October 8, 1998
Justice Department Charges Visa,
MasterCard in Antitrust Lawsuit
By BRYAN GRULEY and PAUL BECKETT
Staff Reporters of THE WALL STREET JOURNAL
In a case that could reshape the credit-card landscape for millions of
consumers, the Justice Department accused Visa USA and MasterCard
International of stifling competition and innovation.
In an antitrust lawsuit filed in U.S. District Court in Manhattan, the
government is seeking to break up the joint ownership of Visa and
MasterCard, the nation's two largest credit-card networks, by the same
group of major banks. The government charged that the banks' control of
both networks has stifled competition between Visa and MasterCard, and
thwarted rivalry from smaller networks such as American Express and
Discover.
The government said consumers have suffered because the dominance of
Visa and MasterCard has choked off efforts to develop and market new
products and services, such as "smart cards" with computer chips that
store personal information and provide access to cash, and secure Internet
transactions.
Such initiatives have been "abandoned, delayed or suppressed," said Joel
Klein, head of the Justice Department's antitrust division. "There's no
telling what other products and benefits we would have seen had Visa and
MasterCard chosen to compete rather than pull their competitive punches."
'Exclusionary' Rules
The suit -- which focuses on credit and charge cards, not debit cards --
also alleges that the networks' bylaws include illegal "exclusionary" rules
preventing banks from issuing rival cards issued by American Express Co.
and others. Mr. Klein acknowledged that the suit isn't likely to directly
lower credit-card rates, which are set by individual banks. But he said
it
eventually could bring lower rates if, by stripping the networks of market
power, it engenders competitive incentive to develop new products and
services.
Visa and MasterCard denied the
charges and vowed to vigorously
defend themselves in the case, which
could take more than a year. "We
believe the suit ... will fail in a court of
law because, when it comes right
down to it, consumers have unlimited
choices when it comes to credit
cards," said Paul Allen, Visa's
executive vice president and general
counsel.
"We are extremely confident in our
legal position and that we will
prevail," said Noah Hanft,
MasterCard senior vice president
and legal counsel. "The Department
of Justice's effort to reconfigure a highly competitive industry is misguided,
and this case is totally without merit."
Last year, credit-card issuers in the U.S. sent more than three billion
direct-mail solicitations, said Alan Heuer, president of MasterCard's U.S.
region. "Any consumer with a mailbox knows the wide choice of payment
cards," he said.
Hold 75% of Market
The Justice Department said Visa and MasterCard account for 75% of all
credit-card activity in the U.S., totaling more than $600 billion of purchases
processed on their networks last year. More than 3.4 million stores and
other outlets accept both cards.
The networks aren't companies, but rather
not-for-profit associations owned and
governed by a group of thousands of large
"member" banks. Under this "duality" system,
these member banks typically issue both Visa
and MasterCard products and profit from
both.
"It's cloudy how this will play out, but this
could have the entire market unravel," said
Robert McKinley, president of CardWeb Inc.,
a Gettysburg, Pa., industry research firm.
With rapid technological advances and huge
mergers in the banking industry, he said,
powerful banks may now be more tempted to
bow out of the Visa and MasterCard
networks altogether and go it alone if the
Justice Department prevails. "The kind of
technology in the market now, coupled with
changes like this, could really have a great
impact on the landscape," Mr. McKinley said.
Philip Purcell, chief executive officer of
Morgan Stanley Dean Witter & Co., which
owns the Discover card through its Novus
Services unit, said: "The big difference this is
going to make is to give consumers more
choices as banks are able to issue more products like Discover and
American Express. This is a great day for the American consumer."
Old-Fashioned Cartel
Harvey Golub, American Express's chief executive, said, "On the surface,
these two card associations appeared to compete with one another. In
reality, they functioned like an old-fashioned cartel. They conspired to
limit
competition. They betrayed millions of American consumers. They abused
the trust of thousands of banks that relied on them."
American Express's stock rose on the news, amid a broad decline in other
financial-services shares. American Express climbed $2.50, or 3.5%, to
$73.25 in New York Stock Exchange composite trading Wednesday.
Visa and MasterCard also are being investigated by the Federal Trade
Commission for possible anticompetitive practices in their debit-card
business, and the associations are the subject of a private antitrust suit
filed
by several major retailers.
The Justice Department's suit alleges that Visa and MasterCard have little
incentive to compete because most of the banks that own them belong to
both associations. In fact, the government said, some big MasterCard
members issued more Visa cards than MasterCard cards.
The department asked the court to bar banks not dedicated to the Visa
brand from having any governing role in the Visa association, and likewise
for MasterCard. So, in theory, banks would have more incentive to push
the brand they control.
But some speculate that such a result could backfire if it restricts banks
from issuing both cards. In that case, banks may be more likely to choose
the more-popular Visa, potentially undercutting MasterCard and
strengthening Visa's hand.