a product that its members could not produce singly…”

18. Additional factors flowing from NaBanco • The following additional factors may be considered by the competition authorities in characterising conduct under section 4(1)(b): • whether, as well as being necessary to market the joint venture, the conduct allows the joint venture to be an effective competitor • whether the conduct potentially creates efficiency-enhancing integration such that it produces a product which none of its members could produce individually • whether the joint venture members share profits or losses, or co-mingles any of its management functions whether the interchange fee is mandatory or may be bypassed through bilateral negotiations between issuing and acquiring banks

19. The European Commission’s decision in Visa: Multilateral Interchange Fee (2002) • Default interchange fee exempted under Article 81(3) of the EC Treaty • Payment card schemes represent considerable economic and technical progress • Interchange is designed to ensure that there is maximum use of the Visa system • Default interchange fee more efficient than bilateral agreements between banks • Interchange fee does not eliminate competition between issuers or between acquirers

20. Texaco Inc v Dagher et al (2006) • Texaco Inc and Shell Oil Co had formed a joint venture whereby the joint venture set a single price for both brands • The question before the Supreme Court was whether the joint determination of price for the joint venture was per se illegal • The court was of the view that the price fixing that occurred was not “price fixing in the antitrust sense” • It therefore reinforced the view that the pricing decisions of a legitimate joint venture are not per se unlawful • This decision is similar to Ansac

21. Conclusion • MasterCard is not in a horizontal space with its customers and its scheme is therefore not subject to the Competition Act’s prohibitions set out in section 4(1)(b) • In addition, its scheme is a legitimate joint venture that entitles it to set interchange fees for the success of the joint venture • The setting of default terms is not anti-competitive, but pro-competitive • This characterisation is envisaged by the SCA’s Ansac decision • The US jurisprudence from which Ansac draws inspiration supports the conclusion that the setting of default terms is a legitimate joint venture type activity