United States of America v. Electronic Payment Service, Inc., Civ. No. 94-208 (D.Del.); Public Comments on Proposed Final Judgment and Response of United States

DEPARTMENT OF JUSTICE

Antritrust Division

United States of America v. Electronic Payment Service, Inc.,

Civ. No. 94-208 (D.Del.); Public Comments on Proposed Final Judgment

and Response of United States

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.

16(b)-(h), the United States publishes below the comments received on

the proposed Final Judgment in United States of America v. Electronic

Payment Services, Inc., Civ. No. 94-208, filed in the United States

District Court for the District of Delaware, together with its response

to the comments.

Copies of the comments are available for inspection in room 3229 of

the United States Department of Justice, Washington, DC and the Office

of the Clerk of the United States Court for the District of Delaware,

Wilmington,Delaware.

Joseph H. Widmar,

Deputy Assistant Attorney General.

In the United States District Court for the District of Delaware

United States of America, Plaintiff, v. Electronic Payment

Services, Inc., Defendant; Filed August 15, 1994; Civ. No. 94-208

Comments Relating to Proposed Final Judgment and Response of United

States to Comments

Pursuant to the requirements of the Antitrust Procedures and

Penalties Act, 15 U.S.C. Sec. 16(b)-(h), the United States hereby files

comments it has received relating to the proposed Final Judgment in

this civil antitrust proceeding, and herein responds to those comments.

This action commenced on April 21, 1994, when the United States

filed a Complaint alleging that an anticompetitive practice of

defendant Electronic Payment Services, Inc. (``EPS'') constituted a

tying arrangement that was per se unlawful under Section 1 of the

Sherman Act, 15 U.S.C. Sec. 1, and that constituted a means whereby EPS

unlawfully had maintained a monopoly in access to regional automatic

teller machine (``ATM'') networks in the Commonwealth of Pennsylvania

and the States of New Jersey, Delaware, West Virginia and New

Hampshire, and in substantial portions of the State of Ohio

(collectively the ``affected states''), all in violation of Section 2

of the Sherman Act, 15 U.S.C. Sec. 2. The United States simultaneously

filed a proposed Final Judgment, a Competitive Impact Statement and a

Stipulation signed by the parties consenting to entry of the Final

Judgment.

The sixty-day waiting period provided for by 15 U.S.C. Sec. 16(b)

for submission of public comments expired on July 11, 1994. The United

States received comments from Cash Station, Inc. (``Cash Station''),

Chemical Banking Corporation (``Chemical Bank''), Citicorp Credit

Services, Inc. (``Citicorp''), William R. Kennedy, Meridian Bancorp,

Inc. (``Meridian''), Midwest Payment Systems, Inc. (``MPS''), Money

Station, Inc. (``Money Station''), and The New York Switch Corporation

(``NYCE''). The United States also received an anonymous comment. The

United States responds herein to these comments.

I. Stored Value Cards

The subject raised most often by the comments was the treatment of

stored value cards under the proposed Final Judgment. Stored value

cards are designed to accept a ``deposit'' of funds, which are then

drawn down by transfer to other parties in transactions. The card

effectively replaces cash in these transactions. The most common use of

stored value cards today is in public transit, most notably in the Bay

Area Rapid Transit system in the San Francisco area and the Washington,

DC Metro system. Rather than paying separately for each ride, a

customer purchases a card for a certain amount, that amount is

``deposited in'' the card, and the cost of each subsequent ride is

deducted from the value in the card. The passenger may add value to the

card with additional ``deposits.'' Libraries also commonly sell stored

valued cards for use in their copying machines.

The banking industry expects that stored value cards will be used

in many other types of transactions in the foreseeable future. Pilot

projects are under way for use of stored value cards with merchants, in

vending machines, and at laundromats. While the stored value cards in

use today are often paper with a magnetic stripe, these cards are

generally expected to be made of more durable material and function

through an internal integrated circuit, or ``chip,'' and are often

referred to as ``smart cards.''

The comments dealing with this subject suggested that EPS could

unlawfully maintain its monopoly in access to regional ATM networks, or

extend its geographic scope, through regulations on the stored value

feature of hybrid ATM/stored value cards issued by members of its ATM

network.These commenters suggested that the proposed Final Judgment

could contain various restrictions on the ability of EPS to issue such

regulations.\1\

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\1\Citicorp suggested that the defendant could block entry of

competing smart card networks by imposing technical restrictions

(presumably covering communications format, hardware or software) on

MAC members that create incompatibilities between their ATMs and

non-MAC smart cards. Citicorp notes that EPS currently uses a smart

card technology different from some competing smart cards.

A similar situation could have, but did not, arise with respect

to ATM cards when they were introduced in the 1970s. There is no

inherent reason to believe that such a situation will arise with

respect to smart cards. While Citicorp's observations may be

correct, detailed regulation of smart card operations and technology

is not necessary or possible at the present time. As discussed

below, if anticompetitive practices develop as smart cards are

introduced, action can be taken at the appropriate time.

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Section IV.H of the proposed Final Judgment prohibits EPS from

restricting the branding of ATMs with the marks of networks in addition

to MAC, and likewise enjoins EPS from restricting the branding of ATM

cards with the marks of multiple networks by banks in certain states. A

later clause in Section IV.H provides that, ``notwithstanding the

preceding, Defendant * * * may restrict the branding of access cards

that contain an integrated circuit computer chip with a stored value

function.''

The effect of this clause is to exclude the branding of the stored

value function from the injunction against restrictions on multiple

branding of cards. EPS may, within the limits of antitrust and other

applicable laws, restrict the branding of ``stand-alone'' stored value

cards (cards having no ATM functions) and the stored value function of

``hybrid'' ATM/stored value cards. EPS may not, however, restrict the

branding of stand-alone ATM cards or the ATM functions of hybrid cards,

nor may EPS defeat the injunction against restrictions on dual branding

by converting ATM functions to integrated circuit technology.\2\ The

clause is necessary since in its absence paragraph IV.H could be

interpreted to enjoin EPS from restricting the branding of both the

stored value function and the ATM functions of hybrid cards.

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\2\For purposes of the proposed Final Judgment, it is irrelevant

whether the ATM functions in a card are carried out by a magnetic

stripe or an integrated circuit. The obligations of EPS are not

affected by the method of ATM access. The clause permitting

restrictions on the branding of stored value functions is limited to

chip-based stored value functions because that was the limit of the

exception EPS sought.

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Any other construction would lead to results not intended by the

proposed Final Judgment. As discussed in the Competitive Impact

Statement, the goal of Paragraph IV.H of the proposed Final Judgment is

to ensure that MAC member depository institutions can participate in

non-MAC ATM networks in practice as well as in theory. To that end, EPS

must permit a member's ATM cards to function in the other networks in

which that member participates; EPS cannot block these cards from

functioning in multiple networks. In general, cardholders are aware of

such multiple network functionality primarily because their ATM cards

carry the brands of the relevant networks. If the clause were

interpreted to allow EPS to restrict the branding of both the stored

value and the ATM features of hybrid ATM/stored value cards, the result

would be that these hybrid cards would function as ATM cards in another

network (as required by the proposed Final Judgment) but would carry no

brand for that network. Cardholders would thus be unaware of their

ability to access this network, and would not use the card for that

purpose. This result--cards with ``hidden'' functionalty--was not

intended by either party to the proposed Final Judgment.

The United States is not aware of any current multiple branding

restrictions on stand-alone stored value cards or the stored value

function of hybrid ATM/stored value cards in the MAC network. Nothing

in the proposed Final Judgment, or any other document filed by the

United States in this action, should be interpreted as evidencing a

conclusion by the United States that such restrictions would or would

not be a violation of the antitrust laws. Contrary to the observation

in a comment filed by Chemical Bank, the proposed Final Judgment does

not give EPS the ``right'' to issue such regulations; rather, EPS

continues to be bound by the antitrust laws and any other applicable

laws. If such regulations are issued and prove to be an antitrust

violation, they can and would be challenged at the appropriate time.

II. POS Issues

Comments filed by MPS, Money Station and an anonymous source argued

that the proposed Final Judgment should apply to access to point-of-

sale (``POS'') network services as well as access to regional ATM

network services.\3\ As previously noted, the investigation conducted

by the United States concluded that EPS had unlawfully maintained a

monopoly in access to regional ATM network services in certain

geographic areas. It did not determine whether EPS had market power in

POS services, or whether the conduct of EPS in relation to its POS

network business constituted an antitrust violation.

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\3\POS terminals are generally located in the establishments of

merchants. They accept an ATM card and, using the ATM network or a

parallel POS-only network, access the cardholder's account to

transfer funds to the merchant's account.

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As explained more fully in the Complaint and Competitive Impact

Statement, MAC has maintained its monopoly in access to regional ATM

network services in part by preventing the use of third party

processors by its member depository institutions. It is the

understanding of the United States that EPS does not forbid the use of

third party processors in its POS network.\41\ Moreover, although the

comments noted that EPS was a significant supplier of POS network

services and suggested that it might exercise its strength in this area

to maintain its monopoly in access to ATM network services, none of the

comments indicated that EPS was taking any action of this type.\5\

Nevertheless, the proposed Final Judgment does not, as argued by Money

Station, leave EPS ``free'' to place restrictions on the use of POS

services by MAC members. Rather, EPS is bound by the antitrust laws and

other applicable laws. If the conduct of EPS in the provision of POS

network services constitutes an antitrust violation, it can and would

be challenged at the appropriate time.

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\4\MPS compared the fees charged by EPS to and for the use of

third party processors in its POS network with the cap set by the

proposed Final Judgment on fees to and for the use of third party

processors in its ATM network. While the comment noted that fees

were higher in the POS network, this in and of itself does not

establish that third party processors are unable to operate in the

POS network, nor does it establish that EPS has monopoly power in

access to POS network services.

\5\Money Station noted that EPS could conceivably forbid MAC

members to join other POS networks, or that it could forbid the use

of third party POS processors by its members. While such conduct

could constitute an antitrust violation, there is no allegation that

EPS has taken such action. The United States is not prepared to

speculate as to whether EPS will issue regulations on the use of POS

network or processing services by its members, nor upon the content

of any such regulations. Such regulations can be challenged if and

when they are instituted.

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III. Voidability of Contracts

Cash Station expressed concern that the proposed Final Judgment

does not make clear that ATM processing and authorization processing

contracts between EPS and its members are voidable by the members.

Paragraph IV.A of the proposed Final Judgment states in relevant

part:

Defendent shall not maintain or enforce any * * * contract * * *

pursuant to which defendant requires any depository institution to

obtain ATM processing or authorization processing from defendant;

that prohibits or purports to prohibit a depository institution from

obtaining ATM processing or authorization processing from any third

party processor; or that conditions MAC membership or availability

of MAC or any successor branded ATM network access on any depository

institution's obtaining ATM processing or authorization processing

from defendant or not obtaining ATM processing or authorization

processing from a qualified third party processor.

This provision makes void any contracts containing such clauses.

Paragraph IV.I of the proposed Final Judgment permits EPS to enter into

new contracts with any customers, including those whose contracts have

become void under the terms of Paragraph IV.A, provided that it

supplies a copy of the Final Judgment to those customers and the new

contracts conform to the terms of the Final Judgment.

Cash Station also expressed concern that unless EPS were required

to explicitly notify those customers whose contracts were voided by the

proposed Final Judgment it would continue to reap the benefits of these

contracts until they expired. Notification is provided for in the

proposed Final Judgment, which requires EPS to provide a copy of the

Final Judgment to all of its customers. In addition, third party

processors and competing regional ATM networks will be highly likely to

bring this fact to the attention of potential customers.

IV. Gateways

MPS suggested that the proposed Final Judgment should require EPS

to establish ``gateways'' with other regional ATM networks.\6\ The

United States considered this issue in the course of its investigation

and concluded that ensuring that MAC members would be permitted to use

third party processors would be a simpler and more efficient type of

injunctive relief to remove the barriers to entry of competing

networks, since access to other networks will be offered by these third

party processors.

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\6\A gateway between two regional ATM networks is essentially a

short-cut to avoid the use of a national ATM network and its

relatively high fees. Often today a cardholder of one network can

conduct transactions on the ATMs of another network. In most cases

such a transaction would be routed to the cardholder's depository

institution over a national ATM network linking the two regional ATM

networks. With a gateway, however the transaction is routed directly

from the network of the ATM deployer to the network of the card

issuer.

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V. Non-bank ATM Deployers

An anonymous comment stated that the proposed Final Judgment did

not clearly apply to ATM deployers other than depository institutions.

Paragraph II.H clearly states that ``depository institution'' for

purposes of the proposed Final Judgment includes all MAC members who

deploy ATMs. The proposed Final Judgment therefore applies to all MAC

members, whether or not depository institutions.

VI. Technical, Financial and Operating Rules

Paragraph IV.E of the proposed Final Judgment requires EPS to

provide qualified third party processors access to the MAC network.

Because a ``qualified'' third party processor is defined in part as one

which meets the defendant's existing technical, financial and operating

criteria for intercept processors and third party processors, an

anonymous comment argued that the United States should undertake a

comprehensive review of the existing criteria and each change to the

criteria.

The terms of the proposed Final Judgment render such a detailed

review unnecessary. The paragraph in question makes clear that these

criteria are the same for both third party processors and intercept

processors.\7\ As discussed in the Competitive Impact Statement, the

United States has concluded that EPS has a strong incentive to deal

fairly with its intercept processors, and requiring equal treatment of

third party processors and intercept processors should therefore assure

that third party processors are also dealt with fairly.

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\7\In fact, EPS has represented that it currently has no

financial criteria relevant to third party processors.

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While a subsequent clause allows EPS to establish additional

technical criteria for third party processors, the clause states that

additional technical criteria may only concern the transaction

information to be transmitted and the communication and data format.

Moreover, the additional criteria may not discriminate between third

party processors and intercept processors.

The comment lists several possible methods by which third party

processors could be treated unfairly by EPS, such as delays in the

payment of moneys owed, unnecessary mandatory training sessions, and

late notification of network technical changes. Because the proposed

Final Judgment requires that third party processors and intercept

processors have equal access to the network, any such discriminatory

treatment would violate the proposed Final Judgment. Additional

restrictions are unnecessary.

VII. Pricing Structure

An anonymous comment discussed the EPS pricing structure for third

party processors and suggested several changes to that structure for

incorporation into the Final Judgment. One section of this comment

alleged that EPS rules require third party processors seeking access to

the MAC network to be ``sponsored'' by a MAC member depository

institution, and that the third party processor is often charged a fee

by the MAC member for this sponsorship. Such a sponsorship requirement

would violate paragraph IV.E of the proposed Final Judgment, which

requires that third party processors be offered access to the MAC

network equal in type and quality to that offered to intercept

processors.

The comment also stated that the charge paid by third party

processors in most ATM networks consists of a combination of a charge

from the network and a charge from the card-issuing bank, and that this

latter charge is paid by the network to the card-issuing bank.\8\ The

comment alleged that this ``bundling'' of fees is anticompetitive,

apparently arguing that this conduct constitutes a tying violation.

However, a traditional element of tying violations is that the products

are actually separate; in other words, that they can be or have been

bought or sold separately. The comment itself suggests that all ATM

networks currently charge in this manner. Moreover, to the knowledge of

the United States, EPS is not currently engaged in such conduct since,

as discussed in the Complaint and Competitive Impact Statement, EPS

essentially has no third party processors in its network. If EPS

chooses to institute such a pricing policy it can then be determined if

the policy violates the proposed Final Judgment or antitrust laws.

