Visa U.S.A., MasterCard, Discover, and American Express (Amex) are the four major network systems in the U.S. payment card industry. Visa and MasterCard are organized as open joint membership associations, owned by numerous banks and other financial institutions (“banks”) that are members of the networks; MasterCard is owned by approximately 20,000 member banks, and Visa is owned by approximately 14,000 member banks. Because Master- Card and Visa each allow their members to issue the other’s cards, many banks are members of both networks. While the member banks engage in the card business for profit, MasterCard and Visa operate as nonprofit organizations and are largely funded through service and transaction fees paid by their members. Both make a “profit” on those fees, but their business model does not strive to maximize earnings at the “network” level. Instead, the two organizations’ capital surpluses are held as security accounts to pay merchants in the event that a member defaults on a payment obligation. Member banks function as “issuers” or “acquirers” or both. An “issuer” bank issues cards to cardholders and serves as the liaison between the network and the individual cardholder. An “acquirer” bank acquires the card-paid transactions of a merchant and acts as a liaison between the network and those merchants.

When a consumer uses a Visa card or a MasterCard to pay for goods or services, the accepting merchant relays the transaction information to the acquirer bank with which it has contracted. The acquirer bank processes and packages that information and transmits it to the network (Visa or MasterCard). The network then relays the transaction information to the cardholder’s issuing bank, which approves the transaction if the cardholder has a sufficient credit line. Approval is sent by the issuer to the acquirer, which relays it to the merchant. American Express and Discover are not joint membership associations; each is a vertically integrated, for- profit entity that combines issuing, acquiring, and network functions. Amex and Discover deal directly with consumers (by issuing cards) and with merchants (by acquiring and processing transactions). When a consumer makes a purchase with an Amex card, for example, the merchant contacts Amex directly, and if the customer has sufficient credit available, Amex approves the sale. Amex then pays the merchant directly while retaining a percentage— usually 2.73 percent.

Competition in the payment card industry takes place at the “network” level, as well as at the “issuing” and “acquiring” levels. At the network level, the four brands compete with each other to establish brand loyalty in favor of Visa, MasterCard, Amex, or Discover. At the issuing level, approximately 20,000 banks that issue Visa and MasterCard cards to customers compete with each other and with Amex and Discover. Unlike the network services market, which has only four major participants, approximately 20,000 entities compete for customers in the issuing market, and no single participant is dominant, although Amex is the largest single card issuer, and Discover is the fifth largest card issuer in the United States, measured by transaction volume. The other large issuers are member banks in the Visa and MasterCard networks.

Beginning in 1995, Amex sought to change its structure by soliciting banks to issue American Express cards. This effort was successful outside the continental United States and abroad, where banks such as Puerto Rico’s Banco Popular began issuing Amex-branded cards. In the continental United States, however, Amex was unsuccessful because of MasterCard and Visa “exclusivity” rules that prohibited their members from issuing American Express or Discover cards. Do these exclusivity rules violate antitrust law? Assuming the answer is yes, what entities could file an antitrust action against Visa and MasterCard? Would the exclusivity rules be analyzed under the per se rule or the rule of reason? Assuming that the rule of reason applies, what arguments could Visa and MasterCard make that the rules are procompetitive? What arguments can the plaintiff make that the rules are anticompetitive? [United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), cert. denied, 543 U.S. 811 (2004).]