Trustbusters Sue Two Biggest Card Networks

Charging that Visa and MasterCard illegally “stifle” competition, the Justice Department filed an antitrust suit Wednesday seeking an end to joint control of the ubiquitous credit card companies by the same large banks.

Atty. Gen. Janet Reno said the unusual arrangement between the credit networks and their member banks--known as “duality”--hurts consumers by impeding technological advances like “smart” credit cards and software that would make shopping through the Internet more secure.

“America’s consumers have simply lost out,” Reno said. “They have lost the benefit of rigorous competition between the two largest credit card networks, which means they have not enjoyed the innovation that competition brings.”

But some analysts said the issues the lawsuit raises have little impact on the average credit card user. It does not, for example, address interest rates or ATM fees, which are set by individual banks.

The civil suit, filed in New York, seeks to overturn Visa and MasterCard bylaws that prevent member banks from offering competing cards, including American Express and Discover. Those bylaws also restrict competitors’ access to automated teller networks.

Visa and MasterCard both said they believe the government’s complaint is groundless, and that the credit card solicitations consumers find in their mailboxes attest to the level of competition.

Consumer groups supported the Justice Department action, agreeing that competition would benefit consumers. Under Assistant Atty. Gen. Joel Klein, the department has taken a more activist role in antitrust matters.

Several industry analysts, however, warned that the lawsuit could backfire if it succeeds. They predicted that Visa--which accounts for 50% of the $1 trillion in annual credit card purchases--would become even more dominant.

“They are going to be like the cat that ate the canary,” said David Robertson, president of the Nilson Report, an Oxnard company that tracks the credit card industry. MasterCard accounts for 25% of the market, and other cards divide up the rest.

A Justice Department lawyer said he gives no credence to that argument. “There are many people in this country in various lines of business who would love to have MasterCard’s franchise,” said the lawyer. “There are very few companies that can’t operate with a 25% market share. The difference is they would have to compete.”

Visa and MasterCard do not issue credit cards themselves. Instead, they are associations that coordinate among banks to arrange payment for credit card purchases. They also advertise their brand names.

Originally, the two card networks were controlled by different groups of banks. But in the early 1970s, the government ruled that Visa could not bar members from issuing MasterCards as well. That began the evolution toward joint control.

The Justice Department cited several instances in which dual control allegedly blocked competition.

It said MasterCard has been blocked by the banks from naming Visa in advertising that would stress that its acceptance is just as widespread. As a result, consumers erroneously believe that more merchants take Visa. In reality, the terminals at grocery stores, malls and car rental companies can take either card.

MasterCard was allegedly stymied by its member banks in developing “smart” cards, which can store information about available credit along with reams of personal information, from car rental preferences to medical records. Both companies are moving forward with development of smart cards now, but the Justice Department alleged that it has taken more than a decade to get progress.

However, industry analyst Bob McKinley, president of Ram Research in Washington’s Maryland suburbs, said development of the high-tech cards has also been delayed by questions about how popular they would prove with consumers.

The Justice Department contends that the lack of competition has also stalled the development of corporate cards.

“And there’s no telling what other products and benefits we would have seen had Visa and MasterCard chosen to compete rather than pull their competitive punches,” Klein said.

If the government wins, Justice Department lawyers said banks serving on the Visa board would have to substantially reduce their MasterCard business, and vice versa. And banks that currently issue only Visa and MasterCard would be able to issue American Express, Discover and other cards.