(FORTUNE Magazine) – With all due immodesty," says swaggering New York attorney Lloyd Constantine, "I know this better than anybody in the world."

The "this" he is talking about is the arcane social history surrounding the myriad plastic payment cards that are now compressed like mica inside your wallet. Constantine knows all about those rapidly propagating symbols, which have spread like the measles over both sides of your ATM cards--the Visa or MasterCard flags and holograms on the front and the Cirrus, PLUS, NYCE, STAR, Pulse, MAC, Interlink, and Maestro logos, among others, on the back.

That jumble of brands might connote vigorous competition to some, but not to Constantine. As he sees it, competition in the payment card industry is being ruthlessly suppressed by the dominant power of Visa U.S.A. and MasterCard International. Constantine, 55, has been monitoring those card associations' machinations for about 15 years, first as the chief antitrust enforcer for New York State and then, since 1991, as a private attorney. Hearing Constantine discuss Visa and MasterCard is like listening to Noam Chomsky analyze U.S. foreign policy: They've never done anything good, even by accident.

In 1996, Constantine and his law partners--including Eliot Spitzer, now the attorney general of New York--launched a class action against Visa and MasterCard, accusing them of violating the federal antitrust laws by forcing retailers to accept their debit cards (a card that enables payment from the cardholder's checking account) as a condition of being able to accept their credit cards (a card that enables payment from the cardholder's line of bank credit). Since merchants feel that accepting credit cards is essential to doing business, and Visa and MasterCard dominate the credit card market, retailers are effectively forced to take their debit cards too, Constantine alleges. Merchants must do so even though they regard the debit cards as overpriced and unnecessary to their business. In legal terms Visa and MasterCard are illegally "tying" debit card acceptance to credit card acceptance, Constantine maintains, and they are attempting to monopolize the debit card market too.

The suit is a big deal because debit cards are now a big deal--the fastest-growing segment of the payment card market. Consumers used them to make about 14 billion retail purchases in 2002, a 30% increase over 2001. This year consumers are expected, for the first time, to make more debit card purchases than credit card transactions, according to The Nilson Report, a trade publication (though the total value of debit purchases still will be lower, because they tend to be for smaller amounts).

Moreover, Constantine's suit, which was due to go to trial on April 28 in Brooklyn federal court, is no ordinary class action. Constantine did not, for instance, simply draft his brother-in-law to go buy a couple of shares of Wal-Mart and then serve as his named plaintiff. No, the lead plaintiff in this class action is Wal-Mart. The largest company in the world has been joined in this audacious adventure by a phalanx of the country's beefiest retailers--the Limited, Sears Roebuck & Co., Circuit City Stores, and Safeway--as well as a string of smaller merchants and all three major retail federations. This coalition of the billing, if you will, now leads a certified class of about seven million merchants, large and small, aiming to wring savings from thousands of U.S. banks by forcibly rejiggering the pricing and branding structure of the nation's electronic payments system.

Though Visa and MasterCard lawyers invariably refer to the plaintiff as "Wal-Mart"--evidently wagering that the behemoth will cut the least sympathetic profile--the plaintiff is in reality nearly every retailer that has ever accepted Visa or MasterCard since October 1992. You see, every time a cardholder used a Visa or MasterCard debit card during that period, the merchant had to pay almost 2% of the value of that transaction to the Visa/MasterCard member banks that facilitated the transaction. The merchants claim they never would have agreed to pay that vigorish absent the illegal tie, and they want all that money back--a sum that, when trebled under the antitrust laws, approaches $50 billion.

As daunting as those damages are, it is the proposed injunctive relief that really has the card associations spooked. Wal-Mart and its allies seek the court-ordered destruction of the "honor all cards" rule. That's the rule requiring merchants who sign up for Visa or MasterCard--or, for that matter, American Express or Discover or NYCE--to accept every card branded with that logo, regardless of the bank that issued it or any other marketing feature of the card (be it gold, platinum, or whatever). The card associations claim that that rule, which long predates the introduction of debit cards, is the foundation of every payment card system ever devised. Striking down "honor all cards" would cause upheaval across the payment card industry, they protest, to the detriment of the very consumers the antitrust laws are supposed to protect.

