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Visa/MasterCard trial starts |
| Justice Dept. contends credit card giants work to hinder
competition |
June 12,
2000: 6:47 p.m.
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NEW YORK (CNNfn) - Credit card giants Visa
and MasterCard found themselves somewhere they didn't want to be
Monday -- in federal court fighting an antitrust lawsuit.
In
opening arguments in the U.S. Justice Department antitrust suit
against the two payment card networks, government lawyers portrayed
Visa and MasterCard as essentially one giant entity that controls
nearly all of the U.S. credit card market, and one that has
decisively tried to shut out competitors American Express and
Discover.
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VIDEO |
 The U.S.
Government accused the Visa and MasterCard of violating
antitrust law and blocking competition through
exclusionary tie-ups with banks in opening arguments at
a federal trial. |
| Real |
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80K | | Justice
argued the evidence will prove that Visa and MasterCard, which are
owned by their 7,000 member banks, tried to shut down the
competition through a policy of prohibiting those banks from issuing
competitors' cards.
"Why would any bank give up both the No.
1 and the No. 2 brand (credit cards) in order to help the No. 3
brand," DOJ attorney Melvin Schwarz said in opening statements
Monday before U.S. District Judge Barbara Jones in New
York.
With his boss, Joel Klein, head of the DOJ's
Antitrust Division, looking on, Schwarz also said Visa and
MasterCard held access to the Cirrus and Plus cash card networks
over member banks' heads as punishment for issuing any competitors'
cards.
But lawyers for MasterCard and Visa replied that their
policies foster competition and that the government's case would, if
successful, do more harm to the industry than good.
"I could
convince somebody who did not know Michael Jordan was a famous
basketball player that he was a bad player. I would do this by
showing them videotapes of him missing shots," MasterCard lawyer
Kenneth Gallo said comparing the government's case to the Chicago
Bulls superstar.
"...and at the end I would show them clips
of Michael Jordan with his arm around the loser and say, 'See, he
doesn't like to compete.' The government's case is an effort to
create an incorrect impression of what goes on in the credit card
industry every day," Gallo said.
Kevin Arquit, another
MasterCard attorney, told CNNfn that
the government spent a considerable sum investigating and preparing
its case against the two networks, which have operated as a
"duality" for more than 20 years, and discovered nothing
significant. (WAV
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Together, Visa, which is based in Foster City,
Calif. and Riverwoods, Ill.-based MasterCard issue about 75 percent
of the 500 million credit cards in circulation in the United
States.
As of the first-quarter 2000, Visa U.S.A. had issued
more than 250 million cards and posted annual purchase volume of
$439.04 billion. MasterCard has 391.7 million card members worldwide
with annual purchase volume of $242.5 billion, according to nilsonreport.com.
The
Justice Department would like to see the associations split up, with
certain banks issuing only Visa cards and others issuing only
MasterCard cards.
David Nelms, president and chief operating
officer of Discover Financial Services Inc., which is owned by Morgan Stanley
Dean Witter (MWD: Research,
Estimates),
said Monday that consumers have been harmed by the higher prices
Visa charges U.S. retailers each time a card is used, which is then
passed onto the consumer.
If the government prevails in the
case, Nelms said U.S. consumers and retailers could expect to save
more than $5 billion.
"If Visa is allowed to continue its
anti-competitive practices, no new networks will be started and
existing smaller networks will be forced to consider alternative
business strategies," Nelms said. "We need to re-create an
environment in which networks are open and fair. This would provide
economic incentives for existing networks to remain in business and
for new networks to emerge."
The charges
The Justice Department's
antitrust lawsuit filed in late 1998 contends that the two companies
are operating what is known as a "duality," in which the
approximately 7,000 banks that operate both associations engage in
collusion, by restricting member banks from doing business with
other credit card companies like American Express and Discover,
thereby limiting consumer choices.
The duality policy permits
executives of the associations' member banks with significant
interests in MasterCard to sit on the Visa board of directors and
vice versa. The effect of this, Justice argues, has been to hinder
innovation and technology that benefit consumers.
"This is
essentially a battle for the control of the American payment
system," said Lloyd Constantine, a New York lawyer who is
representing 4 million retailers, including Wal-Mart, The Limited,
and Sears Roebuck, in a separate class-action lawsuit against the
two companies.
But MasterCard's lawyers point out that in the
last year and a half, MasterCard has changed the composition of its
board of directors so that all but three are completely "dedicated";
that is, MasterCard comprises a majority of their
portfolios.
For more on the Visa, MasterCard antitrust trial from
CNN.com click here.
Constantine's class-action suit will go to court in
November. That case also claims monopolistic abuses, but differs
from the Justice Department case in that retailers are suing because
Visa and MasterCard force them to pay for debit card transactions at
the same rate as credit card purchases, even though debit card
purchases carry less risk of non-payment.
Nicholas
Economides, professor of economics at New York University's Stern
School of Business, said the government is misdirected in its focus
and should be looking at the banks that issue the credit
cards.
"It is possible, that more competition among banks and
credit card companies would diminish interest rates, but more of the
competition is needed among the banks rather than among the
networks," he told CNNfn's In the
Money.
The arguments
In his opening arguments Monday,
DOJ's Schwarz said he would present evidence that Visa determined
the impact to its business if American Express gained access to
banks through which it could issue additional cards, something
Schwarz said the company has been unable to do because of Visa's
policies.
Schwarz also noted that the relationship between
Visa and MasterCard has delayed innovation in the industry, using as
an example so-called "smart cards." Smart cards are credit cards
with a silicon chip embedded in them that can hold all sorts of
information from bank account balances to the holders' medical
history.
Visa and MasterCard researched this technology in
the 1980s, but Schwarz said, they pulled the technology back for
fear of competition with one another. Meanwhile, smaller American
Express, last September, issued its own smart card called
Blue.
Both Visa and MasterCard said they did not issue smart
cards because of the cost for developing the technology and a lack
of consumer interest.
But in Europe and Latin America, the
European Commission declined Visa such exclusivity agreements,
Schwarz said, which has created a more competitive environment in
those markets.
"Visa International has been forced to come up
with alternative means of competing," Schwarz said. "There is no
doubt that repeal of the exclusionary rule will lead to the issuance
of more cards by American Express."
Gallo, MasterCard's
attorney, countered that the payment card industry is extremely
competitive as evidenced by the volume of card offers mailed to
consumers' homes each day.
He said MasterCard and Visa
grappled frequently during the 1990s as MasterCard struggled to gain
some market share from Visa.
"When MasterCard learned that
Visa had entered into a relationship with Microsoft
(MSFT: Research,
Estimates)
... in which Microsoft would collect a fee for every business
transaction done over the Internet for e-commerce, we are not
ashamed of the fact that we enlisted the help of IBM and Netscape,"
Gallo said.
Visa and MasterCard have both claimed that American
Express (AXP: Research,
Estimates)
lobbied the Justice Department to pursue the suit solely as a means
of competing with the two networks.
Gallo said American
Express made a series of poor business decisions such as rejecting
an agreement with American Airlines to issue cards that would give
consumers frequent flier miles every time they charged
something.
MasterCard picked up the agreement after Visa also
rejected it, and it became one of the most successful card issuances
ever, Gallo said.
"Don't cry for American Express," Gallo
said. "They don't need a court to help them compete."  |
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