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\8\The United States is not at all certain that this is the

case. It is the understanding of the United States that in most ATM

networks a transaction that reaches the network switch through the

third party processor of the bank acquiring the transaction results

only in a charge for use of the network. The only other charge

associated with the transaction is an ``exchange revenue'' charge

which is paid by the card-issuing bank to the transaction-acquiring

bank. In essence, this is a charge for use of the acquiring bank's

ATM terminal by the cardholder of the card-issuing bank.

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Finally, the comment argues that the proposed Final Judgment should

order EPS to distribute MAC price lists as a method of ``policing'' the

non-discrimination clause. However, there is no reason to believe

either that EPS will violate the proposed Final Judgment by offering

discriminatory pricing or that it would be able to keep such a blatant

violation confidential. In addition, the proposed Final Judgment

permits the United States to issue inquiries to EPS which would easily

determine its pricing arrangements. It is therefore not necessary to

order publication of price lists.

VIII. Subswitching

Money Station argued that by permitting EPS to charge for

subswitching of transactions, the proposed Final Judgment interferes

with the ability of third party processors to access the network.

``Subswitching'' refers to the switching of transactions between

members of the same regional network without accessing that network,

and therefore without paying its switch fees. Generally this is done by

passing the transaction through a third party processor that provides

ATM processing for both members. Many regional ATM networks, although

not all, have rules against subswitching. These networks argue that

cardholders, who make the ultimate decision about which ATM to access,

choose a particular ATM based upon their expectation that the

transaction will be routed over a common regional ATM network, known to

the cardholder by the brand logo on the ATM and the card. Permitting

subswitching in this view merely allows third party processors to

``free ride'' on the advertising efforts of the common network.

Paragraph IV.G.2 of the proposed Final Judgment permits EPS to

charge a royalty on subswitching equal to the price EPS would charge

for a switched transaction. As Money Station notes, this would likely

discourage subswitching since the third party processor would also

charge a fee for its services. Nevertheless, this will not discourage

entry by third party processors. As described in the Complaint, third

party processors have not been successful in entering MAC's geographic

region because MAC members have been unable to purchase their ATM

processing services. The proposed Final Judgment ensures that MAC

members will be able to use third party processors. Inability to offer

subswitching does not appear to be a substantial barrier to entry.

Moreover, third party processors wishing to offer the ability to switch

transactions can simply become a network by ``branding'' their

services; in other words, putting their brand logos on cards and ATMs.

The third party processor would then become a competing regional ATM

network to which EPS, according to paragraph IV.H of the proposed Final

Judgment, may not restrict access.

IX. Definition of ``Restrict''

Money Station suggests that the term ``restrict'' as used in

paragraph IV.H and certain other clauses of the proposed Final Judgment

is not sufficiently defined. It was not necessary to define this term

since the phrase used was ``restrict in any manner.'' This broad

prohibition on restrictions is all that is necessary; if any

restriction is imposed, it will violate the proposed Final Judgment.

X. Conclusion

Pursuant to 15 U.S.C. Sec. 16(e), the proposed Final Judgment

cannot be entered unless the Court determines that it is in the public

interest. The focus of this determination is whether the relief

provided by the proposed Final Judgment is adequate to remedy the

antitrust violations alleged in the Complaint. United States v. Bechtel

Corp., 1979-1 Trade Cas. (CCH) 62,430 (N.D. Cal. 1979), aff'd. 648

F.2d 660, 665 (9th Cir. 1981), cert. denied 454 U.S. 1083 (1982). After

careful consideration of the comments, the United States continues to

believe that the proposed Final Judgment is adequate to remedy the

antitrust violations alleged in the Complaint and therefore that entry

of the proposed Final Judgment is in the public interest.

After the comments and the response of the United States have been

published in the Federal Register, pursuant to 15 U.S.C. Sec. 16(d),

the United States will move the Court for entry of the proposed Final

Judgment.

Dated: August 15, 1994.

Respectfully submitted,

Kevin C. Quin,

Attorney, Communications & Finance Section, Antitrust Division, 555

Fourth Street, NW., Washington, DC 20001, (202) 514-5660.

Gregory M. Sleet,

United States Attorney.

By Nina A. Pala/by Kevin Quin

Nina A. Pala,

Assistant United States Attorney, Delaware Bar No. 2622, District of

Delaware, 1201 Market Street, Wilmington, Delaware 19801, (302) 573-

6277.

July 6, 1994.

Mr. Richard Liebeskind,

Assistant Chief, Communications and Finance Section, Antitrust

Division, U.S. Department of Justice, 555 Fourth Street, N.W., Room

8104, Washington, D.C. 20001.

Re: Comments to the Proposed Final Judgment in United States of

America v. Electronic Payment Services, Inc., Civ. No. 94-208.

Dear Mr. Liebeskind, Enclosed are comments on the proposed Final

Judgment in the above mentioned action. These comments are submitted

to you pursuant to the provisions of the Antitrust Procedures and

Penalties Act providing for a comment period prior to the effective

date of the proposed Final Judgment.

To be sure, we appreciate your time and efforts in this matter

and look forward to open competition in the banking services

industry. However, we do have concerns with the proposed Final

Judgment which are set forth in the enclosure.

Please feel free to call me with any questions you may have. I

can be reached at (513) 579-5447.

Thank you,

Sincerely,

MIDWEST PAYMENT SYSTEMS, INC.

Henry W. Hobson, III,

Senior Vice President.

Enclosures

c: Robert F. Uhrig

Comments on The Proposed Final Judgment

US v. EPS

When a shared network obtains market dominance, it can preclude

use of it by other parties (financial institutions or third party

processors) by explicit exclusions or by more insidious means,

generally pricing. These issues are clearly recognized by the

proposed Final Judgment, and language in section IV establishes what

the ``prohibited conduct'' would be on the part of MAC. The judgment

goes on to say that MAC ``shall not restrict in any manner, directly

or indirectly, the ability. . .to obtain ATM processing or

authorization for access to the MAC or any successor branded ATM

network controlled by defendant from any qualified third party

processor.'' Generally, equal access shall be provided to qualified

third party processors on equal terms as those extended to intercept

processors, including aggregation of transactions. Reciprocity of

processing, including pricing and terms, is also contemplated.

Defendant is also ordered to offer volume discounts to all, on

substantially equal terms, and the judgment also permits MAC to

offer transaction switching at nondiscriminatory royalties that

shall not be greater than the price for switched transactions. This

last stipulation may need a bit of clarification for the Final

Judgment to have its intended effect, however, and that is the

substance of this comment.

Banks and other financial institutions have ``joined forces'' in

many, widely different combinations to offer electronic banking

services to their customers since the advent of ATM's and other

electronic terminals. Generally speaking, these combinations are

formed for (1) marketing purposes, (2) particular geographic areas,

(3) brand identification that differentiates services available to

particular sets of customers, and (4) cost efficiencies that result

from larger transaction bases (economies of scale). Whatever the

reason, there now exists a diverse tapestry of electronic banking

associations across the United States, but in some areas, a

monopolistic enterprise threatens the existence of many smaller

networks. Such is the case with MAC and its ATM network.

Open access is available, but only from a technological point of

view. Financial institutions and third party processors are

essentially forced to join the dominant network to provide the

greatest access possible to retail customers. There would be no

problem if the dominant network would change only for transactions

(without surcharge or royalty) based on volume of transactions

presented. Then the user of the subordinate network would be paying

for the marketing benefits of its smaller network and only for the

use of the ``electronic highway'' provided by the dominant network.

In fact, the brand identity of the dominant network serves no

purpose to an otherwise ``unbranded'' user. Moreover, no one would

argue that the choice to join MAC should be made by weighing the

advantages of its brand (with all the consequent marketing and

service differentials) against an alternative brand, but MAC's

current pricing structure places a punitive burden on third party

processors and financial institutions and forces membership in the

network, requiring MAC identification, thus hastening the demise of

subordinate networks and eliminating choice between different

providers of service.

Just recently the Quest Network of Kentucky sent a letter to its

participants indicating that its viability had been re-assessed,

with the outcome that the Quest brand would be discontinued in favor

of MAC by June 1, 1995 (letter attached). The only reason for this

change was the layering of pricing to participants in the Quest

Network caused by the brand identity of MAC on its members who were

also members of the Quest Network.

A simple solution to this issue would be the ability of

subordinate networks to use the dominant network for transaction

switching, paying a competitive and nondiscriminatory price for that

use, but without the requirement of brand identification (and

subsequent terms and pricing) of membership in the dominant network.

Reciprocity should also be a requirement, such that if the dominant

network desired the ability to use the subordinate network's

transaction switching service, it, too, would have to provide full,

complete and nondiscriminatory access to its network without

mandating membership and brand identity by the dominant network

members. In essence, ``open access'' should be the rule without

``branding'' each network with the other's identity in an area where

there is clear dominance by one network over others. This is the

case in Illinois where four (4) networks act cooperatively to permit

universal access to any cardholder in that state without requiring

any one network member (or third party processor) to join any other

network. Pricing is based solely upon the number of transactions

processed.

The concept of ``ubiquity and convenience'' can only be

accomplished by a truly open environment where individual

institutions, processors or networks can have access to the dominant

electronic banking network, which in this case is MAC, and where MAC

members can enjoy the same reciprocity at the subordinate network

terminals.

It is not clear what effect the proposed Final Judgment will

have on point of sale (POS) services. Although MAC may or may not be

practicing the exact same ``anti-competitive'' conduct in the POS

area as in the ATM area, certain barriers do exist which discourage

competition. For example, although MAC seems to allow member

financial institutions to use third party processors to provide POS

services to such financial institution's sponsored merchants, the

costs of such an option are prohibitive. MAC charges a $25,000

``Processor Initialization Fee'' to such a third party processor

(MAC Point of Sale Schedule of Fees attached). The MAC Point of Sale

Schedule of Fees states that this fee is for test time and

certification, but the $25,000 only includes 20 hours of test time

and there is a charge of $250 per hour for test time which exceeds

the 20 hours. This set-up or establishment fee is plainly excessive

in relation to the $100 per hour, $1,000 maximum third party

processor set-up fee set forth in the proposed Final Judgment. In

addition, MAC charges third party POS processors $1,000 per month

for the first communications port, $2,000 per month for each

additional communications port and a $300 per month ``Processor

Residency Fee''. Given the importance and dramatic rise in POS

transactions over the years, failure to explicitly include POS

antitrust stipulations in the proposed Final Judgment could have a

devastating effect on competition in the POS area.

Finally, there is a curious exclusion of ``access cards that

contain an integrated circuit computer chip with a stored value

function'' from branding restrictions in Section IV(H). If these

cards should be issued by a MAC member, and their use might include

the necessity to utilize transaction switching services of MAC from

a terminal other than a MAC terminal, should they not also be

included in the philosophy that says there can be no brand

restriction by MAC? It is recognized that use of these unique types

of cards may involve ``off-line'' transactions throughout some

period, but the settlement and switching of settlement transactions

may necessitate the same unrestricted access to the network that

magnetically striped cards would employ in an ``on-line'' mode. As

an example, if a cardholder in an ``electronic benefits'' (EBT)

processing area that utilizes ``smart card'' technology is able to

withdraw a certain amount of cash from ATM's as part of the benefit

distribution process, and that cardholder uses an ATM belonging to a

network or processed by a third party processor other than MAC, the

network or processor should be able to switch settlement

transactions through MAC (paying the standard switching fee) without

paying an excessive royalty or finding it necessary to become a

member of MAC in order to complete the transaction.

MEMORANDUM

Date: June 22, 1994

To: All Quest Network Participants

From: Mike McEvoy, President, Transaction Services Company

Subject: Future Direction of the Quest Network

On May 10, 1993, the Quest Network sent a memorandum to your

organization that outlined our commitment to continue providing

Quest-branded services to financial institutions throughout this

market area. Since that communication a year ago, several major

announcements and changes have occurred which has resulted in a re-

assessment of the ongoing viability of the Quest Network and the

services offered under the Quest brand.

Electronic Payment Services, Inc. (EPS) is a Delaware

corporation currently owned by four bank holding companies: Banc One

Corporation, Columbus, Ohio; CoreStates Financial Corporation,

Philadelphia, Pennsylvania; KeyCorp, Albany, New York (successor to

Society Corporation, Cleveland, Ohio); and PNC Bank Corp.,

Pittsburgh, Pennsylvania. These four bank holding companies have

consolidated their various ATM/POS networks (MAC, Owl, Jubilee, Tri-

Net and Green Machine) into EPS under the MAC brand name. EPS has

also announced plans to add two additional equity owners: Mellon

Bank Corporation and National City Corporation. Locally and

regionally, the affiliates of PNC Bank, Bank One, and National City

Bank will actively participate in the MAC network and will be

converting their cardholder base and ATM terminals to the MAC brand.

Liberty National Bank, which is being acquired by Banc One

Corporation, has also joined and will likewise actively participate

in the MAC network. Liberty will be converting their cardholder base

and ATM terminals to the MAC brand, and will be re-marketing MAC

access to other financial institutions throughout the region.

These developments will cause a majority of the ATM and POS

transactions currently processed by the Quest Network to be

converted to the MAC brand. It is difficult to develop a reasonable

long-term business case for the continuation of the Quest Network

and its Quest brand when a significant portion of the transaction

processing business will be directed to the MAC network.

The owners of the Quest Network believe that the time to begin

an orderly transition from the Quest brand is at hand. The Quest

Network will offer transition assistance to each of its

participants, if requested, and has begun to develop a plan to

assist those participants wishing to convert to the MAC network. The

Quest Network will also assist participants that wish to convert to

another network, if requested. This transition period will begin in

July 1994 and will conclude by June 1995. The Quest Network,

therefore, does not expect to operate beyond June 1, 1995.

We appreciate your past loyalty, support and participation in

the Quest Network and pledge to work with you and your processors to

effect a timely transition with minimal disruption to your financial

institution and your customers. If you have questions, please feel

free to contact any of the owners of the Quest Network regarding any

aspect of this announcement.

Wallace A. Fudold,

Executive Vice President, Bank of Louisville.

Roy A. Eon,

Vice President, Bank One, Lexington N.A.

W. LeGrande Rives,

Executive Vice President, Liberty National Bank.

Leslie H. London,

Senior Vice President, National City Bank, Kentucky.

Edward F. Johnson,

First Senior Vice President, Owensboro National Bank.

Michael D. Moll,

Vice President, PNC Bank, Kentucky.

John T. Perkins,

Executive Vice President, Trans Financial Bank, N.A., Chairman, Quest

Network.

Michael E. McEvoy,

President, Transaction Services Company, Quest Network.

Exhibit A.--MAC Point of Sale Schedule of Fees

[July 1, 1992]

1. Processor Initialization Fee (for $25,000.

either direct access or for intercept

processor on behalf of a financial

institution, includes 20 hours of

test time for certification).

2. processor Initialization Fee for $2,000.

each additional Processor added

through your Gateway link.

3. Excess Test Time Fee (for each hour At current rates (rate as of

of test time in excess of 20 hours). July 1, 1992) is $250 per hour.

4. Additional Communications Ports @ $2,000 per port.

9600 BPS.

5. Monthly Processor Connect Fee:

Port Fee (per port @ 9600 BPS).... $1,000 per month.

Processor Residency Fee (maximum $300 per processor.

$2,000).

6. Transaction Fee: For each $.045 per transaction.

transaction received by the MAC

switch from you including incompleted

and denied transactions.

