1. Interchange Redux—A U.S. Perspective Competition Policy and Platform Industries IDEI, 30 June 2006 Tom Brown

2. 2 Does Interchange Raise A §1 Issue? 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) Do not assume that the answer is yes

3. 3 Australian Regulatory Prescription 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. Visa must eliminate HAC as to debit and credit. Visa’s debit IRF may not exceed RBA benchmark. February 2005 October 2003

4. 4 Laws Of Nature Still Apply Every action produces an equal and opposite reaction Concentrated energy tends to disperse Merchants’ costs decline Associations disadvantaged Cardholder prices increase Issuer revenue decreases Amex, Diner’s advantaged Retail prices unchanged Retailers report higher profits Merchants’ costs decline

5. 5 Merchants Are Paying Less Today At current volumes, RBA has reduced blended cost of acceptance 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Visa et al.Amex et al.Weighted % MDR Pre Post Pre Post Source: Visa US Analysis; Visa Interchange Group

6. 6 No Free Lunch Source: Chang, et al., Economic Effects of RBA Regulation, 2005. Merchants’ gain comes at cardholders’ and issuers’ expense $0 $100 $200 $300 $400 $500 AU$ Millions $492M $148M $197M $344M Merchant Gain First Estimate of Loss Share (Q1 2003) Second Estimate of Loss Share (Q1 2004) Cardholder Loss Issuer loss $295M

7. 7 Amex and Diner’s volume has increased 20% Business Is Shifting Source: Chang, et al., Economic Effects of RBA Regulation, 2005. Open Share Open Closed Rate caps effective Closed Share

8. 8 Higher interchange increased competition, lowering merchant costs 1: Worldwide discount rate Note: 1993-1995 are estimates based on Visa internal analysis Source: Visa US PIC Analysis; Visa Interchange Group US Commercial Product Volume by Network, 1993-2004 $Billions Driving Product Innovation Visa (CAGR 36.7%) American Express (CAGR 9.8%) MDR/IRF Rate

9. 9 These slides do not represent legal advice, and they do not offer anyone’s views on this subject but my own.