Antitrust law ; Automated tellers ; Payment systems

R. Alton Gilbert

English

Research Papers in Economics

II [Yl[~
NOVIMBER/DECEMBER 1995
Editor’s Introduction
This Review contains the proceedings
of a symposium on antitrust issues in the
operation of payment system networks,
sponsored by the Federal Reserve Bank of
St. Louis in March 1995. This article intro-
duces the topic and provides an overview
of the articles in this issue.
Antitrust enforcement in the banking
industry, which dates from the early 1960s,
has focused primarily on banking consoli-
dation, not on the operation of payment
systems. For several decades preceding the
1960s, the overriding objective of federal
banking regulation had been the safety and
soundness of banks. Restrictions on bank-
ing competition were part of a policy to
limit the chances of bank failure.’ Federal
legislation and rulings of the U.S. Supreme
Court in the early 1960s, however, changed
this policy by making the banking industry
subject to the antitrust laws.
The new legislation and court rulings
sparked research on the effects of consoli-
dation on competition among banks.2
Research on the determinants of banking
competition has focused primarily on the
concentration of deposits or assets among
banks with offices in local markets. In this
framework, researchers assume that all
banks in a market compete with each other
for consumers, who are limited to services
from banks in their market. Banks inmar-
kets with higher concentration are
assumed to compete less aggressively for
local customers.3
This framework is not adequate for
dealing with some issues concerning bank-
ing competition. An efficient payment
system requires that banks cooperate to
process the payment orders of their
depositors. The challenge of app’ying the
principles of antitrust to the payments
activities of banks involves permitting
enough cooperation among banks to facili-
tate an efficient payment system, while pre-
serving incentives for competitive behavior.
The development of clearinghouses in
the United States illustrates how banks can
improve the efficiency of the payment sys-
tem through cooperation. Myers (1931, pp.
94—97) describes the problems that banks
in New York City had in operating the pay-
ment system prior to the formation of the
clearinghouse in that city in 1853. To settle
for banknotes and checks drawn on other
banks, each bank would send messengers
with banknotes or checks to other banks to
receive gold coin in exchange. Banks had
to hold largeinventories of gold to meet
these demands and had to face the risks
inherent in having their couriers moving
about the city with large amounts of gold.1
Bankers learned that they could settle their
accountsmore efficiently by exchanging
bank notes and checks at a local clearing-
house, which also would hold the gold
inventories of the clearinghouse members.
Settlement amongbanks in the clearing-
house involved the movement of gold with-
in the vaults of the clearinghouse.~In addi-
tion, banks coordinated their activities
through clearinghouses when facingwide-
spread runs by depositors.6
The cooperation of banks through
clearinghouses also became a means to
limit competition. Clearinghouses attempt-
ed to coordinate restrictions on the interest
rates that banks paid on deposits.7 At
times, clearinghouses expelled member
institutions that were considered to be com-
peting for deposits or loans too aggressively
or unfairly.8
Banks must cooperate to achieve effi-
ciencies for thetnselves and their customers
in operating networks of automated teller
machines (ATMs). The first two articles in
this issue examine the history ofantitrust
policy on mergers of ATM networks from
White (1992), pp. 1-3.
2 Kaufman, Mote ond Rosenbium
(1989).
For o survey of these studies,
see Gilbert (1984).
Myers (1931), pp. 94~97
Cannon (1910).
I Dwyetond Gilbert (1989).
‘fox (1966).
lolluon and Moen (1995).
FEDERAl. RESERVE BANK OF ST. LOUISNOVEMBER/DECEMBER 1995
the perspective of antitrust lawyers:
Donald I. Baker, “Shared ATM Networks
— The Antitrust Dimension” and David A.
Balto, “Payment Systems and Antitrust:
Can the Opportunities for Network
Competition be Recognized?” Bakerand
Balto note that a series of ATM network
mergers have resulted in virtual monopo-
lies ofATM systems within large regions of
the country They interpret the actions of
the antitrust authorities (including the
Federal Reserve in its role of approving
acciuisitions by hank holding companies)
as reflecting the view that regional ATM
networks have characteristics of natural
monopolies. Baker and Balto challenge the
view that regional ATM networks are nat-
ural monopohes and argue for the benefits
of preserving network competition. They
cite cases of vigorous competition between
ATM networks that ceased \vhen networks
merged. Baker ends his article with a
warning that the policy of permitting the
formation of ATM network monopolies
over largeregions will require involve-
ment of government agents (including
the Federal Reserve). Because banks can
argue that participation in regional mono-
poly networks has become essential for
remaining viable, the government will
have to participate in settling disputes
over the terms on which banks may join
the networks.
The third article focuses on the privi-