7. Communications Fees: These shall be

forwarded on a pass through basis

monthly and include line charges,

maintenance and equipment including

maintenance of such equipment.

July 7, 1994.

Mr. Richard Rosen,

Chief, Communications and Finance Section, U.S. Department of

Justice, Antitrust Division, 555 4th Street, NW., room 8104,

Washington, DC 20001.

Re: United States of America v. Electronic Payment Service, Inc.,

U.S. District Court for the District of Delaware, Civ. No. 94-208

In response to the invitation extended on page 24712 of the May

12, 1994 edition of the Federal Register (59 FR 24712), Cash

Station, Inc. comments on the proposed Final Judgment filed in the

proceeding named above.

Cash Station, Inc. operates a regional automated teller machine

(``ATM'') and point-of-sale terminal (``POS'') network, and is

headquartered in Chicago, Illinois.

Our comments are as follows:

1. Paragraph IV.H--Branding Restrictions

Paragraph IV.H of the proposed Final Judgment requires EPS to

permit MAC members to display multiple network marks on ATMs and ATM

cards, stating that ``Defendant shall in no manner restrict any

depository institution ATM deployer that chooses to be affiliated

with multiple ATM networks from displaying multiple ATM network

logos on its ATMs * * * [and] shall not prohibit any institution ATM

card issuer located in [specified states] * * * from issuing cards

that display multiple ATM logos.'' Despite that restriction, EPS is

permitted to ``restrict the branding of access cards that contain an

integrated circuit computer chip with a stored value function.''

Assuming that it is appropriate to limit EPS's ability to

restrict co-branding in connection with the ``MAC'' logo, the

exclusion of stored value cards from this limitation creates a

significant loophole for EPS.

First, as drafted in the proposed Final Judgment, the stored

value card exception appears to allow EPS to retain its prohibition

on co-branding simply by causing all of its debit cards to be

reissued on card stock that has, in addition to the magnetic stripe

found on the cards currently issued, and integrated circuit computer

chip with a stored value function. We expect that many of EPS's

smart cards will be multipurpose cards that bear both the

traditional magnetic strip technology found on today's on-line debit

cards and an integrated computer chip with a stored value function.

Assuming that it is appropriate to provide relief on the branding

restrictions in the case of the stored value cards (see below),

Paragraph IV.H. should specify that such relief applies only to

cards that function solely through use of the computer chip and do

not also function as a traditional debit card using existing

magnetic strip technology. Otherwise, the benefits sought to be

obtained under Paragraph IV.H. may be illusory.

Second, again assuming the EPS is entitled to some relief with

respect to its stored value card, we question whether EPS should be

allowed to further the market power enjoyed by the ``MAC'' ATM brand

by suing that brand to identify the store value card technology. In

other words, if EPS is allowed to avoid the effects of the Final

Judgment in connection with an ancillary product, should it not also

be precluded from promoting the ancillary product with the brand

that is central to the Final Judgment?

Finally, it is not clear why any protection is appropriate in

the case of EPS's stored value card product. It is our understanding

that EPS did not invent the chip card technology but is simply

applying existing technology.

2. Paragraph IV.I.--Voidability of Existing Processing Contracts.

The proposed Final Judgment does not clearly indicate that the

contracts entered into illegally by EPS for ATM processing and

authorization processing are voidable at any time by the financial

institutions. Paragraph IV.A of the proposed Final Judgment states

that EPS ``shall not maintain or enforce any * * * contract,

agreement or arrangement'' that furthers the tying practices that

are the subject of the proceeding, and Paragraph IV.I. of the

proposed Final Judgment allows EPS to sign up new customers by

delivering a copy of the Final Judgment (apparently on a prospective

basis only), but nowhere is it stated affirmatively that each of

EPS's existing ATM and authorization processing customers may cancel

its processing agreements with EPS at any time without penalty or

that EPS must notify its customers of their rights to terminate

these agreements. If it is not made clear that the existing

contracts are voidable, EPS may enjoy the benefits of the tying

arrangements through the expiration of these contracts, which may

not occur for several years.

Very truly yours,

Cash Station, Inc.

By:

James H. Hayes,

Senior Vice President and General Counsel.

July 11, 1994.

By Hand

Richard Rosen, Esq.,

Chief, Communications and Finance Section, Antitrust Division, U.S.

Department of Justice, 555 4th Street, N.W., Room 8104, Washington,

D.C. 20001

Re: United States of America v. Electronic Payments Services, Inc.,

Civ. No. 94-208

Dear Rich: Enclosed are two copies of Citicorp's comments

concerning the proposed consent decree in the above-captioned

matter. They are submitted pursuant to Section 2(b) of the Antitrust

Procedures and Penalties Act, 15 U.S.C. Sec. 16(b), and in

accordance with the notice published in the Federal Register on May

12, 1994. The comments address Section IV, Paragraph H of the

proposed consent decree.

Please let me know if you have any questions concerning these

comments.

Sincerely,

A. Douglas Melamed

Enclosures

Comments of Citicorp Credit Services, Inc., Concerning the Proposed

Consent Decree in United States v. Electronic Payments Services, Inc.

Pursuant to Section 2(b) of the Antitrust Procedures and

Penalties Act, 15 U.S.C. Sec. 16(b), Citicorp Credit Services, Inc.

(``Citicorp'') submits these comments concerning the proposed

consent decree in United States v. Electronic Payments Services,

Inc., which was filed in the United States District Court for the

District of Delaware on April 21, 1994, and published in the Federal

Register on May 12, 1994. Citicorp is not a member of defendant

Electronic Payment Services' (``EPS'') ATM network, Money Access

Service (``MAC''). Citicorp is, however, involved in all aspects of

electronic fund payments, including credit cards, ATM cards, and,

more recently, access cards containing an integrated circuit

computer chip with a stored value function, or ``smart cards''.

The Complaint on which the consent decree is based alleges that

MAC is the largest ATM network in the United States by transaction

volume; that EPS has entered into agreements with a multitude of

banks in Pennsylvania, New Jersey, Delaware, and other states; that

more than ninety percent of all ATMs in Pennsylvania, New Jersey,

and Delaware are connected to MAC; that MAC is the ``dominant'' ATM

network in those states; and that ``nearly all banks'' regard MAC

as, in effect, an essential facility for entry into the ATM

business. ( 14, 19, 20.) The Complaint further alleges that EPS

has used its ``monopoly power'' to exclude competitors from the ATM

business in MAC's areas of dominance. (25.)

The proposed consent decree is intended to put an end to EPS'

anticompetitive practices and thereby to increase ATM network

competition. Citicorp is concerned, however, that the proposed

consent decree could be understood--or, more likely, misunderstood--

to give EPS license to engage in what may be anticompetitive conduct

with respect to the smart card business.

The source of this concern is Paragraph H of Section IV of the

proposed consent decree. Among other things, that Paragraph

prohibits EPS from restricting MAC-member banks from issuing ATM

cards that display multiple ATM network logos. The Paragraph goes on

to state, however, that EPS ``may restrict'' multiple branding of

smart cards. The Competitive Impact Statement asserts that

permitting EPS to restrict multiple branding of smart cards will not

lessen the pro-competitive impact of the consent decree (page 16,

n.10).

Citicorp understands these statements to mean only that

restrictions on multiple branding of smart cards are not prohibited

by the consent decree. But the language is not clear and could be

read to manifest a conclusion by the Department of Justice that

restrictions on multiple branding, and perhaps other EPS

restrictions on smart cards, are not anticompetitive. No such

conclusion is warranted on this record, and the Department should

make clear that it has reached no such conclusion.

It is too early to know whether future restrictions on smart

card branding, or other restrictions not barred by the proposed

consent decree, would be procompetitive or anticompetitive. It is

not difficult to imagine, however, how EPS could engage in

anticompetitive practices that could injure the fledgling smart card

business if EPS' dominant position in the ATM network market

persists.

For example, if successful development of non-MAC smart card

networks required participation of many or all of the thousands of

MAC-member banks, EPS could deal a crippling blow to competing smart

card networks by prohibiting MAC-member banks from participating in

non-MAC smart card networks. Similarly, if access to the MAC ATM

network were essential to the success of competing smart cards, EPS

could doom competitors by prohibiting such access.

EPS could achieve the same objectives through less direct means.

EPS could impose operating rules or technical restrictions on third-

party processors that as a practical matter make it impossible for

MAC-member banks' ATM machines to be accessed by non-MAC smart cards

or cards that utilize a technology different from that used for MAC

smart cards.\1\ Such restrictions would be similar to the ATM

network processing restrictions that are prohibited by the proposed

consent decree.

---------------------------------------------------------------------------

\1\Currently, EPS utilizes the smart card technology offered by

Gem Plus. Competitors including Microcard, Schlumberger, IBM, and

AT&T offer different technology.

---------------------------------------------------------------------------

Restrictions on multiple smart card branding could also make it

economically infeasible for banks to participate in more than one

smart card network. MAC-member banks that issue MAC smart cards

would have to issue additional cards to give their customers access

to non-MAC machines and networks. The resulting additional costs

could discourage MAC-member banks from participating in other smart

card networks and thereby impede the development of competing

networks.

Depending on the circumstances, any of these kinds of

restrictions could reduce competition and prevent the development of

alternative, and perhaps superior, smart card technologies. The

risk, in short, is that EPS could use its existing dominant power in

ATM networks and ATM processing, and the MAC-member banks' control

of essential facilities, to prevent the establishment of competing

smart card networks and thereby leverage its ATM monopoly into

market power in the smart card business. If so, EPS' restrictions

could injure both MAC-member banks (and their customers) and,

perhaps more important, entities (and their potential customers)

that would prefer not to join MAC but rather to compete against it.

Accordingly, Citicorp urges the Department of Justice to make

clear for the Court and the public that the proposed consent decree

does not authorize EPS to impose any branding restrictions for smart

cards or reflect any conclusion by the Department about the

competitive significance of any potential EPS restrictions regarding

smart cards. Such a clarification would not require any substantive

changes to the proposed consent decree. Instead, the Department

could clarify the meaning of the proposed consent decree in the

response to the public comments that it submits to the Court

pursuant to Section 2(b) of the Antitrust Procedures and Penalties

Act, 15 U.S.C. Sec. 16(b).

The development of smart card technology and networks offers

enormous potential benefits to the public. Citicorp urges the

Department to keep a watchful eye in order to prevent

anticompetitive conduct by EPS that could hinder the full

development of smart card technology and its applications.

Respectfully submitted,

A. Douglas Melamed

Martha Aaron Ross

Wilmer, Cutler & Pickering,

2445 M Street, N.W., Washington, DC 20037-1420, (202) 663-6000.

Counsel for Citicorp Credit Services, Inc.

July 11, 1994.

July 6, 1994.

Mr. Richard Rosen,

Chief, Communications and Finance Section, Room 8104, U.S.

Department of Justice, Antitrust Division, 555 4th Street, NW.,

Washington, DC 20001.

Dear Mr. Rosen: I wish to state my opposition to the exception

provision offered in the Consent Decree against EPS, Inc. regarding

the limited branding of Smart Cards.

Sepcifically, the exception will eventually undermine the intent

of the Decree to allow for greater competition if allowed to stand

without greater clarity. EPS should not be permitted to have a

privileged posture on limited branding for cards containing an

intergrated chip simply because they are heavily into its

innovation. Future growth of this technology will require greater

acceptance and access considerations to wit this provision ignores.

Make the better and far more universal interpretation that branding

of all types of cards is in the greater interest of competition and

eliminate this loophole provision.

Respectfully,

William R. Kennedy,

Board Member, New England Network.

July 11, 1994.

Mr. Richard Liefesbind,

Assistant Chief Communications & Finance Section, U.S. Department of

Justice, Antitrust Division, Room 8104, 555 Fourth Street, NW.,

Washington, DC 20001.

Re: United States v. Electronic Payment Services, Inc. (EPS)

Dear Mr. Liefesbind: On behalf of Meridian Bancorp, Inc.,

``Meridian,'' a bank & financial services holding company

headquartered in Reading, Pennsylvania, I would like to make the

following comments to the Consent Decree relating to the branding of

electronic stored value cards (smart cards).

It is our opinion that the provision in Section IV (H) which

would allow EPS to ``restrict the branding of access cards that

contain an integrated circuit computer chip with stored value

function'' is contrary to the competitive provisions being decreed

in the balance of paragraph H. This exemption implies that EPS would

be able to regulate the market by mandating that it's member

institutions only issue smart cards that carry the EPS brand, and

that only cards that carry the sole EPS brand would be capable of

accessing accounts at an EPS certified ATM machine. An issuer that

belongs to other networks would have to issue secondary cards, at

additional expenses, to allow it's customers access via non-EPA

networks.

Additionally, we would also like to point out the inconsistency

in the implied assumption that a smart card is different from an

ordinary ATM card which carries a magnetic stripe. It is quite

likely that both features would have to co-exist on the same card to

allow account access as well as ``refueling'' of the electronic chip

at nationally branded terminals such as CIRRUS and PLUS outside of

the EPS market area.

By allowing EPS to dictate the non-branding of these cards a

loophole has been created which would allow EPS to control network

access of it's member banks and restrict the competitive potential

of other regional networks. We feel that this exception should be

removed from the Consent Decree and in fact specific language should

indicate that smart card and smart card technology are included

within the scope of the decree.

Sincerely,

Peter L. Andersen,

Vice President, Electronic Banking.

July 11, 1994.

Sent by Telecopier and Overnight Courier

Richard L. Rosen, Esq., Chief, United States Development of Justice,

Antitrust Division, Communications and Finance Section, Room 8104,

555 Fourth Street N.W., Washington, D.C. 20001.

Re: Proposed Consent Decree, The United States of America v.

Electronic Payment Services, Inc. Civ. No. 94-0208

Dear Mr. Rosen: Included with this letter is a copy of comments

submitted today by Chemical Banking Corporation with regard to the

proposed consent decree in the above-captioned action. A

confirmation copy of these comments is also being sent to you today

by overnight courier.

If you have any questions concerning these comments, or if you

fail to receive all four pages of the comment letter, please call me

at your earliest convenience.

Very truly yours,

Robert J. Egan

RJE:cv

Enclosure

cc: Michael Hegarty, Ronald A. Braco.

July 11, 1994.

United States Department of Justice,

Antitrust Division, Communications and Finance Section, Room 8104,

555 Fourth Street NW., Washington, DC 20001.

Attention: Richard L. Rosen, Esq., Chief.

Re: Proposed Consent Decree, The United States of America v.

Electronic Payment Services, Inc. Civ. No. 94-0208

Ladies and Gentlemen: Chemical Banking Corporation

(``Chemical'') appreciates this opportunity to comment on the

proposed consent decree in the above captioned action (the ``Consent

Decree''). All terms capitalized in this letter and not defined

herein are used with the definitions assigned to them in the Consent

Decree. Based on the analysis set out below, Chemical is concerned

that Section IV-H of the Consent Decree may create a serious threat

to competitors of EPS.

Background

Chemical is a bank holding company incorporated in the state of

Delaware which participates through certain of its subsidiary banks

in many ATM networks. Chemical is also a shareholder in the New York

Switch Corporation (``NYS'') which owns, operates and controls the

New York Cash Exchange ATM network (the ``NYCE Network'') and will

be a shareholder in the proposed network to be formed by the merger

of the New York Switch Corporation and NENI Inc. when such network

is approved. Chemical's subsidiaries, Chemical Bank and Chemical

Bank New Jersey, N.A., are each a participant in both the MAC and

the NYCE networks, among other ATM networks. Through its subsidiary,

Chemical Bank, Chemical is working on projects involving the use of

smart card technology and has implemented a pilot project using AT&T

technology to test various smart card applications.

