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Credit giants fight back
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June 13, 2000: 7:01 p.m. ET
Visa/MasterCard say granting access to their banks could hurt consumers
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NEW YORK (CNNfn) - American Express gained an unfair advantage over MasterCard and Visa in Puerto Rico because the same competitive rules governing the payment card industry now under attack here do not exist in the U.S. territory, MasterCard lawyers argued Tuesday.
On day two of the U.S. Justice Department's antitrust trial against Visa U.S.A. and MasterCard International in federal court here, MasterCard's lawyers tried to prove that American Express, the second largest credit card issuer in Puerto Rico, unfairly benefited from an agreement in which Banco Popular began distributing American Express cards.
 The Justice Department sued Visa and MasterCard for alleged antitrust violations in late 1998. The suit contends that Visa and MasterCard are operating what is known as a "duality," in which the approximately 7,000 banks that operate both associations engage in collusion.
The trial began Monday without a jury before U.S. District Judge Barbara S. Jones.
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 technologies that benefit consumers.
The suit also accuses the associations of violating federal antitrust laws through their policies of restricting member banks from doing business with other credit card companies like American Express and Discover, thereby limiting consumer choices. If a member banks issues a competing card, they are immediately dropped from the Visa or MasterCard network.
Amex swipes business away
Visa and MasterCard said the relationship between American Express and Banco Popular, Puerto Rico's largest bank, is unfair because American Express can issue its own cards, whereas Visa and MasterCard do not.
 MasterCard and Visa, which together own about 80 percent of the U.S. credit card market are associations owned and operated by member banks.
On Monday, Melvin Schwarz, the DOJ's lead attorney, called Lawrence Kessler, executive vice president of Banco Popular to testify about how the three credit cards fiercely compete in Puerto Rico because no "exclusivity" rule exists there to prevent Visa and MasterCard member banks from issuing competitors' cards.
Through his cross-examination of Kessler Tuesday, MasterCard attorney Eugene Bannigan showed that Banco Popular charges merchants up to 40 percent more to participate in the American Express network than it does for Visa and MasterCard. And that Bannigan said ultimately costs consumers 20 percent more.
Bannigan pointed out that the amount of purchases charged to Banco Popular Visa and MasterCards dropped from 75 percent in 1995, before the agreement with American Express, to about 47 percent in 1998-1999.
It is MasterCard and Visa's contention that if the DOJ wins its case and the exclusionary rule is eliminated, the same thing will happen in the continental U.S., jeopardizing Visa and MasterCard's viability and hurting consumers with higher fees.
"If American Express' idea of innovation is offering products at higher prices, then it's no surprise why the company is losing out in the marketplace," Visa spokesman Kelly Presta said Tuesday. "How does it benefit consumers to pay more for the same product? Once again, it's clear that the only beneficiary in this litigation is American Express, not the consumer."
Proving the case
In opening arguments Monday 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.
But lawyers for MasterCard and Visa countered that their policies foster competition and that the government's case would, if successful, do more harm to the industry than good.
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.
"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.
The arguments
Schwarz noted Monday 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 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. 
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