On the surface, there appears to be considerable competition in the credit-card business. With great regularity, US mailboxes fill up with offers for new Visa or MasterCards promising special introductory rates and balance transfers.
Last year, there were 4 billion of these mailings - almost 14.5 for every man, woman, and child in the US.
But the government says customers aren't getting real deals. Issuers of Visa or MasterCard don't offer "smart cards," for example, with chips inside that might give a consumer more options. And none of the offers include elimination of late charges or credit fees. Is there some kind of conspiracy going on here?
Over the next 16 to 18 weeks, the US government will try to prove in federal court that MasterCard and Visa, which have a combined 75 percent of the $1.3 trillion credit-card market, have limited competition to the detriment of consumers. If the government proves its case, some outside observers believe it could have vast ramifications - equivalent to the government's recent antitrust victory over Microsoft.
The lawsuit, which will be decided by Judge Barbara Joan, is the result of years of government investigation. The government's suit essentially challenges the current industry structure, called "duality."
For more than 25 years, members of the MasterCard and Visa network have had the right to issue MasterCards while participating in the governance of Visa, and vice versa.
Despite the 4 billion sales pitches to customers each year, the government alleges this system is anticompetitive.
The 'other' credit cards
At the same time, the government is also attacking the two nonprofit, joint-venture associations because they prohibit their member banks from issuing competing cards from such companies as American Express and Discover.
Melvin Schwarz, lead counsel for the Justice Department, has said, "There is no question that the output of American Express and Discover would go up if they had access to the banks."
MasterCard and Visa, however, maintain that the lawsuit is designed to benefit American Express, which is expected to testify on behalf of the government. "We built the house, paid the mortgage, and now they want to move in with a government escort," says Noah Hanft, deputy general counsel for MasterCard.
The credit-card companies are expected to argue that American Express wants to "cherry pick" the banks it would like to deal with. And they will note that for years, American Express had no interest in dealing with banks or anyone else. In fact, it turned down the opportunity to co-brand a credit card with American Airlines, which now uses Citibank in one of the most successful new credit card launches in years.
"The argument of one defendant is that they had the opportunity to compete but chose not to and in hindsight realized it was a mistake and now want to be co-branded," says Anita Boomstein, a lawyer with Hughes Hubbard & Reed LLP and an expert on credit cards. "The government is going to have a hard time showing how any consumer has been harmed by any of this."
'Choke hold' on banks?
But Frank Torres, a legislative aide at Consumers Union, believes MasterCard and Visa have a "choke hold" on the banks to prevent them from competing in a meaningful way. "They tend to lock-step on issues that matter such as limiting the shrinking of the grace period," he says.
Mr. Torres agrees it's hard to calculate damages. But, he thinks the consumer could have had more choices. For example, in other countries, consumers are now using credit cards with computer chips in them. These so-called "smart cards" allow easier payment over the Internet and other functions.
But MasterCard says it looked into the cards, which would have required an expenditure of more than $1 billion. The company says the new cards didn't make economic sense.
Although MasterCard and Visa are the defendants in the case, part of their strategy is to attack American Express.
Over the next several weeks, the judge is likely to hear about how the company has failed to win new customers overseas, where the duality issue does not exist.
American Express says last year its 60 partners experienced a 30 percent growth. At the same time, the government will count on an economist to show what might have happened if there had been full-fledged competition in the US.
Mr. Schwarz will introduce internal documents from the credit card companies that may show they inhibited competition so they wouldn't lose market share. It will all add up to a complex case with the potential to cause significant changes in the credit-card business.
(c) Copyright 2000. The Christian Science Publishing Society