Analysis

As a corporation which directly, and indirectly through its

subsidiaries, is both an active participant in ATM networks and

involved with the development and implementation of smart card

technologies, Chemical is concerned about the potential anti-

competitive impact of that portion of Section IV-H of the Consent

Decree that provides that ``Defendant [EPS] may * * * restrict the

branding of access cards that contain an integrated circuit computer

chip with stored value function * * *'' The cards described in the

quoted language of the Consent Decree are commonly referred to as

``smart cards.'' If the Consent Decree were to be adopted in its

present form, EPS would have the right to impose such restrictions

for a period of ten years. Depending on how defendant EPS availed

itself of such right, it could place Chemical and its local bank

subsidiaries at a distinct competitive disadvantage. If, for

example, defendant EPS were to allow only the MAC brand to appear on

any smart card used in the MAC Network or otherwise restrict the

ability of other regional networks' brands to appear on a smart card

used in that network, it cold force Chemical Bank and Chemical Bank

New Jersey, N.A., along with other banks which have a significant

customer base in the area where the MAC network now dominates, to

issue two cards to each customer; one which would bear the MAC brand

and would be for use in the MAC network and a second which would be

for use in all other networks in which such banks participate,

including the NYCE network. If the cost of such a two-card program

proved too burdensome for some banks, this restriction cold lead to

those banks issuing a single card bearing the MAC brand to those

customers located in areas where the MAC Network had significant

market-power. Such action would impede the possibility of another

network being able to develop a customer base in MAC dominated areas

sufficient to challenge the MAC Network.

The Competitive Impact Statement which accompanies the Consent

Decree seeks to justify this provision of the Consent Decree by

stating that ``* * * restricting multiple branding of electronic

stored value cards will not lessen the pro-competitive impact

because `ordinary' ATM cards which are far more common will not be

restricted.'' Competitive Impact Statement, fn 10, p. 16. This

approach appears to assume that there would be two totally different

types of cards used in the markets' EPS now dominates: ordinary ATM

cards and ``smart cards.'' In fact, it is far more likely during the

period in which the Consent Decree would be in effect that most

financial institutions would issue cards that contained both forms

of technology. In the pilot project implemented by Chemical Bank

referred to above, the cards used contain both a chip and a magnetic

stripe. This will be done in order to assure that the smart cards

issued will continue to be usable in all of the ATM networks in

which Chemical Bank is a member.

Smart cards, with their enhanced capability and increased

versatility, will certainly be the emerging technology for bank

cards over the next ten years. For example, smart cards are seen as

the desirable card for use in the area of government sponsored

electronic benefit transfer programs.\1\ The rights granted to EPS

with regard to smart cards could, if permitted to remain in the

Consent Decree, influence significantly EBT programs in the states

where EPS is now the dominate ATM and POS service provider.

Therefore, to allow EPS to control the introduction of such cards

effectively allows them to restrict what may well be the next stage

of development for ``ordinary'' ATM cards as well as to restrict the

deployment of cards which blend today's ``mag'' stripe technology

with smart card enhancements. Such a result could extend EPS'

control to new areas of the payment system beyond ATM and POS

networks. If the language of the Consent Decree were modified to

provide that EPS could not restrict branding with regard to any card

which combined the smart card and magnetic stripe technologies,

much--through not all--of the concern about this provision would be

alleviated.

---------------------------------------------------------------------------

\1\See, ``From Paper to Electronics: Creating a Benefit Delivery

System That Works Better & Costs Less,'' Report of the Federal

Electronic Benefits Transfer Task Force (May 1994) p. 32 et seq.

---------------------------------------------------------------------------

The Competitive Impact Statement does not put forward any

effective argument to support granting EPS this restrictive power.

EPS itself is not a developer of smart card technology but has

acquired technology from one of a group of companies which are

developing such technology today. The Consent Decree expressly

prohibits EPS from imposing restrictions on branding in other

circumstance based on a finding of significant prior abuse by EPS

yet allows it to restrict smart card deployment based solely on the

view that such cards are not widely used today and that such an

approach will encourage innovation and technology among those

developing smart card technology. By allowing EPS to restrict

branding in the case of smart cards, EPS could effectively limit

access to the MAC network to only those entities utilizing a

technology it approves. Based on 1993 transaction volumes, the MAC

network is the largest regional ATM network in the country, greater

in size than the next two networks combined.\2\ Using this power it

could secure a preferential price from a vendor of smart card

technology in exchange for the exclusive right to be the vendor of

the only technology used in the MAC network. This could have a

chilling effect on the development of smart card technology and

grant to EPS and to its shareholder banks the ability to have a

serious impact on the technological innovations of their competitors

without any justification.

---------------------------------------------------------------------------

\2\See, American Banker, July 5, 1994, p. 12.

---------------------------------------------------------------------------

Conclusion

For the reasons stated, Chemical urges the Justice Department to

strike that portion of Section IV-H which allows EPS any right to

restrict the use of smart cards in the MAC network. Alternatively,

the language of this Section should be modified to limit to cards

that contain only smart card technology and that the restrictions on

branding will be subject to regular review by the Department of

Justice to assure their reasonableness.

Very truly yours,

Ronald A. Braco

July 11, 1994.

By Telecopy and Courier

Richard Rosen, Esq.,

Chief, Communications and Finance Section, Room 8104, U.S.

Department of Justice, Antitrust Division, 555 Fourth Street, N.W.,

Washington, D.C. 20001.

Richard Liebeskind, Esq.,

Assistant Chief, Communications and Finance Section, Room 8104, U.S.

Department of Justice, Antitrust Division, 555 Fourth Street, N.W.,

Washington, D.C. 20001.

Re: Comments of Money Station, Inc. on Proposed Final Judgment in

United States v. Electronic Payment Services, Inc., Civ. No. 94-208,

D. Del.

Gentlemen: Money Station, Inc. (Money Station) submits this

comment pursuant to 15 U.S.C. Sections 16(b), (d), on the proposed

Final Judgment in United States vs. Electronic Payment Services,

Inc. published on May 12, 1994, at 59 Fed. Reg. 24711 et seq.

According to the Competitive Impact Statement published along

with the proposed Final Judgment, Electronic Payment Services, Inc.

(EPS) has maintained a ``tying arrangement that is per se unlawful''

by foreclosing independent third-party ATM processors (id. at 24718)

as ``has maintained a monopoly in regional ATM network access''

(id.) in numerous states, including ``substantial portions of the

state of Ohio'' (id). The proposed Final Judgment is intended to

advance the public interest in both a direct and an indirect way.

The intended direct benefit is to increase competition in the market

for ATM processing services by eliminating the tying arrangement.

The intended indirect benefit is to increase competition in the

market for regional ATM access by making it possible for banks to

join multiple ATM networks through third-party ATM processors.

Money Station operates an ATM network principally located in

Ohio, but which also has participants located in Kentucky, Indiana

and West Virginia (where EPS is also alleged to have monopoly power)

with ATM machines that bear the Money Station trademark and are

linked to the Money Station network. Money Station represents

exactly the kind of potential and actual competition that the

Government looks to as a means of making the market for regional ATM

access more competitive in the geographic areas where MAC is

currently the ubiquitous network with market power. Consequently,

Money Station has reviewed the proposed Final Judgment carefully.

Money Station agrees with the Government that elimination of the

tying arrangement, if effectively implemented, will open up

competition for ATM processing services. Money Station, however, has

far less confidence that competition in ATM processing services can

overcome the ``collective action program,'' referred to in the

Competitive Impact Statement, in the market for regional ATM access.

(Id. at 24720.) There are genuine economic costs associated with

joining more than one regional network (e.g., card issuance costs,

signage costs). Unless multiple banks act simultaneously to join one

or more competing networks in addition to the ubiquitous network, no

benefits can accrue to the individual bank that joins one or more

such competing networks. In other words, no bank will incur the

costs to join network B in addition to the ubiquitous network A

unless network B provides sufficient ATMs and cards that the bank's

transaction volume flowing through network B generates enough income

(or savings) to justify the costs associated with joining network B.

That transaction volume depends on the actions of other banks. This

``collective action'' problem is exacerbated if the ubiquitous

network with market power is able to establish any disincentives

(whether technical or economic) against joining other networks.

Nevertheless, Money Station recognizes that elimination of the

tying arrangement challenged in the complaint in this case, if

effectively implemented, does open up competition for ATM processing

services and is thus in the public interest. Money Station further

recognizes that elimination of the tying arrangement, again if

effectively implemented, is a necessary first step, even if not a

totally sufficient step, in opening up the market for regional ATM

access and so, again, is in the public interest. Money Station

therefore supports the proposed Final Judgment as a general matter.

To ensure, however, the effectiveness of the proposed Final

Judgment, Money Station recommends that several issues be addressed

before the proposed Final Judgment is approved.

First, the same card that provides access to ATMs also usually

provides access to POS devices, and virtually every ATM network,

including the networks operated by EPS and Money Station, also

operates a POS network. As Money Station reads the proposed Final

Judgment, EPS is free in the future to place restrictions on members

of its MAC network (which operates both a POS and ATM network) with

respect to their right to be members in other POS networks or even,

possibly, on their right to use third-party processors for their POS

outlets. Such POS-related restrictions, if imposed, would add to the

entry barriers in regional ATM access already created by the

``collective action'' problem. The proposed Final Judgment should be

clarified so that access to the MAC ATM network or to the MAC POS

network is not denied, impeded, or discriminated against through

pricing or other means if a financial institution elects to join a

competing POS network.\1\

---------------------------------------------------------------------------

\1\Money Station believes that EPS enjoys a position of

dominance with respect to access to regional POS networks that is

comparable to the dominant position EPS has maintained in markets

for regional ATM network access.

---------------------------------------------------------------------------

Second, the proposed Final Judgment uses the phrase ``shall not

restrict in any manner'' or similar phrases several times. For

example, Section IV(H) mandates that ``Defendant shall in no manner

restrict any depository institution ATM deployer from enabling ATMs

to function in multiple ATM networks.'' There is no definition of

the verb ``restrict'' in the proposed Final Judgment. The proposed

Final Judgment clearly does prohibit directly exclusionary contracts

and discriminatory pricing related to ATM network membership.

However, it is not clear that the proposed Final Judgment deals

effectively with various other disincentives that EPS may establish

that would further discourage banks from incurring the already

significant costs and risks of joining multiple networks. Although

the proposed Final Judgment does prohibit penalties imposed on or

direct legal obstructions to a bank's joining a competitive network,

it is not clear that a reward for not joining to competitive network

is a restriction under the proposed Final Judgment. Given EPS's

history of practices to preserve its monopoly in the regional ATM

access, it seems prudent to clarify that the phrase ``shall not

restrict'' bars any practice that creates disincentives for a bank

to belong to multiple networks.

Third, Section IV(G)(2) of the proposed Final Judgment appears

on its face to give EPS the discretion, with respect to transactions

between depository institutions that are members of an EPS network

and switched by a third-party processor, to impose a royalty fee

equal to the price of transactions switched (i.e., processed) by EPS

itself. Because the third-party processor must charge some fee to

cover its costs in this situation, the combination of a license fee

equal to EPS's fee (referred to in this provision as ``loyalties

that shall not be greater than the price for switched

transactions'') plus the third-party processor's fee will

necessarily exceed EPS's direct fee. Therefore, this provision

appears to give EPS a means to continue to hamper severely third-

party processors seeking to dissipate EPS's monopoly power. This may

well negate the effectiveness of the proposed Final Judgment's

intent to open up competition in the ATM processing services and,

indirectly, in regional ATM access. In Money Station's view, Section

IV(G)(2) should either be revised or clarified.

Fourth, Money Station believes that skeptical scrutiny should be

given to the provision in Section IV(H) that permits EPS to

``restrict the branding of access cards that contain an integrated

circuit computer chip with a stored value function.'' This language

is an exemption for what are known as ``smart cards'' from the

requirement in Section IV(H) that EPS cannot bar ATM card issuers

that choose to be affiliated with multiple ATM networks from issuing

cards that display multiple ATM network logos or from displaying

multiple ATM network logos on their ATMs. Money Station believes

that this exemption could well have a powerful anti-competitive

effect on the development and competitiveness of ATM networks other

than EPS. This effect would occur if EPS took the position that the

exemption language applied to access cards that contain both a

normal ``mag stripe'' feature--as do most ATM cards--as well as a

``smart card'' feature. If so, and if EPS inserted a ``smart card''

feature on an appreciable number of cards with a traditional ``mag

stripe'' feature,\2\ the multi-branding purpose of Section IV(H)--

which seeks to sustain the competitiveness of other ATM networks--

would be undermined. In addition, Money Station is concerned that as

a result of this exemption, EPS will require that ATM or POS

machines that are part of EPS's network may not accept ATM or POS

cards with a ``smart card'' feature other than that utilized or

approved by EPS. In this event, the pro-competitive purpose of

preventing EPS from barring co-branding of ATM machines would also

be undermined. To the best of Money Station's knowledge, EPS is not

a developer of ``smart card'' technology, but simply a customer of

developers of that technology. Money Station thus believes that the

theory cited in support of the exemption--``that * * * restrictive

branding of electronic stored value cards will encourage innovation

and competition'' in connection with such cards\3\--has no

applicability to EPS.

\2\Money Station believes that this is highly likely because EPS

is likely to want its access cards to work at ATM machines that lack

an EPS trademark, but contain the PLUS or CIRRUS trademarks and that

are configured only to accept cards with a ``mag stripe.''

\3\59 Fed. Reg. 24721, n. 10.

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Respectfully submitted,

A. Edward Gough,

President.

July 11, 1994.

By Hand Delivery

Richard L. Rosen, Esquire,

Chief, Communications and Finance Section, Antitrust Division, U.S.

Department of Justice, 555 4th Street, N.W.--Room 8104, Washington,

DC 2001.

Re: United States v. Electronic Payment Services, Inc. Civ. No. 94-

208 (D.Del.).

Dear. Mr. Rosen: I am writing on behalf of The New York Switch

Corporation (``NYS'') to comment on the proposed Stipulation, Final

Judgment (``the decree''), and Competitive Impact Statement in

United States v. Electronic Payment Services, Inc. (``EPS''), Civ.

No. 94-208, as set out at 59 Fed. Reg. 24711 (May 12, 1994). NYS

operates the NYCE ATM/POS network. For many years, NYCE

has been foreclosed from competing against EPS' MAC

network in Pennsylvania and other states where MAC has successfully

established monopoly power through the very types of exclusionary

practices which are the subject of the decree. By prohibiting its

members from joining NYCE or selecting NYCE as their processor, EPS

has largely succeeded in insulating itself from competition from

NYCE, as well as from other regional ATM networks and third party

processors, in Pennsylvania and a number of other states.

The remedial purpose of the proposed decree is to check EPS'

market power by facilitating the entry of competing regional ATM

networks and ATM processors into markets in which EPS has heretofore

exercised market power through various exclusionary practices. To

that end, the decree would prohibit EPS from restricting its

depository institution members from belonging to other networks;

under the decree, EPS also cannot restrict any depository

institution from (i) ``displaying multiple ATM network logos on its

ATMs''; (ii) ``issuing cards that display multiple ATM network

logos''; or (iii) ``enabling ATMs to function in multiple ATM

network.''\1\ NYS applauds the Department of Justice for bringing

this action and for achieving the foregoing remedial provisions,

which NYS supports.