Visa and MasterCard officials can't quite believe that it is really happening to them. "The striking part of this," says Paul Allen, Visa's stern, craggy executive vice president and general counsel, "is that if Wal-Mart gets what it wants, it will deny consumers the choice that consumers now have. Wal-Mart is perfectly free to accept any means of payment it wants--cash, checks, other cards. No rules bar that. Wal-Mart is free to encourage the customer to make whatever form of payment Wal-Mart wants."

"Visa is two things," interjects Stephen Bomse, an outside litigator for Visa, "guaranteed acceptance and guaranteed payment. Visa wants its consumers to know that if they have a Visa card and they take it to a merchant that displays the blue, white, and gold Visa flag, that card will be accepted. "Honor all cards" makes that a reality. The merchant has to honor all cards so that Visa can fulfill its promise to the consumer. In return, Visa makes a promise to the merchant: Accept, and you'll be paid. It's a wonderful bargain for merchants and for consumers."

But barring an 11th-hour settlement, the final word on just how wonderful that bargain is, and for whom, will belong to 12 citizens drawn from the Brooklyn voting rolls and driver's license registry.

WHAT'S A DEBIT CARD, ANYWAY? In the late 1970s and early 1980s, two small associations of heartland banks, one in Wisconsin and the other in Iowa, decided to usher in the cashless society. The Tyme and Shazam networks, as they were called, wanted to create something more ambitious than the existing regional ATM networks, which merely enabled customers to get cash at banks other than their own. Tyme and Shazam wanted to install modified banking terminals in retail outlets and, over time, right in the checkout lane. The idea was that customers would move funds electronically straight from their bank accounts into the merchants' accounts by swiping their ATM cards and entering a personal identification number, or PIN. That would be good for the consumer, and better for banks and merchants, which would save on the costs of check processing, check fraud, armored trucks, and so on.

Today that vision has largely come true--in Canada. Though Canadian banks did not launch a PIN debit network until long after Tyme and Shazam started theirs, check use in Canada has already become vestigial. When payment by debit card is an option, it's more popular than credit cards, checks, or even cash. In some Canadian churches, the collection is now taken electronically.

In the U.S. the story is more complex. To be sure, debit card use has enjoyed explosive growth here in recent years. From 1992 to 2001 the number of PIN debit transactions in the U.S. rose from 112 million to 3.5 billion, while their dollar value rocketed from $4 billion to $135.7 billion.

Nevertheless, per capita use of debit cards in the U.S. is no more than about half what it is in Canada, while the horse-and-buggy business of processing paper checks remains a mainstay of U.S. banking. Of merchants that accept plastic, only 28% have installed PIN pads in the U.S., compared with at least 54% in Canada. While Canada leads the globe in debit card usage, the U.S. is sixth.

Moreover--and perhaps not coincidentally--the most common form of debit card in the U.S. is not PIN debit, but rather something called signature debit. Signature debit cards basically look and operate like credit cards: You just sign instead of punching in a PIN. If your ATM card has a Visa or MasterCard flag on it, then you have a signature debit card, though you may not have realized it. You may think you have a hybrid card that is a credit card if you sign and a debit card if you punch. That notion is a mistake: Your card is signature debit when you sign, and PIN debit when you punch. To use the signature debit function on your card, however, you must counterintuitively choose "credit" when offered a choice by a store clerk or on a card-reading terminal. (Each side in the lawsuit blames the other for this outlandishly confusing situation. Trust us--you don't want to know the details.)

While PIN debit places a hold on the card user's funds and ensures settlement within a day, a signature debit transaction can take up to three days to clear. It's therefore easier to overdraw your account with signature debit. Fraud is also more of a problem with signature debit, since it's easier for a thief to forge your signature than to guess your PIN. But perhaps the most significant difference between the two methods of payment is this: Signature debit costs merchants a lot more than PIN debit does (see chart).

