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.
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.
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.
"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 444KB) (AIF 444KB)
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 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.
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."