---------------------------------------------------------------------------

\1\59 Fed. Reg. at 24717.

---------------------------------------------------------------------------

What concerns NYS is the ambiguity and potential for abuse of

the exception permitting EPS to ``restrict the branding of access

cards that contain an integrated circuit computer chip with a stored

value function''\2\ (referred to as ``smart cards''). According to

the Competitive Impact Statement, the Department has concluded that

``[p]ermitting EPS to restrict the multiple branding on smart cards

will not undercut the impact of the decree because the branding of

ordinary ATM cards, which are not by far more common, is not

restricted.''\3\ In conjunction with this statement, the Department

cites the contention of EPS ``that allowing restrictive in services

among firms marketing such cards.''\4\

---------------------------------------------------------------------------

\2\Id. (emphasis added).

\3\Fed. Reg. at 24721, n.10.

\4\Id.

---------------------------------------------------------------------------

NYS believes that this provision, which is an exception to the

general prohibitory thrust of the decree, creates a potential

loophole which EPS could interpret to perpetuate its exclusionary

practices with respect to ATM cards. For this reason, while NYS

generally supports the decree, it nevertheless urges the Department

to withhold its consent unless the exception is modified or

clarified as suggested below to reduce its anticompetitive

potential.

I. Tunney Act Standards

As the Department well knows, the Tunney Act, under which these

comments are permitted, is intended to ensure that antitrust consent

decrees serve the public interest. As the court in the recent

Airline Tariff Publishing case pointed out, one of the tests for

determining whether the entry of a proposed consent judgment is in

the public interest is whether the proposed decree ``effectively

opens the relevant markets to competition and prevents the

recurrence of anticompetitive activity.'' United States v. Airline

Tariff Publishing Co., 1993-2 Trade Cas. (CCH)  70,409 at 71,167

(D.D.C. Nov. 1, 1993, quoting United States v. American Del. and

Del. Co., 552 F. Sup. 131, 153 (D.C. 1982), aff'd sub. mom.,

Maryland v. United Sates, 460 U.S. 1001 (1983). Using language that

is applicable here, the court inquired whether the proposed final

judgment ``Using language that is applicable here, the court

inquired whether the proposed final judgment ``prohibit[ed] both

behavior that the government receives to be a current antitrust

violation and behavior that could enable the settling defendants to

devise methods through which to engage in anti competitive

behavior.''\5\

---------------------------------------------------------------------------

\5\Airline Tariff Publishing Co., 1993-2 Trade Cas. (CCH) at 71,

168 (emphasis added).

---------------------------------------------------------------------------

NYS submits that the ambiguous language of the smart-card

exception (i.e., ``cards that contain'' the stored value function)

could allow EPS to continue its exclusionary conduct with respect to

ATM cards simply by merging the ATM cards with smart-card

functionality. The Competitive Impact Statement does not appear to

recognize the ability of EPS to take advantage of the smart-card

exception to avoid the prohibitions of the decree. Based on its

knowledge of the impending market impact of smart cards, NYS

strongly believes that the Department must directly address the

anticompetitive potential of this ambiguous smart-card exception.

2. The Smart Card Exception Undermines the Purposes of the Decree

EPS has established a pattern of excluding competitors by

conditioning its financial institutions' membership on their

agreement not to belong to other networks and not to use the brands

of those networks on their cards and ATMs. NYS is concerned that the

smart-card exception could be interpreted and exploited by EPS to

subvert the general prohibitions in the decree against ATM and ATM

card branding restrictions. Through this exception, EPS would be

able to convert its ATM cards to dual-function cards and escape the

prohibitions of the decree, to the detriment of NYS competition

generally.

The Department's acceptance of the smart-card exception appears

to rest on two premises: one is that stored value cards, with their

computer-chip component, are so distinct from ``ordinary ATM cards''

(which rely on magnetic stripe technology) that the exception will

not significantly affect the member institutions' use of ``ordinary

ATM cards'' which are the primary focus of the Complaint; the other

premise appears to be that the current number of smart cards is

still relatively low compared with the number of ordinary ATM cards

and that any anticompetitive consequences of the exception will

therefore be negligible. NYS disagrees with both premises.

It cannot be assumed that ``ordinary ATM cards'' and smart cards

are and will remain separate, stand-alone devices. NYS has reason to

believe that the smart card being marketed by EPS to financial

institutions is not, in fact, a product separate from the ordinary

ATM card but is instead a hybrid, multi-function card that contains

both a computer chip with stored value functionality and a magnetic

stripe with on-line debit functionality. This dual functionality in

a single card is already being tested and its use is likely to

increase substantially in the near future. Moreover, as several

industry publications disclose, EPS intends to offer a multi-purpose

smart card which is basically a combination ATM/stored value card.

For example, one source reports that:

Consumers will get a micro-chip smart card that also has a mag-

stripe on back. The card will be available for both on-line debit

and off-line prepaid debit applications. When consumers use the card

in an ATM or on-line POS application, a terminal will read the mag-

stripe and when used in an off-line prepaid application, the

terminal will read and deduct funds from the chip memory.\6\

\6\Bank Network News, Vol. 11, No. 7, Aug. 26, 1992, at 7. See

also American Banker, Feb. 12, 1993, at 3 (reporting that EPS stored

value card ``doubles as an ATM card'').

---------------------------------------------------------------------------

Nor is it correct to assume that the number of smart cards will

remain relatively low. Although just emerging, smart-card

applications are expected to expand rapidly. EPS apparently intends

to market its smart card aggressively to financial institutions

throughout its service area. While the Department correctly observes

that the number of smart cards is now relatively small when compared

with ordinary ATM cards, EPS has made it clear that it sees the

potential for significant growth in the use of its hybrid ATM card

with a computer chip.\7\

---------------------------------------------------------------------------

\7\ABA Banking Journal, July 1993, at 68 (``MAC's 26 million

card holders will still use their cards for ATM transactions, but

those with the smart-card version will be able to load monetary

value onto the cards at the ATMs, as well. EPS estimates there will

be 20 million smart-card users by 1998.''); see also, American

Banker, Feb 12, 1993 (reporting that EPS sees potential volume

greater than ATM debit card programs).

---------------------------------------------------------------------------

The decree explicitly bars EPS from restricting its members'

branding of ATM cards. Yet, the intention and effect of the smart-

card exception are ambiguous. It is possible that EPS would be able

to prohibit all of its member banks from placing the NYCE brand or

other competing network brands\8\ on any card (including an

``ordinary ATM card'') simply by adding a computer chip with stored

value functionality to its cards, a modification which is neither

difficult nor expensive.

---------------------------------------------------------------------------

\8\Of course, the smart-card exception would also permit EPS

selectively to allow dual branding with national network brands

while prohibiting co-branding with NYCE and other regional network

competitors. In this manner, EPS could exclude NYCE (one of its

strongest competitors) from those very areas where, as the

Competitive Impact Statement notes, the MAC network has a history of

``largely successful efforts to keep competitors out. * * *'' 59

Fed. Reg. at 24719.

---------------------------------------------------------------------------

If the smart-card exception could be interpreted in the manner

just suggested, the potential for exclusion of competing networks

through the exception is not an imaginary concern. A recent article

in the trade press has reported that Delaware financial institutions

accounting for over 90% of the state's DDA base will issue EPS smart

cards.\9\ As the Complaint notes, the MAC network already has a

monopoly position in Delaware; virtually all Delaware financial

institutions belong to MAC. Given MAC's dominance, the smart-card

exception will offer MAC another vehicle for erecting a barrier to

entry into the state. If the exception means that EPS can tell its

financial institution members that they cannot put the NYCE brand on

any MAC-branded cards because those cards also happen to contain an

integrated computer chip for stored value functionality, those

institutions will have to issue (at considerable cost) separate

cards if they wish to offer access to NYCE. In those states where

MAC already has a monopoly, it is difficult to see what possible

incentive the financial institutions would have for joining NYCE at

all.

---------------------------------------------------------------------------

\9\Card FAX, May 23, 1994, at 1.

---------------------------------------------------------------------------

Furthermore, the smart-card exception is ambiguous not only with

respect to exclusive branding of cards but also with respect to

exclusive branding of ATMs. Under the decree, EPS is barred from

restricting its members' multiple branding of ATMs and from

restricting ``any depository institution ATM deployer from enabling

ATMs to function in multiple ATM networks.'' NYS is concerned,

however, about ambiguity in the Competitive Impact Statement, where

it says, ``EPS must permit MAC members to display multiple network

marks on ATMs and ATM card, except for electronic stored value

cards.''\10\ It is NYS' understanding that EPS' smart cards will be

used in its existing ATMs which will be retrofitted to handle the

additional smart-card functionality. If EPS is permitted, through an

evasive interpretation of the smart-card exception, to refuse

acceptance of smart cards bearing any brand other than its own at

ATMs in its network the decree's objective of facilitating

competitive access by other networks to customers in states where

EPS has ATM dominance will be seriously undermined. This issue also

requires clarification.

---------------------------------------------------------------------------

\10\59 Fed. Reg. 2471 (emphasis added).

---------------------------------------------------------------------------

The Smart Card Exception Will Not Encourage Innovation and

Competition

In the Competitive Impact Statement, the Department acknowledges

the following justification for the smart-card exception: ``allowing

restrictive branding of electronic stored value cards will encourage

innovation and competition in services among firms marketing such

cards.''\11\ In NYS' judgment, this is not correct and does not

justify the smart-card exception, even if the exception is meant to

apply only to stand-alone smart cards; this reason certainly does

not justify application of the exception to a combined ATM/smart

card.

---------------------------------------------------------------------------

\11\59 Fed. Reg. at 24721, n.10. It is clear that the Department

concurs with this contention of EPS, but this reason appears to be

offered as an explanation for the Department's lack of concern about

the smart-card loophole.

---------------------------------------------------------------------------

First, smart-card technology is not in any sense ``new'' or

``unique''; it has been deployed widely in Europe and Japan for

several years and is now being used in various applications in this

country as well.\12\

---------------------------------------------------------------------------

\12\Smart cards are used in both ``closed system'' and ``open

system'' environments. ``Closed systems'' include both single-vendor

stored value systems and systems designed for single-site use, such

as a public transit system or a university campus. An ``open

system'' refers to a multiple-vendor, multiple-site system, similar

to a POS network in which the value stored on the card can be used

at a wide range of participating vendors.

---------------------------------------------------------------------------

Second, EPS is not truly an ``innovator'' with respect to smart-

card technology--rather, it is a single customer of the technology.

The actual producers and innovators of smart-card technology are

data-technology firms such as Schlumberger, GemPlus, Microcard, IBM

and AT&T. To the extent the EPS' application of the technology makes

any contribution to technological innovation or development, many

other entities, including individual banks and the national credit

card networks, are also actively engaged in the development of

various payment-systems applications of smart-card technology.\13\

---------------------------------------------------------------------------

\13\For example, NYS is aware that Chemical Bank has developed

and is pilot-testing a card with an embedded, integrated circuit

chip and a co-resident magnetic stripe, which allows holders to do

regular ATM transactions and to pay for purchases with stored cash

value. Chemical Bank's cards will be used in ATMs equipped with

smart-card reader/writer capability. Citicorp is also reported to be

testing a smart card. Bank Network News, Vol. 12, No. 16, January

12, 1994, at 1.

---------------------------------------------------------------------------

Most importantly, it is difficult to see how permitting EPS to

restrict its member banks from putting the logos of NYCE and other

networks on their smart cards in those states where EPS has market

power will encourage innovation or technological competition. While

NYS recognizes that, under certain conditions, a restriction on co-

branding of a product may stimulate interbrand competition (thereby

stimulating innovation), this benefit is achievable only where the

firm imposing the restriction is in fact subject to interbrand

competition. The Complaint, however, makes clear that EPS has no

competition in at least five states; in those states, EPS has the

ability to lock financial institutions into use of a single smart

card, thereby excluding any competition.

In sum NYS believes that the smart-card exception will not

promote innovation in the development of smart-card technology, even

if the scope of the exception is confined to smart cards only. It is

certain that an ambiguous exception which would permit evasion of

the decree would not be not be justified on that basis.

Conclusion

The intent and scope of the smart-card exception contained in

Paragraph IV.H of the proposed decree are ambiguous. The exception

is susceptible to an interpretation by which EPS could continue the

exclusionary practices which the decree seeks to redress simply by

adding the smart-card function to its ATM cards. surely the

Department did not intend to create such a device for evasion of the

decree. NYS respectfully submits that the exception should be

amended to clarify that the exception applies only to the banding of

stand-alone, single-function smart cards (those with stored value

functionality provided by an integrated computer chip) and not to

any type of multiple-function or hybrid ATM cards (those that use

magnetic stripe technology).

To repeat, NYS supports the general thrust of the proposed decree

and greatly appreciates the efforts of the Department to open the MAC

network to competition. Even so, the ambiguity of the smart-card

exception and the potential for circumvention of the decree compel the

submission of these comments and concerns.

Very truly yours,

Gary S. Roboff,

President, The New York Switch Corporation.

cc: Mr. Richard Liebeskind, Assistant Chief, Communications and

Finance Section.

July 11, 1994.

Mr. Richard Liebeskind,

Assistant Chief, Communications and Finance Section, Antitrust

Division, U.S. Department of Justice, 555 Fourth Street, NW., Room

8104, Washington, DC 20001.

United States of America v. Electronic Payment Services, Inc.

Dear Mr. Liebeskind: The enclosed comments on the proposed Final

Judgment in the above-entitled case are submitted pursuant to 15

U.S.C. Sec. 16(b). The comments are being submitted on behalf of a

client that has an interest in this matter, but prefers to remain

anonymous. The client is deeply concerned that, were its name or

that of its counsel known, the submission of these comments might

cause it to suffer retaliation from its competitors. Accordingly,

this letter, and the enclosed comments, are hereby submitted without

signature or any other information that might indicate their source.

Please submit the comments to the Court and publish the comments and

the Department's response in the Federal Register, as provided in

the Competitive Impact Statement and under the Tunney Act.

In the United States District Court for the District of Delaware

United States of America Plaintiff, v. Electronic Payment

Services, Inc., Defendant.

Comments on the Proposed Final Judgment, Pursuant to 15 U.S.C.

Sec. 16(b)

The following comments on the proposed Final Judgment in the

above-captioned action are hereby submitted, pursuant to 15 U.S.C.

Sec. 16(b). The comments are submitted on behalf of a client that

does not wish its identity to be disclosed because of its concerns

that its competitors might retaliate against it were its identity

known.

Background

There has been a steady shift in the credit card processing

industry from processing of card transactions by financial

institutions to processing by third party, non-financial

institutions. The 1993 Edition of Card Industry Directory: The Blue

Book of the Credit and Debit Card Industry of the United States

(Faulkner & Gray) (hereinafter, ``the 1993 Card Industry

Directory'') reported that the merchant processing business ``has

come to be dominated by firms not controlled by banks, a trend that

concerns some executives in the banking community.'' (See Exh. A.)

The most recently available figures show that non-banks have moved

to the top of the credit card processing business, with 3 of the top

10 processors being institutions that are not affiliated with

depository institutions. (See Exh. B, the 1994 Edition of Card

Industry Directory: The Blue Book of the Credit and Debit Card

Industry of the United States (Faulkner & Gray) (hereinafter, ``the

1994 Card Industry Directory''), ``Top 25 Merchant Acquirers'' list,

showing NaBANCO (#1), Card Establishment Services (#3) and National

Data Corp. (#7) among the top 10 processors, with the top 10

processors commanding more than 49% of the market.)