lege of payment systems to restrict their
membership: Dennis W Carlton and z\lan
S. Frankel, “Antitrust and Payment
‘l’echnologies.” Their article focuses large-
ly on a court case involving Visa and
Discover Card. Visa denied an application
for membership by a depository institution
owned by Discover Card,and Discover
Card sued Visa. Their analysis of this case
includes evidence that the entry of aggres-
sive competitors into the Visa credit card
network made the credit card industry
more competitive.
One of the discussants,Jamesj.
McAndre\vs, examines the arguments of
Carlton and Frankel concerning two
aspects of the market for credit cards:
interchange fees and duality Interchange
fees involve the payments from banks that
issued cards to the banks that received the
deposits of the merchants that accepted
the credit cards as means of payments.
The issuing banks pay a fraction of the
amounts purchased with the cards to the
acquiring banks [he fraction of the pur-
chase pricewithheld hy the issuing hank
is called the interchange fee. Carlton and
Frankel examine the potential for mem-
bers of credit card systems to extract
monopoly profits from merchants through
interchange fees. McAndrews challenges
the argument that the existence of
interchange fees necessarily rellects anti-
competitive practices by members of a
payment system.
Duality involves the freedom of banks
to offer their customers access to more
than one competing payment system. In
the past Visa and MasterCard restricted
duality A hank that joined one card
system was not permitted tojoin the other.
The credit card systems removed this re-
striction and permitted duality in response
to a legal challenge. Some antitrust ana-
lysts, including Baker and Ba]to, argue that
duality reduces the degree of competition
among payment systems. MeAndrews
argues that a pohcy of restricting duality
may he ineffective as a means of promoting
competition among credit card networks.
To increase its market share, a network
would have to induce banks to switch all
of their credit card business from other
networks, possibly disrupting relations
with its merchant customers and card
holders, The costs to banks of switching
networks may he too high for effective
competition among networks, operating
under restrictions on duality
Nicholas Fconomides, a second dis-
cussant, examines the competitive implica-
tions of payment system networks from
the perspective of his research on other
industries characterized as networks,
such as the telephone industry I-Ic sug-
gests a solution to the natural monopoly
issue that is being implemented in other
network industries: connectivity. To
illustrate, long-distance companies are
authorized to route their customers’ calls
FEDERAL RESERVE BANK OF ST. LOUIS
2ll[Yl[~
NOVEMBER/DECEMBER 1995
over lines owned by other telephone eom— lollmon, Ellis W., and Jon R. Moen. ‘Private Sector Responses to the
panics, including their competitors. The Panic of 1907: A Camporison of New York and Chicago,” Federal
equivalent arrangement in the operation of Reserve Bank of Atlanta Economic Review (March/April 1995),
ATM and point-of-sale (POS) systems pp. 1-9,
would be a network with no ATM or P05 White, Eugene N. The Comptroller and the Tronsformotion of American
terminals in a given market area offering Banking, /960-7990. Camptrollerof the Currency (1992).
its payment services through the terminals
of the existing regional monopoly net-
work. This would be a new approach to
dealing with the natural monopolyissue in
the operation of payment systems.
The articles and discussant comments
in this issue of the Review deal primarily
with two components of the payment sys-
tem—ATM networks and credit card
systems. The articles and comments indi-
cate that issues concerning competition
among payments networks are far from
settled. These issues are relevant for other
components of the payment system, since
all components of the payment system
function as networks. In addition, devel-
opment of new payment instruments, such
as stored value cards, will haveimplica-
tions for the competitive pricing of
payment services. These development
will create new challenges for research.
— R. Alton Gilbert
RIWERENCIS
Cannon, James G. Clearing Houses, U.S. Notional Monetary Commission,
Senate Document No. 491, 61 Cong. 2nd Sess. U.S. Government
Printing Office, 1910.
fox, Albert H. Regulotion of Interest Rates on Bank Deposits. Bureau of
Business Research, University of Michigan (1966).
0~eç Gerald P., and R. Alton Gilbert. ‘Bank Runs and Privote
Remedies,~ this Review (May/june 1989), pp. 44-61.
Gilbert, R. Alton. “Studies of lank Market Structure nnd Competition: A
Review and Evaluation,” JournalofMoney, Credit, and Banking
(November1984, part 2), pp. 6l7~45,
Kaufman, George G., Lorry R. Mote, and Harvey Rosenblum. “The First
Quarter Century of the Bank Structure Conference,” Booking System
Risk: Chaffing a New Course. Federal Reserve Bank of Chicago,
(May 1989). pp. l-xv.
Myers, Margaret G. The New York Money Market, Vol. I, Origins and
Development. Columbia University Press (1931).
FEDERAL RESERVE BANK OF ST. LOUIS
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Antitrust issues and payment systems networks: introduction

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