On 4 February 2013, the Australian Competition and Consumer Commission (ACCC) commenced proceedings in the Federal Court of Australia against Visa Inc, and a number of Visa affiliates (together, Visa), alleging contraventions of the Competition and Consumer Act 2010 (Cth) (the Act) in relation to dynamic currency conversion services (DCC). Visa is no stranger to litigation by competition authorities but this one is a little different.
Payment card systems
Payment cards are used to pay a merchant (usually a retailer) for goods or services or to obtain cash from a bank counter or automated teller machine (ATM).
Four parties are normally involved when a credit card is used: the cardholder, the issuing bank (which issues a card to the cardholder), the merchant and the acquiring bank (which has acquired the merchant for acceptance of the card of a certain brand).
Competition cases in this sector have distinguished a market for the provision of services by payment card networks to financial institutions – for example, authorisation routing, currency conversion, clearing, risk management and settlement. At this level, competition takes place between different payment card schemes, which could be classified as “inter-system” competition. Downstream, two further markets have been distinguished, in which competition takes place among (1) issuing banks or financial institutions, providing services to cardholders; and (2) acquiring banks or financial institutions, providing services to merchants. These latter two markets exhibit “intra-system” competition.
DCC allows purchasers paying by card in a foreign currency to have the cost of transactions converted to, and shown in, their home currency at the point of sale or at an ATM.
The chief advantages of DCC for consumers are: (1) the ability to view and understand pricing in foreign countries relative to their home currency; (2) the exchange rate is locked in and disclosed to the cardholder at the point of sale at the time the transaction takes place, providing additional certainty as to the exchange rate applied and reducing the risk of subsequent (upward) exchange rate trends; and (3) DCC is thought to simplify business travellers’ expense accounting.
However, DCC transactions do tend to attract a less favourable exchange rate at the point of sale than transactions entered into in local currencies and then subsequently converted “back-office” by payment card networks. The foreign exchange margin can also be applied at a varying rate, depending on the credit card company, DCC provider, payment gateway or merchant, and the DCC charge accrues in addition to any conversion fee or commission.
DCC services appear to fall outside the markets and issues identified in previous payment card network cases, which have focused on back-office currency conversion fees set by payment card network operators and issuing banks (see, for example, the Ross and In re Currency Conversion cases), rules for the admission of acquiring banks to payment card networks (see the Morgan Stanley decision) and multilateral setting of various components of so-called merchant service charges by card payment card network operators and financial institutions (see the Visa MIF decision).
The ACCC’s case
The ACCC’s originating application alleges contraventions of sections 46 and 47 of the Act, respectively relating to misuses of market power for anticompetitive purposes and exclusive dealing practices that substantially lessen competition.
Section 46. To establish a misuse of market power, the ACCC must investigate, and prove to the satisfaction of the court, that (1) the defendant company has a substantial degree of market power; (2) the company has used its power; and (3) that the use of market power is for a proscribed purpose.
To determine whether a company has relevantly used its market power, the court will likely consider the following: (1) whether the conduct was materially facilitated by the company’s substantial degree of market power; (2) whether the company engaged in the conduct in reliance on its substantial market power; (3) whether it is likely that the company would have engaged in the conduct if it did not possess market power; and (4) whether the conduct is otherwise related to the company’s market power.
The Act proscribes the following anticompetitive purposes: (1) eliminating or substantially damaging a competitor; (2) preventing the entry of a person into a market; or (3) deterring or preventing a person from engaging in competitive conduct on a market. The purpose does not need to be the only or dominant purpose underlying the conduct, but it must be “substantial”.
Section 47. This section prohibits certain exclusive dealing practices that have the purpose or likely effect of substantially lessening competition. In particular, the prohibition extends to (1) contracts, agreements and understandings that include conditional supplies or acquisitions of goods or services (conditions might include restrictions on the ability of contractual partners to resupply products or acquire similar goods or services from competitors); or (2) refusals to supply on certain conditions that substantially lessen competition.
Analysis of the alleged contraventions
Point-of-sale contraventions. The ACCC’s originating application alleges that, in contravention of section 46 of the Act, from May to October 2010, Visa implemented and maintained rules that prohibited the further expansion of the supply of DCC services on point-of-sale transactions on the Visa network by rival suppliers.
The conduct banned DCC providers, acquirers and merchants from offering DCC services to international Visa cardholders for transactions conducted at merchant outlets in Australia that had not already been actively conducting DCC transactions for Visa international cardholders as at 30 April 2010. In effect, this froze the pool of merchants that could offer DCC during the period in which the ban was in force (around five to six months).
Second, in contravention of section 47 of the Act, the ACCC alleges that Visa stipulated that it would only supply multicurrency point-of-sale card services to Australian acquirers on condition that those acquirers would not, except to a limited extent, acquire currency conversion services from competing providers of DCC services.
ATM contraventions. The application also alleges that, in contravention of section 46 of the Act, from at least October 2007 to February 2013, Visa banned Australian acquirers and DCC providers from offering DCC services to operators of ATMs in Australia or international Visa cardholders that wanted to withdraw cash from ATMs in Australia – in particular, at ATMs operated by ANZ (from February 2008), Travelex (from April 2008) and Westpac (from February 2010).