The same trend is apparent in the point-of-sale (``POS'') debit

and ATM processing markets.\1\ While those processing markets have

traditionally been dominated by financial institutions (with EPS,

the owner of MAC, being the largest of the top 5 Electronic Funds

Transfer (``EFT'')\2\ Processors, by a significant margin), in 1993,

2 non-financial institutions--Deluxe Data Systems and Electronic

Data Systems--were included among the top 5 EFT Processors. (See

Exh. C, 1994 Edition of the Debit Card Directory: The Complete Guide

for the Debit Card Industry in the United States (Faulkner & Gray)

(hereinafter, the ``1994 Debit Card Directory'') at p.22.)

---------------------------------------------------------------------------

\1\Cards issued by depository institutions and activated by the

holder's entry of a personal identification number (PIN) can be used

in ATMs located at financial institutions and in or near retail

establishments, as well as in point-of-sale (POS) debit terminals at

merchants. When the card is used in an ATM, the cardholder enters

his personal identification number. The transaction is then

authorized by the financial institution that issued the card, the

cardholder receives the authorized amount of cash, and the

depository account to which the card is tied is debited by that

amount. When the card is used in a POS terminal for a debit

transaction, the transaction likewise begins with entry of the

cardholder's PIN and an on-line authorization of the transaction

from the card-issuing financial institution. Once the transaction is

approved, the customer receives the merchandise or services and, in

many cases, cash back from the merchant (in rough analogy to paying

for groceries with a check for more than the amount of the

purchase). A hold is then immediately put on the customer's funds on

deposit for subsequent payment to the merchant.

\2\EFT (or Electronic Funds Transfer) is the movement of funds

from one source to another using electronic transmission over

telecommunications networks.

---------------------------------------------------------------------------

Like the market for processing services, the market for

ownership of ATMs and other similar devices has expanded well beyond

depository institutions. However, the judgment is somewhat ambiguous

as to its application to ATMs owned by entities other than

depository institutions. It should be clarified to provide that all

ATMs, and not just ATMs owned by depository institutions, are

included within its scope. Today, six non-depository institutions

rank among the top 300 ATM owners, owning more than 3,000 terminals.

(See Discussion, infra, under Comment No. 1.)

Second, and more significantly, the judgment fails to reach the

overlapping and interchangeable POS debit market. (See Discussion,

infra, under Comment No. 2.) According to a survey published by

Faulkner & Gray in 1993, in the next 7 years significant growth is

expected in the EFT market, which encompasses both ATM and POS.

Until now, the growth in EFT has primarily been fueled by ATM

growth. While ATM growth is expected to continue, it is projected

that the most sizeable increases in the EFT market will come from

debit POS. Many networks have predicted that POS alone will grow by

more than 50% a year and, that by the year 2000, POS transactions

will exceed ATM transactions. (See Exh. D, 1994 Debit Card

Directory, Chapter 9, Section 1.) If POS grows at such rates, the

failure of the proposed judgment to include debit POS could render

it less and less effectual as time progresses and the EFT market

changes.

Moreover, it is not apparent that the Department of Justice

conducted a thorough review of the existing operating, technical,

and financial requirements that restrict third party processors'

access to the network, or the pricing mechanisms governing such

access, to ensure that the order truly provides third party

processors with meaningful, non-discriminatory access to the

network. As discussed in Comments 3 and 4, below, the operating,

technical and financial regulations, and the complex pricing

structure imposed by MAC and other networks, have the potential to

pose a mine field, severely restraining third party entry to the

processing market. Those regulations and pricing must be examined

carefully and safeguards need to be put in place to assure future

compliance with the judgment.

Accordingly, in order for the judgment to meet the Department's

goal of eliminating MAC's monopoly power in card processing in the

affected region, the proposed Final Judgment must (1) extend to ATMs

owned by non-depository institutions; (2) encompass the debit POS

network; (3) require the Department of Justice to review operating,

technical, and financial restrictions placed on third party

processors by the ATM and debit networks and put related safeguards

into place to ensure that the networks provide meaningful access by

third party processors; and (4) require the Department of Justice to

examine the pricing structure of the networks, and put certain

safeguards into place, to be certain that the costs assessed to

third party processors are truly non-discriminatory.

Specifically, the following modifications must be made to the

proposed Final Judgment:

Comment No. 1

The Final Judgment should be clarified to include ATMs owned and

deployed by non-depository institutions, as well as those owned and

deployed by depository institutions.

Discussion

Section II.B of the proposed Final Judgment defines ``ATM'' as a

machine ``typically owned and deployed by a depository

institution.'' The first sentence of section II.H defines depository

institution as ``a bank, saving bank, savings and loan association,

credit union or other institution authorized by federal or state law

to take deposits.'' In a second sentence, Section II.H of the

judgment goes on to state that, for purposes of the Final Judgment,

depository institution includes ``any other member of a branded ATM

network operated by defendant that also deploys ATMs within that

network.''

While ATMs have traditionally been owned by depository

institutions, a growing number of non-depository institutions are

entering the ATM market. For example, the 1993 Card Industry

Directory boasted among its list of the ``Top 300 ATM Owners'' two

supermarket chains, Publix Super Markets, Inc. and Wegmans Food and

Pharmacy, which, obviously, lack the demand deposit accounts

necessary to constitute a ``depository institution'' within the

meaning of the first sentence of section II.H. (See Exh. E., which

ranks Publix as the 21st largest ATM owner in the United States with

483 ATMs, and Wegmans as number 106 with 91 ATMs.) The 1994 Debit

Card Directory showed a marked increase in the number of non-

depository institutions owning ATMs and the number of ATMs owned by

those institutions: the number of non-depository institutions owning

ATMs increased from two to six, and the number of ATMs owned by such

non-depository institutions increased from 574 ATMs (in 1992) to

3343 (in 1993). (See Exh. F, listing Electronic Data Systems Inc. as

number 7, with 1,200 ATMs; Affiliated Computer Systems as number 10,

with 950 ATMs; Publix as number 28 with 497 ATMs; FIserv as number

29, with 496 ATMs; Delchamps Supermarkets as number 98, with 100

ATMs; and Wegmans as number 100, with 100 ATMs.)

In light of the rapidly changing identity of the ATM owners, the

failure to expressly include in the Final Judgment ATMs owned and

deployed by non-depository institutions creates a substantial

potential loophole in the judgment. As the judgment will remain in

effect for the next 10 years, such a possible loophole could have an

adverse effect on competition. Unless the judgment is clarified to

include ATMs owned and deployed by non-depository institutions, the

goals of the judgment--to open up the ATM network and ATM processing

markets to competition by prohibiting MAC from discriminating

against third party processors in terms of pricing and access--will

not be effectuated in this growing segment of the ATM market.

Comment No. 2

The Final Judgment should apply not only to Us, which perform

the traditional functions of dispensing cash, account inquiry,

payment authorization, transfer or deposit, but also to retail

point-of-sale (``POS'') card acceptor machines that perform debit

transactions, that is, POS terminals that allow consumers to use

bank cards linked to demand accounts to pay for services or

merchandise and, often, receive cash back from the merchant, and

contemporaneously debit the customer's depository account.

Discussion

Cash (ATM) and debit (POS) terminals provide the same service.

They are sufficiently interchangeable that consumers view them as

substitutes for one another and utilize them for many of the same

transactions.\3\ (See United States Department of Justice Horizontal

Merger Guidelines (1992) at 1.1, Trade Reg. Rep. (CCH) 13,104 at

p. 20,572 (1992).) MAC has a significant presence in both the ATM

and POS terminal markets, as set forth below. Accordingly, all card

acceptor machines, and not merely ATMs, should be included within

the terms of the Final Judgment.

---------------------------------------------------------------------------

\3\Among some industry specialists, cards are beginning to be

known simply as ``access devices'' and the terminals that accept

them, whether for an ATM, debit or credit transaction, as acceptors

of access devices.

---------------------------------------------------------------------------

Debit transactions at U.S. merchants utilizing POS terminals

with PIN-pads have risen substantially over the last few years. The

June 1993 issue of The Nilson Report (Issue 549) (the leading news

and advisory service for credit/debit-card executives) reports that,

in 1992, debit card transactions at U.S. merchants with PIN-pad POS

terminals were up 30% from 1991, sales volume was up 47%, and the

number of POS terminals with PIN pads was up 77%. (See Exh. G.)

As the 1993 Card Industry Directory indicates (at p. 193), the

debit card is positioning itself to ``rival the credit card as a

payment system.''

``With MasterCard and Visa busily wooing card issuers to joint

their respective Maestro and Interlink national on-line point-of-

sale programs, the debit card finally is reaching a position to be

more than an ATM access device. Consequently, debit card issuers

have shifted their attention away from simply getting more cards

into account-holders hands and toward activating the cards already

out there. The objective is to position debit as a revenue generator

that could someday rival the credit card as a payment system.''\4\

---------------------------------------------------------------------------

\4\The national debit networks operated by VISA and MasterCard

under the ``Interlink'' and ``Maestro'' logos, respectively, differ

from the previously existing VISA and MasterCard debit cards.

Interlink and Maestro transactions must be generated on POS PIN-pad

terminals and, once approved, result in an automatic hold on the

customer's deposit account. Traditional VISA and MasterCard debit

transactions do not incorporate PIN security and do not place a hold

on the cardholder's account.

---------------------------------------------------------------------------

In addition to its dominance in the ATM market, MAC has a

significant, and growing, presence in the debit POS market. At year-

end 1992, MAC operated the third largest PIN-based debit system in

the United States (ranked by transaction volume). (See Exh. G.) In

that year, MAC showed the strongest growth of the top 5 PIN-based

debit systems (with the top 5 systems switching 84% of all

transactions) and offered the largest terminal base. (See id.)\5\

---------------------------------------------------------------------------

\5\The numbers attributable to MAC in The Nilson Report did not

include the ninth rank Owl system, which at that time was in the

process of reissuing all of its cards to carry the MAC name. (See

Exh. G.)

---------------------------------------------------------------------------

MAC's position in debit POS continued to grow and strengthen.

According to the 1994 Card Industry Directory, the four institutions

that own defendant EPS--Banc One Corp., PNC Financial Corp., Key

Corp. a/n/a Society Corp. and CoreStates--rank 7th, 13th, 22nd and

27th among the ``100 Most Active Debit Card Bases.'' (See Exh. H.)

Moreover, the 1994 Debit Card Directory shows that EPS is the second

largest Electronic Funds Transfer Network (ATMs and POS terminals

combined) (see Exh. I) and the third largest POS network, with MAC

doubling the number of its on-line terminals from 15,000 in 1992 to

32,000 in 1993 (see Exh. J. 1994 Debit Card Directory at pp. 25-26).

Indeed, of the top 50 EFT networks in 1993, MAC was the fastest

growing EFT Network in the country, with a 78% increase in

transactions. (See Exh. I, p. 33.)

To the ultimate consumer, ATM and POS are interchangeable

because they meet the same needs. MAC is a major factor in both

segments of the market. As POS terminals increasingly rival ATMs and

credit cards as payment mechanisms, the interests of the United

States in opening both the network and the processing markets now

dominated by MAC to competition could be frustrated unless the Final

Judgment is extended to encompass POS. Because the Final Judgment is

to remain in effect for 10 years, the failure to make that judgment

applicable to point-of-sale debit networks could leave that

substantial, fast-growing segment of the market subject to the same

abuses by MAC that the ATM system has been and allow MAC to evade

the purpose and intent of the order.

Comment No. 3

The Final Judgment should (a) provide for a comprehensive review

by the Department of Justice of the MAC operating procedures to

determine that the existing operating procedures and associated

technical financial requirements do not impose requirements on third

party processors, or give MAC control over unnecessary devices or

equipment, that could give MAC the ability to, effectively, exclude

competitive processors; and (b) require MAC, in the future, to

publish and circulate to third party processors all proposed changes

in the operating regulations at the same time that such changes are

circulated to intercept processors.

Discussion

The goal of the Final Judgment is to open up the processing

market to competition. Section IV.E of the Final Judgment requires

defendant EPS to permit third party processors to access the MAC

network on the same terms as intercept processors so long as the

third party processor meets the technical, financial and operating

criteria for intercept processors. It also permits MAC to impose

such additional technical criteria, regarding information

transmitted and the format for transmission of such information, as

is ``reasonably appropriate for third party ATM processing for

unaffiliated multiple banks.''

In the abstract, requiring MAC to give third party processors

access to the MAC network on the same terms as intercept processors

is, potentially, an adequate means to achieve the United States'

goal. However, the existing technical, financial and operating rules

and procedures applicable to intercept processors should not be

endorsed by entry of a consent decree unless and until they have

been thoroughly reviewed by persons with the requisite expertise.

Experience in numerous industries has shown that, where a

dominant service provider controls access to a network with which

competitors must interconnect, the standards and protocol set for

interconnection are ripe with potential for abuse by the dominant

network owner. Probably the best known example of such abuse comes

from the conduct of AT&T during the existence of the Bell system

monopoly. For example, as discussed in Litton Systems, Inc. v.

American Telephone & Telegraph Company, 487 F. Supp. 942 (S.D.N.Y.

1982), aff'd. 700 F.2d 785 (2d Cir. 1983), AT&T required all

telephone systems using non-Western Electric/Bell equipment to

purchase a protective coupling device from AT&T, and to pay AT&T to

install and maintain the device. It was ultimately determined that

the device was not, in fact, needed to protect the AT&T network from

harm, but was designed for anticompetitive reasons. See also United

States v. American Tel. & Tel. Co., 524 F. Supp. 1336 (D.D.C. 1981).

Similar findings were made as to the technical requirements imposed

on competitors such as MCI and Sprint. See, e.g., MCI Communications

v. American Tel. & Tel. Co., 708 F.2d 1081 (7th Cir. 1983).

The ATM and debit card processing businesses are rife with

similar opportunities for dominant networks like MAC to manipulate

interconnection requirements and related financial and operating

procedures to exclude competitors by imposing on third party

processors operating rules or technical and financial requirements

with little or no legitimate business purpose--rules and procedures

designed to raise the costs to third party processors and thereby

frustrate competition. For example, one of the ``hottest'' technical

developments in the field relates to the method of encryption (or

coding) of transactions to ensure their security as the cardholder's

request is transmitted from the terminal to the network to the card

issuing institution, and the authorization and transaction

instructions are transmitted through the network, back to the

terminal. Currently, MAC and others operate on a ``master key''

system, under which all transactions from the terminal are given the

same code. Many networks have indicated that they intend to change

to a ``DUKPT'' system, where every transaction will be given a

unique key. Many processors, however, are not presently equipped to

operate on a DUKPT system, and they will require very substantial

lead time (and need to invest substantial funds) to modify or

replace existing equipment. (For example, in the credit card

processing industry, the lead time for implementing changes

reflecting technological advances often ranges from 3 to 5 years.)

Security of customer transactions is clearly a legitimate

concern of the networks. However, before DUKPT or other technical

advances are implemented, the Department of Justice should have

mechanisms in place to ensure the changes meet legitimate needs and

that they are implemented in a pro-competitive manner. Particularly

in a business undergoing rapid technological change, a mechanism is

needed both to insure that the rules and regulations of the monopoly

provider are not designed to inhibit competition by other providers

using existing technology and, at the same time, insure that the MAC

network be open to competitors using new and technologically

superior equipment.\6\ Accordingly, before the Department of Justice

recommends that the current rules governing intercept processors be

applied to third party processors, it should review MAC's technical,

financial, and operating rules and determine that those standards do

not have a negative impact on competition.

