Visa, MasterCard Facing Antitrust Allegations

NEW YORK —  Fresh from winning its antitrust case against Microsoft Corp., the government is taking on the credit card industry.

Today, the Justice Department is scheduled to open arguments in U.S. District Court in Manhattan in a trial that could force major changes in the way the Visa and MasterCard networks operate.

The Justice Department filed the suit in October 1998, alleging that Visa USA and MasterCard International Inc. violated antitrust law by limiting competition. Visa International, which governs Visa USA and other regional subsidiaries, also was named in the lawsuit.

The suit charged that the same group of banks control both Visa and MasterCard, lessening competition between the two networks. And it said rules adopted by both credit card associations restrict the ability of banks to do business with other card networks such as American Express and Morgan Stanley Dean Witter & Co.’s Discover card.

The result, the government said, was reduced consumer choice and slowed technological innovations in the credit card market.

In a preliminary hearing last week, Melvin A. Schwarz, lead counsel for the Justice Department, said the Visa and MasterCard rules “are designed to severely restrict competition” and added: “There is no question that the output of American Express and Discover would go up if they had access to the banks.”

Visa and MasterCard have repeatedly denied the allegations and suggested that American Express, which is not a party to the case but will testify for the government, has been maneuvering behind the scenes to try to force changes in the industry for its own benefit.

Both Visa and MasterCard are set up as nonprofit associations. Representatives of their 8,500 member banks sit on their boards as well as policy-making committees. Their rules allow banks to issue both Visa and MasterCard credit cards, but bar member banks from issuing other cards.

The two companies currently control about 75% of the credit card market in the United States. American Express, which issues the AmEx charge cards and the Optima credit card, has about a 17% share, with Discover and other cards holding the balance.

New York antitrust lawyer Harry S. Davis said that if the government wins the case, it is likely that American Express and other independent card companies will move to create joint ventures with major banks to get access to the banks’ customers.

This, he said, would give a company such as AmEx the ability to issue more credit cards as well as introduce debit cards, which must be tied to checking or other deposit accounts.

“In the short term, that would mean a greater degree of competition among banks to issue products to their customers, and a wider variety of alternatives for customers,” Davis said.

Bruce Brittain, a credit card analyst in Atlanta, said he was not convinced of the government’s argument that the current system limits consumers’ choice.

“From the consumer’s point of view, there is a lot of competition in the credit card world,” he said. “Being able to get an AmEx or Discover card from your local bank doesn’t make much difference to them. They can get them now if they want by calling an 800 number, picking up a form at a restaurant, going onto the Internet.”

He said the benefit for AmEx of linking up with a big bank would be that it could offer financial services beyond its traditional travel card. Discover, he said, mainly serves a domestic market; with a link to a large bank, it could go international.

The Justice Department case is separate from a suit brought by Wal-Mart Stores Inc. and about 20 other retailers, who alleged that Visa and MasterCard have used their dominance in credit cards to force them to accept their debit cards, for which they have charged excessive transaction fees.

Earlier this month, the 2nd U.S. Circuit Court of Appeals agreed to review a lower court’s decision granting class-action status to the case. The retailers reportedly are seeking $1.8 billion.