Rigged Game of Cards

Judging from the millions of bank credit card solicitations that flood mailboxes each year, consumers might think that competition is brutal between Visa and MasterCard. In fact, there is a cozy accommodation between the world’s two largest credit companies in that both are controlled by the same group of banks. This kinship has shut out other competitors and stifled the development of new card products, says U.S. Atty. Gen. Janet Reno. “America’s consumers have lost out,” she declared Wednesday in announcing a federal lawsuit against the credit card giants.

The two bank card companies, which together account for 75% of all credit card purchases in the United States, have rules that prohibit banks that issue their cards from doing business with competing credit card networks such as American Express or Discover. American Express, for example, has been trying to persuade U.S. banks to issue its cards. That company and Advanta, a Pennsylvania bank specializing in credit cards, planned to launch a joint venture in 1996, but Advanta withdrew in the face of suits from the two big card companies.

In the new federal suit, which grew out of a complaint from American Express, the Justice Department contends that since both Visa and MasterCard are controlled by the same banks, which in turn issue both cards, the two companies limit head-to-head competition that might lead to new and better products and services. The government asked the court to remove the exclusionary rules from the bylaws of both companies and to require that banking associations be dedicated to either MasterCard or Visa, not both. The suit did not address interest rates and fees, which are set by individual banks.

The cross-control of Visa and MasterCard is hard to defend, considering the dominance of these two companies in the credit card business. There is little incentive for either to offer products that compete with the other. The government said the lack of competition held up the introduction of electronic “smart cards” for about a decade and slowed the development of a secure system of transactions for the Internet. Consumers benefit from greater choice, but instead they’re stuck as captives in a static market. The Justice Department is doing the right thing.