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Visa, MasterCard and Diners Club were hit with a consumer antitrust suit Thursday that accuses them of conspiring for years to fix the price of foreign transactions with identical “surcharges” of 1 percent on every transaction. The suit, filed in U.S. District Court in Philadelphia, also names a handful of the nation’s largest banks and alleges that they, too, conspired to add an additional 2 percent surcharge to all foreign transactions beginning in June 1999. American Express is not named as a defendant, but the suit says it was a “co-conspirator” in fixing the 1 percent surcharge. When the issuing banks added their own 2 percent surcharge, the suit says, American Express and Diners, which issue their own cards, upped their surcharges from 1 percent to 2 percent. The added charges are generally hidden from consumers, the suit says, because the banks and the credit card networks “agreed not to publicize, disclose, or compete for customers on the basis of the foreign currency surcharge, to facilitate the fixing and imposition of such charges.” Joining forces to file the suit are attorneys Merrill G. Davidoff, Ruthanne Gordon, Edward W. Millstein and David A. Langer of Philadelphia’s Berger & Montague; Joseph C. Kohn and William E. Hoese of Kohn Swift & Graf; and Marc H. Edelson of Hoffman & Edelson in Doylestown, Pa. Calls to both Visa’s and MasterCard’s corporate headquarters were not returned. The issuing banks named as defendants include Citibank; Universal Bank; Bank of America; Bank One Corp.; First USA Bank; Chase Manhattan Bank; and Providian Bank. MBNA America Bank is not named as a defendant in the suit, but is alleged to have been a co-conspirator in the imposition of the 1 percent surcharge levied by Visa and MasterCard. Unlike the other major banks, MBNA, the nation’s third-largest issuer of credit cards, did not add a 2 percent surcharge of its own, the suit says. But the suit says MBNA “colludes with the issuing bank defendants by failing to advertise, compete, or prominently disclose its policy on foreign currency surcharges to customers and prospective customers.” According to the suit, the surcharges on foreign transactions are imposed at two levels — first by the credit card networks, and second by the banks that issue the cards to consumers and businesses. “The foreign currency surcharge is the result of plainly collusive price fixing in violation of the applicable antitrust laws,” the suit alleges. The suit says that control of the two major credit card associations — Visa and MasterCard — is “characterized by a relationship referred to as dual governance” in which a small number of banks make all of the decisions for both companies. The U.S. Department of Justice has already filed suit against Visa and MasterCard for their system of dual governance, alleging that banks with significant economic interests in Visa have been permitted to participate in governance of MasterCard and banks with significant economic interest in MasterCard have been permitted to participate in governance of Visa. Visa and MasterCard are the two largest networks for “general purpose” credit cards. Together, they account for more than 75 percent of all credit card purchases and 86 percent of the cards issued in the United States. Diners Club, American Express, and Discover/Novus account for all but a small portion of the remainder of credit card purchases, the suit says. Both Visa and MasterCard are joint ventures or “associations,” created, owned, governed, and operated by and in the interests of their members and “ostensibly operate on a not-for-profit basis,” the suit says. Their activities are financed through fees and assessments levied on their members, including the issuing banks. As owners of Visa and MasterCard, the banks receive a “direct economic benefit” from the 1 percent foreign currency surcharge, the suit alleges. Control of both associations, the suit says, “is exerted by a select group of member banks — essentially a group of the largest banks operating in the general purpose card market.” The banks “establish their control,” the suit says, “by simultaneously serving on the board of directors and/or on important committees of either association,” and each of the banks issues significant numbers of both Visa and MasterCard credit cards. “This dual governance has substantially lessened competition between the Visa and MasterCard associations because these large banks have been, and continue to be, significantly less willing to fund and implement competitive initiatives that would cause consumers to change from one general purpose card to the other,” the suit says. “This dual governance also provides the vehicle for other anticompetitive behavior by both [Visa and MasterCard] and the issuing bank defendants, including the imposition of the foreign currency surcharge,” the suit says. As of January 2000, the suit says, Citibank, BankOne, Chase Manhattan, Bank of America, and Providian constituted five of the top six issuers of Visa and MasterCard credit cards with combined transactions of more