Second, in contravention of section 47 of the Act, the ACCC alleges that Visa stipulated that it would only supply multicurrency ATM card services to Australian acquirers on condition that those acquirers would not, except to a limited extent, acquire currency conversion services from competing providers of DCC services.
Alleged anticompetitive purpose and risk of a substantial lessening of competition. The ACCC alleges that the anticompetitive purposes behind the conduct were (1) the prevention of the expansion of DCC to new merchant outlets (such as retail stores); and (2) to prevent businesses from supplying DCC services on ATMs in competition with Visa’s own DCC service. The ACCC considers that the rationale for engaging in these practices is that Visa receives less revenue when a consumer chooses DCC than when they use Visa’s own back-office currency conversion systems.
According to the ACCC, the chief competition concerns focus on the effects of these practices on consumers, retailers and competitors.
First, in the alleged contravention period, foreign nationals visiting Australia and using a Visa payment card were not able to choose which company performed their currency conversion when they withdrew cash from an ATM. In addition, these travellers were unable to ascertain the cost of such transactions in their own currency at the time any transactions were made.
Second, Australian retailers were denied the opportunity to share in the revenue from processing DCC transactions at new merchant outlets in the alleged contravention period.
Third, suppliers of DCC services in Australia were (and continue to be) denied the opportunity to compete with Visa in relation to DCC services at ATMs.
Key points to note
Chances of success and tasks for the court
Whether the ACCC is able to establish that Visa enjoys a substantial degree of market power in any market is the key threshold question for the court. The application alleges the existence of a substantial degree of market power in either the international payment card network point-of-sale or ATM services markets, or in the combined international payment card services markets. The market definition appears to stop short of defining relevant markets for the provision of those services on the Visa payment card network only, although this would appear to be a narrower market on which the ACCC could more easily make out its market power claims (if it could prove to the satisfaction of the court that such a market exists).
The burden of proof as to market definition and the other limbs of the ACCC’s claims is on the ACCC, and the court will hold the ACCC to a high standard of proof. The ACCC chairman Rod Sims noted in a recent speech (at the Australasian Convenience and Petroleum Marketers Association Annual Conference, 2 September 2012) that “section 46 sets very high hurdles. And that is as it should be – because the implications of the section, for business and the economy, are considerable.” It is noteworthy that the ACCC has a mixed record of success in section 46 claims before the courts.
If the ACCC’s claim can overcome the first hurdle in the analysis – to define a relevant market in which Visa has a substantial degree of market power – it will be interesting to see how the court weighs the evidence in relation to the anticompetitive purpose of the allegedly anticompetitive arrangements. The court’s analysis is likely to be extremely fact-intensive, given the complex market structure and the nature of misuse of market power inquiries generally, and there is very little precedent as to the application of section 46. Due to these factors, we expect a long judicial process and no first instance decision within a year.
Implications for Visa
We understand that this is the first time that Visa has had to answer charges related to its market power anywhere in the world, although it has been investigated previously for its part in a range of anticompetitive practices, as noted earlier. Visa has already strongly rebutted the ACCC’s claims in press statements. However, if Visa fails at court, we can expect a rash of similar claims to spring up in other jurisdictions. A number of high-profile losses could be significantly damaging, both financially and in terms of reputation. The stakes are high for Visa, not least because around a third of its US$10.4bn revenues in the financial year ending 30 September 2012 were derived from international transactions.
The ACCC’s enforcement trends
Whether successful or not, the case demonstrates an increasing willingness on the part of the ACCC to pursue its enforcement goals by litigation where necessary. Indeed, in his first speech as chairman of the ACCC, Rod Sims expressed the view that the ACCC should litigate more frequently and take more cases where the outcome is unpredictable and ACCC success less assured.
The choice of target also demonstrates both an increasing tendency of the ACCC to pursue higher-profile international companies and its increasingly strategic thinking as to competition enforcement. Recent high-level objectives include a focus on “acting against widespread consumer detriment with a particular focus on vulnerable consumers” (see the 2011/2012 ACCC annual report). This clearly applies to customers of point-of-sale and ATM services. As the chairman confirmed in the publicity surrounding the application, the pursuit of “companies who misuse their substantial market power, to the detriment of consumers and small businesses in particular, as is alleged against Visa in these proceedings, is an enforcement priority for the ACCC”.
Ross et al v Bank of America NA (USA) et al, No 05-cv-7116, MDL No. 1409 (SDNY); and In re Currency Conversion Fee Antitrust Litigation (MDL No 1409)
Case COMP/37.860 - Morgan Stanley Dean Witter/Visa, prohibition decision of 3 October 2007
Case COMP/39.398 - Visa MIF, commitments decision of 8 December 2010
Visa Inc Annual Report 2012, page 47
Mr Rod Sims, ACCC chairman, speech at the Law Council Competition and Consumer Workshop, 27 August 2011
ACCC Annual Report 2011/12, Part 1 - year in review, p3
Mr Rod Sims, ACCC chairman, ACCC press release, “ACCC commences Federal Court proceedings against Visa Inc”, 4 February 2013
This article was first published in CLi Volume 12, inBrief 3, 5 March 2013