Despite its arguable drawbacks, signature debit has been expanding its dollar share of the U.S. debit market--from 52% to 68% between 1993 and 2001. Which may be just fine. If Americans prefer a mode of payment whose back-end technology is a little clunkier, so what? Consumers aren't harmed by the fraud risk, since the issuers of signature debit, Visa and MasterCard member banks, guarantee zero-liability protection from fraud. Moreover, signature debit is useful in many situations in which PIN debit is not yet suitable--like mail order, telephone, and Internet sales, or dining in fancy restaurants. In any case, comparing our banking system with Canada's is dicey, since the countries' regulatory environments are different, and fee structures are hard to compare.

On the other hand, maybe it's not fine. Maybe the slower pace of PIN debit adoption in this country is part of a plot. The chief prophet of that intriguing possibility is Lloyd Constantine.

THE WORLD ACCORDING TO LLOYD First of all, Constantine asserts, Visa and MasterCard, though they have separate boards of directors and portray themselves as competitors, should actually be regarded as a single entity. He calls it Visa/MasterCard. The reason is simple: Visa and MasterCard are owned by the same people. Each is an association made up of thousands of member banks, but they are by and large the same banks. That is, in the U.S. more than 95% of Visa's member-owner banks are also member-owners of MasterCard, and vice versa.

For reasons that are the subject of a different antitrust suit, now being pressed by the U.S. Justice Department, Visa/MasterCard has cornered more than 90% of the market for credit cards and more than 70% of the broader market that includes both credit and charge cards. Visa/MasterCard now seeks to extend that dominance into the burgeoning debit card market, according to Constantine. The main obstacle is competition from the regional PIN debit networks. Visa/MasterCard's debit product uses the old credit card network--it rolls down the same railroad tracks, so to speak, that credit cards do--while PIN debit employs a cheaper, safer, and faster electronic technology.

To suppress competition from PIN, Constantine theorizes, Visa/MasterCard effectively imposed a form of technological featherbedding on the American populace. Visa/MasterCard decided that--public be damned--it would push signature debit.

Visa/MasterCard member banks prefer signature debit not because of any nostalgic preference for the credit card tracks, but rather because of a thoroughly contemporary preference for credit card revenues. Banks incur substantial costs in issuing credit cards, to cover credit-rating checks, fraud, and the risk of default. Merchants happily pay a large share of those costs, because they view credit cards as extremely valuable to their businesses. Credit cards enable customers to make big-ticket purchases that they couldn't make with immediately available funds. So when you buy something with a credit card, the merchant surrenders almost 2% of the value of that purchase, paying roughly 1.5% to the Visa/MasterCard bank that issued your card, and another 0.25% to the merchant's bank, which must also be a Visa/MasterCard member. Those banks then forward small percentages of their revenues to Visa or MasterCard itself. (Stores pay even more for American Express, but that's another story.)

Debit cards don't involve comparable risks and costs. When you buy something with a debit card, the merchant electronically checks with your bank to make sure you have sufficient cash on hand, and places a hold on those funds. You almost can't default.

More important, retailers don't value debit cards the way they do credit cards. Debit cards don't enable you to make bigger-ticket purchases than you would with cash. From the retailer's perspective, if he refuses to take your debit card, you'll probably just find a nearby ATM and come back to make your purchase with cash.

For all those reasons, the PIN debit networks typically charge merchants only modest flat fees--in the range of 15 cents per transaction. In contrast, Visa/MasterCard signature debit cards are priced very similarly to their credit cards, with nearly 2% of every sale flowing from retailers to banks.

If merchants don't think signature debit is worth it, why don't they just refuse to accept it? They can't. That's where the "honor all cards" rule comes in. Merchants that sign up to accept Visa or MasterCard credit cards must honor all Visa-or MasterCard-branded cards, including signature debit cards.

Though the cardholder may not realize he's paying anything for signature debit--since all fees are imposed on the merchant rather than on the cardholder--consumers ultimately do pay, because merchants pass along their costs in the form of higher prices. That's how the consumer gets hurt by Visa/MasterCard's allegedly inflated fees for signature debit, according to Constantine, and that's why the antitrust laws forbid its tying scheme.