than $416 billion in 1999. The remaining member banks in the top 10 accounted for $180.3 billion that year. Visa and MasterCard associations have “virtually identical member banks,” the suit says, because nearly every major bank in the United States is a member of both associations, resulting in a 95 percent overlap in association membership. “Yet, despite this overlap in membership and ownership, neither Visa nor MasterCard enforces the safeguards necessary to prevent one association from obtaining confidential competitive information about the other,” the suit says. Almost all of the largest card-issuing member banks have representatives participating on the board of directors and/or the important policy-influencing committees of both associations, the suit says. In 1996, the suit says, 12 of the 21 banks represented on Visa’s board of directors were also represented on MasterCard’s business committee. And 17 of the 27 banks on MasterCard’s business committee had representatives on Visa’s marketing advisors committee. MasterCard and Visa regulations provide that conversion of a transaction made in a foreign currency into U.S. dollars is based on either a “wholesale” or “government-mandated” currency conversion rate. But regardless of which rate is used to calculate the conversion, the suit says, the final payment amount is increased by 1 percent. “The 1 percent fee charged by Visa and MasterCard was, and is, retained by them and is extremely profitable to both associations,” the suit says. “The fee has been fixed, for many years, as a result of collusive, horizontal price fixing by the defendants and other banks represented on the Visa and MasterCard boards.” The suit alleges that the identical 1 percent surcharges are the result of “collusive price fixing” and that “there is and was no excuse or cost justification for the imposition of the foreign currency surcharge” because Visa and MasterCard assess the fee despite the fact that their member banks are responsible for the administrative, billing and customer service costs associated with such foreign currency transactions. The suit also says there is no relationship between the transaction costs and the price of the surcharge. For a $10 meal, a consumer is charged just 10 cents, but a $10,000 jewelry purchase results in a surcharge of $100 — even though the transaction costs to the networks is the same for both. Beginning in June 1999, the suit says, the issuing banks “conspired between and among themselves � to further increase profits by collecting an additional 2 percent foreign currency surcharge over and above the 1 percent foreign currency surcharge already charged by Visa and MasterCard.” Diners Club and American Express responded, the suit says, by doubling their surcharges from 1 to 2 percent. “The additional foreign currency surcharge set by the issuing banks is horizontal price-fixing and almost pure profit because it is Visa and MasterCard that convert the foreign currency to dollars,” the suit says. “The Defendant issuing banks have no involvement in and incur no expenses in connection with the currency conversion, yet have conspired to impose such additional charges upon their cardholders, despite the fact that they provide no new or additional services,” the suit alleges. The “conspiracy to overcharge” on foreign transactions, the suit alleges, is in stark contrast to other areas in which the banks engage in “vigorous competition,” such as annual fees, interest rates, grace periods and “perks” like frequent flyer points. But the identical foreign surcharges are hidden from consumers, the suit alleges, because “neither the networks nor the issuing banks disclose the surcharge in any of their advertising or promotional materials, despite the fact that their advertisements tout their cards as the easiest, safest, and most convenient method of payment abroad.” The surcharges are also hidden on monthly statements, the suit alleges. “On some monthly statements, the consumer charging the goods or services abroad only sees the amount of the charge in the foreign currency and the corresponding amount owed in dollars. Other statements list the exchange rate but fail to disclose that the foreign currency surcharge is built into the exchange rate,” the suit says. Consumers would benefit if the banks did not “act in concert” and hide the practice, the suit says, because “those banks which imposed the surcharge would stand to lose some of their best customers to those member banks which did not.” The suit alleges that the foreign currency surcharge “is a profit center” for both the networks and the banks. In the past four years, the suit says, Visa has processed approximately $50 billion in transactions by U.S. cardholders traveling abroad and has received approximately $500 million from the 1 percent surcharge. During the same time, the suit says, MasterCard processed about $20 billion in transactions and received about $200 million in surcharges. The case , Ross v. Visa USA Inc., 01-cv-1006, has been assigned to U.S. District Judge Jay C. Waldman.

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