---------------------------------------------------------------------------

\6\Technical requirements are not the only area where card

processors have already experienced abuse by dominant providers. For

example, ATM and debit networks have been known to impose upon third

party processors unwarranted and unjustified delays in transferring

money to third party processor funding accounts. They have also

required processors to send significant numbers of their employees

to network training sessions and charged prohibitive per employee

fees, where training of a small number of supervisory employees

would suffice.

---------------------------------------------------------------------------

To ensure compliance by MAC with its obligation under the

judgment to impose on third party, unaffiliated, multiple bank

processors only such additional technical criteria as is

``reasonably appropriate,'' and to be sure that all subsequent

modifications and additions to regulations and operating procedures

made to keep pace with changing technology are necessary and do not

discriminate against third party processors, the decree should

require MAC to publish and circulate to third party processors for

comment such modifications before their enactment. At a minimum, MAC

should be required to make those rules and procedures available to

third party processors at the same time that they are available to

intercept processors. Providing third party processors with the

right to review and comment on proposed technical requirements could

give third party processors the opportunity to recommend less costly

but equally secure measures (if such measures are available and

adequate) and, in any event, would ensure that third party

processors are informed of technical changes in a timely fashion so

that they can comply with such changes. These proposed modifications

to the proposed Final Judgment will promote industry self-regulation

and assure that third party processors are not frozen-out by

unnecessary technical, financial or operational requirements, or

changes made to those requirements on short notice.

Comment No. 4

The present pricing structure for access by third party

processors to the network should be evaluated and modified to

require MAC (a) periodically to publish its pricing schedules; (b)

to unbundle its switch fee to third party processors; and (c) to

eliminate the requirement that third party processors be sponsored

by a MAC member.

Discussion

Section IV.G prohibits MAC from discriminating in the pricing of

branded ATM network access to the MAC network on the basis of a

customer's choice of ATM processor. Specifically, section G.1 of the

Final Judgment mandates that third party processors receive the same

volume discounts as intercept processors. Section G.2 provides that

royalties charged to third party processors to switch transactions

between member depository institutions not be greater than the price

charged by MAC to switch such transactions. Section G.3 requires MAC

to provide branded ATM service pursuant to a nondiscriminatory price

schedule. While these three limitations are helpful in fixing a

pricing structure that reduces barriers to entry by third party

processors, the proposed Final Judgment does not go far enough in

that regard. The Department of Justice apparently has not examined

the pricing mechanisms by which third party processors are

constrained and has not taken sufficient measures to assure that

existing discriminatory pricing practices have been eliminated.

In the case of ATM transactions, a third party processor is

ordinarily assessed a per transaction driving (or switch) fee, a one

time network (or membership) fee and, where the processor is a not a

financial institution, it must be sponsored by a member financial

institution and pay that institution a sponsorship fee (which could

be a one time or a per transaction fee). Similarly, in the case of

debit POS transactions, a third party processor pays a switch fee, a

network (or membership fee, and a sponsorship fee.

To be certain that the order achieves its goal of eliminating

discriminatory pricing and opening up the processing market to

competitors of MAC, the judgment should:

A. Mandate regular publication of MAC's prices, including volume

discounts, so as not to discriminate against smaller competitors.

This is a simple, inexpensive means of policing MAC's obligation

to offer non-discriminatory prices pursuant to a non-discriminatory

pricing schedule.

B. Require MAC to unbundle its switch fee.

Currently, branded ATM networks charge third party processors a

``switch fee'' for each transaction utilizing the network. That per

transaction fee is a bundled rate, comprised of a charge to the

third party processor for the costs to the network of electronically

transferring the transaction information and a fee that is

reimbursed to the card issuer. The bundled rate has the effect of

causing third party processors to bear a disproportionate share of

the issuer's costs.

Charging a unitary fee for bundled services is a classic form of

anticompetitive abuse by a monopolist. Causing MAC to unbundle its

switch fee will foster competition by allowing MAC's competitors to

decide which services they desire to purchase and requiring them to

pay only for those services actually used.

C. Eliminate the requirement that, in addition to paying an

``acquirer'' membership fee, third party processors be sponsored by

a member financial institution.

In addition to the per transaction switch fee, MAC charges third

party processors a membership fee. MAC, however, prohibits non-

depository, third party processors from becoming full-fledged

members of MAC. Instead, under the guise of maintaining the

integrity of the MAC network, MAC requires that every third party

processor be sponsored by a MAC member; each sponsoring MAC member,

in turn, requires the third party processor to pay a substantial

sponsorship fee. Those requirements, by definition, discriminate

against non-depository institutions that act as third party

processors and deter competition in the processing market, without

serving any legitimate business need.

Conclusion

In light of the 10-year life of the consent decree, it is

critical that the Department of Justice close the loopholes

described above before the court endorses the judgment so that the

judgment will keep pace with the changing nature of the industry,

and its rapid technological advances and thus, remain effective into

the next century.

To:

Richard Liebeskind, Esq.,

Assistant Chief, Communications and Finance Section, Antitrust

Division, U.S. Department of Justice, 555 Fourth Street, NW., room

8104, Washington, DC 20001.

Exhibit A

Card Industry Directory: The Blue Book of the Credit and Debit Card

Industry in the United States (Faulkner & Gray) pp. 23-24, 1993

Edition

the resources needed to promote use of their cards. Old-line

retailers are particularly hard-pressed, and those programs have

born the brunt of market retrenchment. New competitors such as

specialty stores typically secure the services of third-party

private-label card issuers instead of managing their own store-card

programs, so that segment of the market is gaining on single-store

cards.

Major issuers of Visa and MasterCard are as likely to fill the

role of third-party issuer as any other entity, and some of them are

scoring remarkable successes. One standout program is the Select

card issued by First of America Bank in partnership with home-

improvement retailers such as furniture stores, carpet firms, and

home centers. Those merchants sell the type of big-ticket items that

are most likely to need revolving credit, so the profit potential is

significant for the issuing bank. The merchants pay a flat monthly

charge for acceptance, so they save money on their discount rates.

And cardholders get a lower APR than most Visa and MasterCard cards

command.

Bankruptcy filings continued to take a toll on private-label

cards, both proprietary plastic and third-party cards. Zale Corp.'s

bankruptcy filing and liquidation in 1992 eliminated a major portion

of the private-label portfolio at NationsBank, which also ranks as

the 10th largest bank card issuer.

BANKS' DIMINISHED MERCHANT ROLE

In the merchant processing business, consolidation is

accelerating, with the five largest processors commanding more than

60% of the market. This part of the credit-card distribution system

has come to be dominated by firms not controlled by banks, a trend

that concerns some executives in the banking community. The trend is

continuing, with Citicorp leaving the merchant arena in mid-1992. It

sold Citicorp Establishment Services to venture capitalists who also

own the industry's largest independent sales organization.

But the trend has an up-side for some issuers. The growth of

third-party processors has helped smaller card issuers maintain a

niche in the market, analysts point out. Those issuers have been

relieved of the need to maintain in-house processing services while

still enjoying the efficiencies of scale those processors bring. The

biggest third-party processors also are the most frequently cited

merchant and cardholder processors used by the top 250 card issuers:

FDR rates 85 mentions in Chapter 4, and Total System is cited 60

times.

Sheer size enables the largest issuers to process in-house, and

efficiencies of scale are getting better for many of them. Three

major bank mergers affected the 10 largest bank card issuers since

the directory's third edition was published. Manufacturers Hanover

Trust, the 10th largest a year ago, was merged into Chemical Bank to

form the eighth largest issuer. NCNB and C&S/Sovran combined to form

NationsBank. And BankAmerica maintained its position as the fourth

largest card issuer on the strength of its April 1992 merger with

Security Pacific Bank.

Mergers will keep the consolidation trend going. Comerica Bank

already has merged with Manufacturers National Corp., and card

operations were consolidated in August 1992. Security Bank & Trust

merged with First of America in April 1992, with merger of the

respective credit card operations expected by mid-October. On May 2,

1992, Merchants National Corp. merged with National City Corp.,

adopting the name National City Indiana in October.

The portfolio sale which drove consolidation in recent years

became a non-factor after mid-year 1991. Whether they return to

their old prominence might depend on the overall health of the

banking industry. A survey of banking executives conducted in 1991

found 23% of those with total assets of $5 billion or more expected

to sell their card portfolios by the end of the decade because of a

need to raise capital. If capital conditions become more favorable,

either through market forces or regulatory changes, many of those

banks could decide to retain their portfolios.

AFFINITY CARDS ON THE WANE

A credit card trend that may have run its course is the affinity

card. Affinity programs reported by the 250 largest card issuers in

the 1992 survey totaled 2,654, a moderate improvement from the

previous year's 2,404. But if the marketing efforts of a single

issuer, MBNA America, are factored out, a net loss occurred. MBNA

lead the industry with 1,530 affinity programs, but a score of

issuers report fewer affinity programs now than a year ago.

All but two of the 250 credit card issuers in Chapter 4 are

Visa/MasterCard issues, and the dominance of Visa plastic continues

to grow. In the directory's first edition, 54.5% of those issuer's

card were Visa. The following year the ration jumped to 57.1%., then

57.5%. In this latest survey, the Visa share has climbed to 58.4%.

One other trend not readily apparent in the pages that follow is

the decline in the average number of cards per credit-card account.

When the first edition of the directory was published three years

ago, the top 250 issuers averaged 1.5 cards per account. The ratio

has steadily declined in the intervening years and know stands at

1.44 cards per account. That tent is more likely a reflection of the

social trend toward more single-person households and greater

numbers of women in the labor force than any concerted effort by

card issuers to issue fewer cards per account.

Likewise, the outlook for credit and debit profitability will

probably be dictated by economic circumstances beyond the industry's

control. But industry competition will also play a major role, and

the chapters in this directory give the most complete presentation,

segment by segment, of who the major competitors are and how they

compare to the rest of the industry.

Exhibit B

Card Industry Directory: The Blue Book of the Credit and Debit Card

Industry in the United States (Faulkner & Gray) pp. 363-367, 1994

Edition

Chapter 8

The 25 Largest Merchant Acquirers

Consolidation is occurring in every segment of the bank card

business, but no where is the pace faster than in the merchant

acquiring business. The 25 largest merchant acquirers presented in

last year's edition of the Card Industry Directory accounted for

48.75% of the Visa/MasterCard volume going through merchants; this

year's roster held the merchant contracts that accounted for 64% of

1992's billings. Concentration was especially pronounced at the top

end of the market, with the 10 largest merchant acquirers

representing $148.6 billion in bank card billings--49% of 1992's

market, up from 33.7% in 1991.

The number of merchant locations served by the leading acquirers

did not change appreciably between January 1, 1992, and January 1,

1993. The aggregate total of 1.6 million was only a 3 percent

improvement, or 47,248 locations. But as the bank card industry

expands the utility of Visa and MasterCard cards to include health

care providers, grocers, movie theaters, and restaurants, the

composite profile of the bank card merchant is changing. Still, the

average value of credit card transactions in 1992 was virtually

unchanged from 1991 at $65.48, the industry's leading merchant

acquirers report.

The most remarkable growth on an individual-acquirer basis

occurred at National Bancard Corp., which jumped into the No. 1

position on the strength of 36% dollar-volume growth. Most of

NaBANCO's $10.5 billion dollar gain was the result of the

acquisition of CFC Financial Services' merchant portfolio. Other big

gainers in 1992 were NationsBank, which moved from eighth to fifth

on the list; First USA Merchant Services, breaking into the top 10

for the first time as the sixth largest acquirer; and First Premier

Bank, the former First Interstate of South Dakota. First Premier

entered the merchant acquiring business in 1989 and vaulted from the

No. 13 position in 1991 to become the tenth largest acquirer.

Two banks are new to the top 25 this year: National Bank of

Detroit and Mercantile Bank. Dropping out of the industry's upper

echelon are CFC Financial and MBNA America.

Information in this chapter was compiled through direct contact

with executives at the acquiring organizations. In situations where

the information was unavailable, estimates were made on the basis of

consultation with industry experts.

[Pages irreproducible. Pages are pp. 364-367 of Card Industry

Directory: The Blue Book of the Credit and Debit Card Industry in

the United States (Faulkner & Gray). Copies are on file with the

United States District Court for the District of Delaware and the

Antitrust Division of the United States Department of Justice.]

Exhibit C

Debit Card Directory: The Complete Guide for the Debit Card

Industry in the United States (Faulkner & Gray) p. 22, 1994 Edition

The Top 5 EFT Processors

------------------------------------------------------------------------

Monthly

transactions

------------------------------------------------------------------------

Electronic Payment Systems.............................. 89,500,000

Deluxe Data Systems..................................... *58,000,000

Midwest Payments Systems................................ *55,500,000

BankAmerica............................................. 46,000,000

Electronic Data Systems................................. 42,000,000

------------------------------------------------------------------------

Source: National Automated Clearinghouse Association, Federal Reserve

Board.

Exhibit D

Debit Card Directory: The Complete Guide for the Debit Card

Industry in the United States (Faulkner & Gray) pp. 187-191, 1994

Edition

The first eight chapters in this book describe the debit

business as it is. What about the future? What shape will the

industry take in the years leading up to the turn of the century? To

answer these questions, we reprint here a major study published in

1993 by Faulkner & Gray.

The study, ``Debit Card 2000,'' surveyed the 45 largest debit

card issuers and the top 35 networks to find out what kind of growth

to expect, what new services and enhancements will arrive, and what

developments to look for in national POS by 2000--just six years

away.

Some of the results are surprising, particularly if you've

always viewed debit cards as a customer service rather than a profit

center. That's now how issuers and networks in the near future will

look at the product. By 2000, they say, there cold be as many as 1

million POS terminals installed. Visa and MasterCard, meanwhile,

predict there'll be 100 million off-line debit cards in force in six

years, well beyond today's 15 million.

If your plans depend on solid forecasts for the foreseeable

future, the following pages should make useful reading.

Table 2.--Issuers Annual Projected Debit Card Growth Between 1993-2000

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Issuers expecting:

1% to 3% annual card growth................................ 55

4% to 7% annual card growth................................ 20

8% to 12% annual card growth............................... 5

13% to 20% annual card growth.............................. 20

------------------------------------------------------------------------

Note: Projections exclude growth from mergers or acquisitions.

Source: Bank Network News.

Table 3.--Debit Card Growth Between 1982-1993

------------------------------------------------------------------------

Cards Growth

Year (millions) (percent)

------------------------------------------------------------------------

1993.......................................... 209.1 2.1

1992.......................................... 204.7 2.2

1991.......................................... 200.3 4.6

1990.......................................... 191.4 4.0

1989.......................................... 183.9 7.6

1988.......................................... 170.9 12.4

1987.......................................... 152.0 8.6

1986.......................................... 140.0 7.7

1985.......................................... 130.0 30.0

1984.......................................... 100.0 34.0

1983.......................................... 74.6 24.3

1982.......................................... 60.0 NA

------------------------------------------------------------------------

Source: Bank Network News.

Table 4.--Checking Account Saturation: 1993

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Accounts with Cards today:

Less than 50%.............................................. 11

Between 50% and 60%........................................ 14

Between 60% and 70%........................................ 25

Between 70% and 80%........................................ 21

Between 80% and 90%........................................ 11

Over 90%................................................... 18

------------------------------------------------------------------------

Source: Bank Network News.