HONOR ALL CARDS To appreciate Visa and MasterCard's side of the story, we must begin at the beginning. "Once upon a time there was no Visa," says Visa outside counsel Bomse, taking us back to the 1960s. Like every payment card system, Visa faced the chicken-and-egg problem. How do you persuade banks to issue a card that no merchants yet accept, and how do you get merchants to accept a card that no banks yet issue? "Solving that problem took a long time," Bomse says. But eventually Visa got its network up and running nationally and, indeed, globally.

Visa introduced signature debit cards in 1975. When it did so, it put the familiar Visa name and flag on the card, of course, taking advantage of the existing credit card network it had so painstakingly built up. Though it would seem odd for Visa to have done anything else, that is the act that Constantine now labels an illegal tie. To have avoided the tie, Visa would have had to withhold the Visa name and flag from its debit card, choosing to start a new brand from scratch--one not yet issued by any bank or honored by any merchants--taking on the chicken-and-egg problem all over again. "But why would you possibly have done that?" Bomse asks.

The point is critical. The debit card was neither the first nor the last permutation of payment card that the "honor all cards" rule enabled Visa and MasterCard to introduce. Visa general counsel Allen lays out a string of Visa-flagged cards across a conference table, as if commencing the mother of all solitaire games. There are gold and platinum cards, co-branded cards (like airline cards), and "affinity" cards (linked in various ways to charitable organizations). "You can pay when you get the bill at the end of the month, or take a loan over 12 months, or pay out of your checking account in three days," Allen says. If your credit rating is bad, there's a cash card you can "load" in advance. There are gift cards, a "Buxx card" for twentysomethings (the bill goes straight to the parents), and even a payroll card. "Rather than a check, every two weeks the employee gets a card," Allen explains. None of the products that consumers now get to choose from could have been introduced without the "honor all cards" rule, he claims.

Constantine responds that he hasn't challenged the "honor all cards" rule over any card except debit. "We've only challenged the tying arrangement," he says. But his response coyly avoids the question of how courts could possibly draw a distinction if any retailer later on did challenge other cards.

Shortly after Visa and, later, MasterCard introduced their signature debit cards, the ATM networks began extending their reach to the point of sale. Both varieties of card languished, however, until the early 1990s, when Visa and MasterCard aggressively promoted debit.

When they did so, they took opposite tacks. Visa pushed signature debit, but MasterCard initially bet on PIN, launching its own PIN product, Maestro. (Their pursuit of divergent strategies undercuts Constantine's contention that they are a single entity.)

Visa's signature debit card proved much more successful than Maestro. By 1994, MasterCard had reversed course and adopted signature debit as its preferred product. Signature debit was more popular, Visa and MasterCard officials maintain, largely because merchants could use it without having to install PIN pads or train their clerks to use them. They could just use their existing credit card railroad tracks.

"Candidly speaking," says Noah Hanft, MasterCard's senior vice president and general counsel, "MasterCard spent years hitting its head against the wall, trying to convince merchants to put in PIN pads. All the while, Visa continued to grow." For that reason, MasterCard officials now find it especially galling that their company is named as a co-conspirator with Visa in an alleged scheme to suppress PIN debit.

Still, there was an additional factor working to ensure the success of signature over PIN cards: Banks were more eager to issue and promote it, since it brought them a fat revenue stream. In recent years, in fact, banks have "bribed" customers to use signature debit, as a recent Sanford C. Bernstein analyst's report puts it, by offering cardholders frequent-flier miles and sweepstakes opportunities. "Skip the PIN. Sign and win!" goes one campaign. A quarter of the country's banks have begun imposing surcharges of up to $1 on PIN use at the point of sale, according to an August 2002 Dove Associates study--an unpleasant surprise for cardholders and a powerful disincentive. Thus, to preserve their revenue stream, banks have manipulated consumers into "choosing" signature debit. And that revenue stream would not exist, claims Constantine, but for the "honor all cards" rule.

Conspicuous by their absence from the merchants' suit are the regional PIN networks themselves--NYCE, STAR, Pulse, etc.--which are, remember, the alleged victims of Visa/MasterCard's scheming. They're the ones whose business has allegedly been suppressed and foreclosed by the tying behavior. Why aren't they suing?