Table 5.--Accounts With Cards in 2000

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Less than 50%................................................ 0

Between 50% and 60%.......................................... 0

Between 60% and 70%.......................................... 17

Between 70% and 80%.......................................... 9

Between 80% and 90%.......................................... 22

Between 90% and 99%.......................................... 39

100%......................................................... 13

------------------------------------------------------------------------

Source: Bank Network News.

Table 6.--Current Activation Rates

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Less than 50%................................................ 14

Between 50% and 60%.......................................... 36

Between 60% and 70%.......................................... 25

Between 70% and 80%.......................................... 7

Between 80% and 90%.......................................... 4

Over 90%..................................................... 14

------------------------------------------------------------------------

Note: Active is defined as using a card once a month.

Source: Bank Network News.

Table 7.--Projected Activation Rates in 2000

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Less than 50%................................................ 0

Between 50% and 60%.......................................... 22

Between 60% and 70%.......................................... 35

Between 70% and 80%.......................................... 13

Between 80% and 90%.......................................... 13

Over 90%..................................................... 17

------------------------------------------------------------------------

Note: Active is defined as using a card once a month.

Source: Bank Network News.

Table 8.--Network ATM Deployment Projections

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Networks expecting:

Less than 1% annual growth................................. 13

1% to 3% annual growth..................................... 19

4% to 7% annual growth..................................... 39

8% to 12% annual growth.................................... 3

13% to 15% annual growth................................... 13

Over 15% annual growth..................................... 13

------------------------------------------------------------------------

Note: Projections exclude growth due to mergers or acquisitions.

Source: Bank Network News.

Table 9.--Issuer ATM Deployment Projections

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Issuers expecting:

Less than 1% annual growth................................. 14

1% to 3% annual growth..................................... 36

4% to 7% annual growth..................................... 18

8% to 12% annual growth.................................... 18

13% to 15% annual growth................................... 9

More than 15% annual growth................................ 5

------------------------------------------------------------------------

Note: Projections exclude growth due to mergers or acquisitions.

Source: Bank Network News.

Table 10.--ATM Growth 1982-1993

------------------------------------------------------------------------

Growth

Year ATMs (percent)

------------------------------------------------------------------------

1993.......................................... 94,822 8.6

1992.......................................... 87,330 4.5

1991.......................................... 83,545 4.2

1990.......................................... 80,156 6.0

1989.......................................... 75,632 4.3

1988.......................................... 72,492 6.6

1987.......................................... 68,000 6.3

1986.......................................... 64,000 6.7

1985.......................................... 60,000 9.0

1984.......................................... 55,000 37.5

1983.......................................... 40,000 21.2

1982.......................................... 33,000 NA

------------------------------------------------------------------------

Source: Bank Network News.

Table 11.--Network Transaction Growth Projections

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Networks expecting annual growth:

Between 1% and 5%.......................................... 20

Between 6% and 10%......................................... 15

Between 10% and 15%........................................ 10

Between 15% and 20%........................................ 15

Between 20% and 30%........................................ 20

Between 30% and 40%........................................ 5

Between 40% and 50%........................................ 15

------------------------------------------------------------------------

Note: Projections exclude growth due to mergers and acquisitions.

Source: Bank Network News.

Table 12.--Issuer Transaction Growth Projections

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Issuers expecting annual growth:

Less than 5%............................................... 0

Between 6% and 10%......................................... 21

Between 10% and 15%........................................ 26

Between 15% and 20%........................................ 16

Between 20% and 30%........................................ 21

More than 30%.............................................. 16

------------------------------------------------------------------------

Note: Projections exclude growth due to mergers and acquisitions.

Source: Bank Network News.

Table 13.--Transaction Growth 1982-1992

[Transactions in millions]

------------------------------------------------------------------------

Monthly Percent

Year volume growth

------------------------------------------------------------------------

1993.......................................... 677.9 7.9

1992.......................................... 628.1 13.5

1991.......................................... 553.5 11.8

1990.......................................... 495.2 13.2

1989.......................................... 437.4 14.1

1988.......................................... 383.1 12.5

1987.......................................... 340.3 12.0

1986.......................................... 304.0 2.2

1985.......................................... 297.2 13.9

1984.......................................... 261.0 30.5

1983.......................................... 200.0 19.8

1982.......................................... 167.0 NA

------------------------------------------------------------------------

Source: Bank Network News.

Ballinger, senior vice president, expects over 80% will have one by

2000. ``We'll never hit 100%, but I would like, in theory, to have a

card in very customer's hands, ``Ballinger says.

Issuers also expect the percentage of consumers with a debit

card who use their card at least once a month to grow in the next

seven years. While only about 25% of the issuers say their

activation rates currently average more than 70%, 43% expect that

their rates will exceed 70% by 2000. (See tables 6 and 7.)

``The activation rate continues to creep up, especially as

younger users replace older customers,'' says Patricia Bauer, senior

vice president of Minneapolis-based First Bank Systems. U.S.

Bancorp's Kresge notes that POS is also pushing up activation rates

with his customers as some who had no use for their debit cards at

ATMs find they like using them at the point of sale.

Like debit cards, new ATM deployment is expected to enjoy only

modest growth. About 32% of the networks and 50% of the issuers

expect the number of their ATMs to grow by less than 3% annually,

while only 13% of the networks and 5% of the card issuers expect

this growth to exceed 15% annually. (See tables 8 and 9.)

A few networks and banks, however, are expecting more active new

ATM deployment, particularly at off-premise locations. ``We have a

tremendous amount of corporate relationships where we can put ATMs

in work locations,'' says Fifth Third's Ballinger. ``We're looking

at deploying 25 to 30 ATMs a year in the workplace. Some will pay us

to install ATMs so they can get rid of or cut their cashier

functions.''

And some banks note they expect to deploy more new ATMs to

perform non-traditional applications beyond cash withdrawals and

accepting deposits. A few innovators already have been deploying

advanced ATMs which can cash checks, issue account statements, sell

stamps or allow consumers to apply for bank loans. ``The traditional

cash withdrawals and deposit-taking terminals have leveled off,''

says Edward Gough, president of Ohio-based Money Station network.

``But other ATM applications such as EBT will push ATM installations

for expanded functions that will add to the growth of ATMs.''

This projected growth is slightly less than the growth in recent

years. In 1993, the number of ATMs in the U.S. grew by 8.6%. It grew

by 4.5% in 1992, 4.2% in 1991, 5.9% in 1990 and 4.3% in 1989. (See

table 10.) And projected growth is considerably less than the

double-digit growth of the early 1980s.

Despite modest expectations for debit card and ATM growth,

networks and issuers have higher expectations for total EFT

transactions. Executives expect the most growth in POS transactions

while seeing growth of only 10% or less for ATM transactions. The

result will be significant overall transaction growth.

About 55% of the network executives and 53% of bank card issuers

expect their EFT volume growth to exceed 15% annually. Another 26%

of the issuers and 10% of the networks expect growth to be between

10% and 15% annually. (See tables 11 and 12.)

``Between now and the end of the decade, the number of POS

transactions will equal the number of ATM transactions,'' says

Edward Gough, president of Ohio-based Money Station network. ``POS

is now only 5% of our total volume.''

Others also expect POS to lead the growth. ``We will see a lot

of transaction volume growth,'' says Olen Thomas, vice president of

Richmond, VA.-based Crestar Bank. ``The POS component of transaction

volume could grow by 50% a year for the next two to three years.''

Despite modest expectations for ATM transaction growth, network

executives say it still will be healthy. ``We keep expecting the

rate of growth in ATM transaction volume to slow, but last year it

exploded,'' says James Martin, president of Wisconsin-based Tyme

network. ``In POS, we expect a 55% increase in 1993 and we expect

ATM volume to continue to grow 10% a year.''

Networks projecting the lowest rate of growth--less than 10%--

typically do not offer or plan to offer POS and also do not have

ambitious plans for other new electronic payments programs. These

projections would indicate that POS, which finally seems ready to

take off after years of hopeful expectations, will drive EFT volume

increases in excess of the 12% to 14% growth that had been common in

recent years. (See table 13.)

Although POS has been growing slowly in recent years, new

regional POS programs throughout the country, the advent of national

POS programs, the skyrocketing level of acceptance of debit cards by

supermarkets and penetration of POS into new markets like fast-food

restaurants and specialty shops have raised the expectations of both

network and financial institution executives.

Exhibit E

Card Industry Directory: The Blue Book of the Credit and Debit Card

Industry in the United States (Faulkner & Gray) 1993 Edition

The Top 300 ATM Owners

--------------------------------------------------------------------------------------------------------------------------------------------------------

POS

Bank ATMs terminals ATM vendor POS terminal vendor

--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Bank of America, San Francisco, CA 94103.............. 4,500 *3,500 InterBold, Fujitsu NCR, Omron........ N/A.

2. Citicorp, Lake Success, NY 11040...................... 2,466 0 N/A.................................. None.

3. NationsBank Corporation, Charlotte, NC 28255.......... 1,680 0 NCR, InterBold Fujitsu, Omron........ None.

4. Wells Fargo Bank, San Francisco, CA 94111............. 1,653 23,400 InterBold Fujitsu, NCR............... N/A.

5. First Interstate Bancorp, Los Angeles, CA 90071....... 1,508 3,150 InterBold NCR........................ VeriFone.

6. Banc One Corp., Columbus, OH 43271.................... 1,137 186 InterBold NCR........................ IBM, NCR, VeriFone.

7. BayBank Systems Inc., Waltham, MA 02154............... 991 0 InterBold Fujitsu.................... None.

8. First Union National Bank, Charlotte, NC 28288-0362... 948 0 InterBold............................ None.

9. U.S. Bancorp, Portland, OR 97204...................... 863 35 Fujitsu InterBold, NCR............... VeriFone.

10. Fleet Financial Group, Providence, RI 02903.......... 840 0 NCR, InterBold....................... None.

11. Chemical Bank, New York, NY 10004.................... 820 0 NCR, Fujitsu Omron................... None.

12. Chase Manhattan Bank NA, New Hyde Park, NY 11042..... 684 3,400 InterBold............................ VeriFone.

13. PNC Financial Corp., Pittsburgh, PA 15222............ 667 2,894 NCR, Fujitsu, InterBold, Diebold, IBM Envoy, Diebold, VeriFone,

Omron, NTN, NCR,

Schlumberger.

14. Society Corp., Cleveland, OH 44114................... 666 110 NCR, InterBold....................... NCR, VeriFone Hypercom.

15. First Bank System, Minneapolis, MN 55480............. 621 341 InterBold, NCR....................... VeriFone.

16. Barnett Banks, Jacksonville, FL 32203................ 620 0 InterBold, NCR....................... None.

17. Mellon Bank, Pittsburg, PA 15258..................... 600 0 NCR, InterBold....................... None.

18. National City Corp, Louisville, KY 40202............. 543 0 Diebold, ACS......................... None.

19. Wachovia Corp., Winston-Salem, NC 27150.............. 540 N/A NCR, InterBold....................... N/A.

20. Norwest Bank, Minneapolis, MN 55479-0005............. 511 N/A InterBold, NCR, Fujitsu.............. N/A.

21. Publix Super Markets Inc., Lakeland, FL 33802........ 483 4,700 NCR.................................. NCR.

22. Shawmut National Corp., Framingham, MA 01701......... 474 0 InterBold, NCR....................... None.

23. Great Western Bank, a Federal Savings Bank, 436 0 InterBold, NCR....................... None.

Northridge, CA 91328.

24. First Fidelity Bancorporation, Newark, NJ 07102...... 411 N/A InterBold, Omron, NCR................ N/A.

25. SunBanks Inc., Orlando, FL 32809..................... 409 0 InterBold, NCR....................... None.

26. First of America Bank Corp., Kalamazoo, MI 49009..... 405 0 InterBold, Docutel, NCR.............. None.

27. Home Savings of America, Whittier, CA 90601.......... 401 N/A NCR.................................. N/A.

28. KeyCorp, Albany, NY 12207............................ *400 0 InterBold, NCR, Fujitsu.............. None.

29. TCF Bank Savings FSB, Minneapolis, MN 55402.......... 395 0 NCR, Fujitsu, InterBold.............. None.

30. NBD Bancorp, Troy, MI 48098.......................... *365 0 InterBold............................ None.

31. Comerica Inc., Detroit, MI 48275-2430................ 361 358 InterBold............................ OMRON/-VeriFone.

32. CoreStates, Philadelphia, PA 19101................... 322 12,224 InterBold, NCR, Fujitsu.............. Taltex, GTE, Citizen CBM.

33. Valley Bank of Nevada, Las Vegas, NV 89101........... 316 0 InterBold............................ None.

34. Marine Midland, Buffalo, NY 14240.................... 308 0 InterBold............................ None.

35. Michigan National Bank, Lansing, MI 48917............ 300 1,000 InterBold............................ N/A.

36. Maryland National Bank, Baltimore, MD 21202.......... 274 53 NCR, Fujitsu......................... VeriFone, DataCard, Diebold.

37. Midlantic Corp., Edison, NJ 08818.................... 267 1,500 InterBold, NCR....................... VeriFone, Taltec.

38. Bank South, Atlanta, GA 30302........................ 266 0 Fujitsu, NCR, InterBold.............. None.

39. First American Metro Corp., McLean, VA 22102......... 253 0 NCR, InterBold....................... None.

40. Meridian Bancorp Inc., Reading, PA 19603............. 253 4,000 NCR.................................. VeriFone.

41. State Employees' Credit Union, Raleigh, NC 27603..... 245 0 InterBold............................ None.

42. HomeFed Bank, San Diego, CA 92121-1710............... 240 0 NCR.................................. None.

43. Signet Bank, Richmond, VA 23219...................... 227 0 NCR.................................. None.

44. Crestar Bank, Richmond, VA 23219..................... 220 0 InterBold, NCR, Omron................ None.

45. Valley National Corp., Phoenix, AZ 85004............. 219 4,000 InterBold............................ VeriFone, Hypercom.

46. San Diego Financial Corp., San Diego, CA 92111....... 214 0 Unisys, InterBold.................... None.

47. United Jersey Banks/UJB Financial Corp., Princeton, 212 4,300 NCR.................................. Taltek, VeriFone, Omron,

NJ 08540-2066. Envoy.

48. Boatmen's Bancshares Inc., St. Louis, MO 63101....... 208 0 InterBold, NCR, Fujitsu.............. None.

49. Union Bank, San Francisco, CA 94104.................. 206 0 InterBold, Fujitsu................... None.

50. First Chicago Corp., Chicago, IL 60670............... 200 0 Diebold, NCR......................... None.

51. Glendale Federal Bank, Glendale, CA 91209............ 199 0 Fujitsu.............................. None.

52. Dominion Bankshares Corp., Roanoke, VA 24019......... 181 0 Diebold, NCR......................... None.

53. Trust Company Banks in Georgia, Atlanta, GA 30303.... 178 0 NCR, InterBold....................... None.

54. First Tennessee Bank NA, Memphis, TN 38101........... 177 1,500 InterBold, NCR, Fujitsu.............. Omron, VeriFone.

55. California Federal, Rosemead, CA 91770............... 171 0 Fujitsu.............................. None.

56. First City Texas NA, Houston, TX 77002............... 170 0 InterBold, NCR....................... None.

57. Southtrust Corp., Birmingham, AL 35203............... 170 0 InterBold, NCR....................... None.

58. Central Fidelity Bank, Richmond, VA 23219............ 165 0 InterBold............................ None.

59. Standard Federal Bank, Troy, MI 48084................ 165 0 InterBold, NCR....................... None.

60. The First National Bank of Boston--Massachusetts,

This text is long and has been trimmed here. Open the source document for the complete record.