"A lot of PIN network executives will be testifying," says Constantine, "and you'll see them come out of the closet at trial." He'll present evidence, he says, that the PIN networks have complained about Visa/MasterCard to federal regulators over the years, but that they are restrained in their public actions either by directors on their boards who are officers of Visa/MasterCard banks or by the fear of endangering relationships with the card associations.

But it's clear that officials of many PIN networks are genuinely ambivalent about the suit. In the early 1990s they were beneficiaries of Visa's and MasterCard's massive promotional campaigns for signature debit, as they have openly acknowledged. The ad campaigns, which the PIN networks could never have afforded, introduced consumers to the idea of debit cards. The regional networks' cards, in the early days accepted by only a smattering of merchants within each network's limited territory, became far more valuable to consumers when co-branded with the Visa or MasterCard flag, honored by four million merchants nationwide and 20 million internationally.

For a while, then, PIN debit rode on signature's coattails. On the other hand, things did happen later on that PIN executives are less happy about. "Especially one of the organizations we feel has used a lot of muscle to get where they're at in some of their product offerings," says Jim Martin, executive vice president at the Pulse PIN network.

Martin is evidently talking about Visa, which wields much more clout than MasterCard--commanding about 55% of the total debit market, compared with MasterCard's 13%--and stands accused of many more allegedly predatory acts by Constantine. The merchants claim, for instance, that Visa has connived to jack up the price of PIN debit, giving merchants less incentive to install PIN pads or complain about signature debit prices.

In 1992, for instance, Visa acquired Interlink, a West Coast PIN network, and ordered merchants to start paying 0.45% of every Interlink purchase to the issuing banks--a revolutionary development in the PIN realm, where most merchants then paid no fees. Interlink's competitor PIN networks were thereby pressured to pay fees to banks also, lest those banks drop their PIN network logos from their cards.

They faced upward price pressure again in 1998, when Visa launched Visa Check II, a debit card that offered cardholders the benefits of Visa membership--like zero-liability fraud protection, for instance whether the card was used as signature or PIN. The new card's price to the merchant for PIN usage was even steeper than Interlink's. In addition, issuing banks were required to ban all other regional PIN network logos from the back of the Visa Check II card. Visa offered key banks glittering cash inducements to issue the card, Constantine alleges, paying Bank of America $36 million, for instance.

"There's a word for that," responds Visa counsel Bomse. "It's known as 'competition.'"

REMEMBER MICROSOFT On April 1, Constantine won an important pretrial ruling in which Judge Gleeson agreed to frame the issues for the jury in a way that accepts certain key premises of Constantine's case that Visa and MasterCard had hoped to contest. Nevertheless, the card associations will still be able to present the heart of their case, which is that the "honor all cards" rule benefits rather than hurts consumers. In addition, the card associations will be allowed to argue that the PIN networks, which have experienced supernova growth during the past decade, do not show much evidence of having been suppressed, let alone monopolized, by Visa/MasterCard. In fact, if government regulators permit the pending merger of First Data Corp. and Concord EFS, the combination--which would own the STAR and NYCE networks--will command 70% of the PIN market, compared with just 12% for Visa's Interlink and MasterCard's Maestro combined.

Those may be difficult hurdles for Constantine to overcome--if not in the eyes of Judge Gleeson or the jurors, then perhaps in the eyes of the appellate judges to whom Visa and MasterCard have vowed to take any adverse verdict. In recent years ever more conservative appellate judges have become ever warier of forbidding alleged tying arrangements without dynamite proof of an anticompetitive impact on consumers. Remember, the most famous illegal tie that's ever been alleged--Microsoft's bundling of its Internet browser with its monopoly operating system--may have been kosher after all. Though the appeals court found Microsoft guilty of a different antitrust transgression, it ordered a retrial on the tying charge, and the government never pursued it. In this case Constantine is asking the judiciary to turn the thriving payment card industry upside down, and appellate judges will want to see compelling proof indeed.

That said, the appellate judges' hands are shackled to a degree by the jurors' findings of fact. "You can assume both sides here have done focus groups and mock trials," Constantine says. "And I'll tell you something," he adds with a wicked grin. "I'm pretty confident."