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The U.S. Department of Justice filed an antitrust lawsuit against VISA and MasterCard yesterday alleging that the card associations have engaged in anti-competitive practices by cooperating with each other rather than competing with each other. The DOJ says duality has suppressed the development of new products and services, including smart cards and Internet transaction protocols. The DOJ also claims that VISA and MasterCard's bylaws, prohibiting members from issuing American Express and Discover card products, have stifled competition. The response by VISA, MasterCard, American Express and Discover, indicates the DOJ may face an uphill battle in court. VISA was the first out of the chute yesterday declaring a vigorous defense against government intervention in the credit card industry. VISA believes if its members were allowed to market AmEx and Discover cards through VISA banks, as the government advocates, these banks would be compelled to compete against their own products. MasterCard said it is mystifying for the government to disrupt an efficient and highly competitive market structure that the Justice Department itself blessed some 25 years ago by approving duality. Meanwhile, American Express says VISA and MasterCard have functioned like an old-fashioned cartel, by conspiring to limit competition. AmEx says V/MC has betrayed millions of American consumers and abused the trust of thousands of banks that relied on them. AmEx points to its success with bank alliances outside of the U.S. as proof of its argument. Discover pointed to its antitrust lawsuit filed on VISA's anticompetitive behavior seven years ago and says the company has been speaking out on this matter ever since. However, Discover eventually lost its case against VISA. It is expected it will take nearly a year before yesterday's DOJ charges are heard in court in the southern district of Manhattan. Robert McKinley, president of CardWeb, warned in today's Wall Street Journal that the entire market could unravel if the DOJ prevails, and given the technological advances and huge mergers in the banking industry, powerful banks might be tempted to bow out of the VISA and MasterCard networks, changing the entire landscape.
FULL STORY:
The Justice Department sued Visa and MasterCard yesterday, the nation's two largest credit card networks, for limiting competition in the credit card network market. Together Visa and MasterCard account for 75% of all credit card purchases.
The complaint challenges the joint control of both networks by the same group of banks, known in the industry as "duality," which lessens competition between the networks. In addition, the complaint challenges exclusionary rules adopted by both networks that restrict the ability of banks to do business with other credit card networks, such as American Express and Discover.
"Visa's and MasterCard's anti-competitive behavior has stifled competition between these two dominant networks and has thwarted competition from smaller networks," said Attorney General Janet Reno. "Competitive initiatives that could benefit consumers have been abandoned, delayed or suppressed. Consumer choice has been reduced, and competition among card networks has been substantially restrained."
Visa and MasterCard are both associations that are owned, governed, and operated by their member banks. The Department charges, that Visa and MasterCard violated the antitrust laws by placing authority for their competitive decisions in the hands of banks that have significant financial interests in both networks - known in the banking industry as "duality." These governing banks have rejected competitive initiatives that might lead consumers to switch from one association's brand of card to the other's.
"This action will promote innovation and higher quality in credit card products, and provide greater choice for consumers," said Joel I. Klein, Assistant Attorney General for Antitrust. "Vigorous competition among credit card networks is critical to ensure that consumers have the benefit of the best payment methods, particularly as more and more commerce is conducted through credit cards and electronic forms of payment."
The government's complaint alleges that duality substantially lessens competition in a number of specific ways. Visa and MasterCard do not target one another in advertising campaigns and have slowed down the development of new card products and technologies such as smart cards, commercial cards, and systems to permit secured card transactions over the Internet. Also, as a result of duality, products, services and innovations that could benefit consumers are not seriously considered or even proposed.
The complaint quotes current and former Visa and MasterCard officers who have admitted that duality lessens competition. According to the complaint, one top Visa executive testified that: "It is very difficult for us to take a step, an aggressive step that hurts MasterCard because the same banks who sit there on the board, who are in Visa are also in MasterCard." The complaint also quotes a top MasterCard executive who said, "It is clear that because of duality you don't see MasterCard and Visa in the marketplace attacking each other."
The Department also charges that the Visa and MasterCard networks both adopted exclusionary rules that prohibit member banks from doing business with other networks, such as American Express and Discover. Although Visa and MasterCard allow member banks to issue each other's card, if a bank were to issue an American Express or Discover card that bank would lose its right to issue Visa and MasterCard products.
"Banks that want to offer their customers card choices beyond Visa and MasterCard have been prevented from doing so," Klein said. "Consumers have had fewer choices in the types of card products available to them, and networks like American Express and Discover have been effectively precluded from competing to enlist banks to issue their cards."
The complaint also states that the exclusionary rules impair the ability of other networks to compete with Visa and MasterCard, particularly with respect to debit and smart cards that are dependent upon a cardholder's bank relationship. Increased competition from other network competitors would spur development of new and higher quality products.
The Department's proposed relief would require that banks governing an association be dedicated to one particular network. The Department also seeks removal of the exclusionary rules.
The lawsuit was filed in U.S. District Court for the Southern District of New York. Visa USA, Inc. and Visa International, Inc. are named as defendants in the suit. Both are Delaware corporations headquartered in San Francisco. Also a defendant is MasterCard International, Inc., a Delaware corporation headquartered in Purchase, N.Y. which sets policies for and operates the MasterCard network throughout the world.
PREPARED REMARKS OF ASSISTANT ATTORNEY GENERAL JOEL I. KLEIN ON DOJ CASE AGAINST VISA AND MASTERCARD
"This case affects all Americans. It involves credit cards and charge cards, which consumers and businesses rely on for substantial amounts of their purchases every day.
"Despite the obvious importance of these cards, however, Americans are not getting what they deserve because of the serious anticompetitive practices of Visa and MasterCard, which operate the two largest credit card networks and which, between them, have long controlled at least three-quarters of this market.
"As our lengthy investigation found, and as the complaint we filed today in federal court demonstrates, Visa and MasterCard have engaged in two systematic violations of the antitrust laws. First of all, these two groups -- the number 1 and number 2 players in this market -- really don't compete with each other.
That's because they're both controlled by the same banks (an arrangement that is referred to in the industry as "duality"). And, since the same banks issue both cards, they won't allow Visa and MasterCard to engage in head-to-head competition to develop new and better products and services. Indeed, many of the banks that control MasterCard actually issue more Visa cards than they do MasterCards.
"The remarkable thing is that each of the defendants in this case has already admitted to this lack of competition in prior sworn testimony and communications with the Justice Department, as the quotations on Chart 1 indicate. Despite this candor, however, Visa and MasterCard insist on continuing with this patently anti-consumer arrangement.
"Our investigation has uncovered several specific examples where consumers have been hurt by this joint refusal to compete. The Attorney General mentioned smart cards, which were delayed by about a decade; we found similar anticompetitive practices with respect to commercial cards for business use as well as with respect to the development of a system of secure transactions for the internet, something consumers and businesses would obviously welcome. As a Visa executive explained in 1995, "if we had our group [of banks] and [MasterCard] had their group, . . . [an internet product] would be out already." Although this system has subsequently been developed, its appearance was substantially delayed because of duality. 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.
"In addition to refusing to compete aggressively with each other, these two dominant credit card systems also engaged in a second antitrust violation, this time to protect themselves from competition by other networks. They did this by adopting bylaws or rules that prohibit their members banks -- which amounts to essentially all the large banks in the United States -- from dealing with any of their real competitors, such as American Express or Discover. The language of these prohibitions, which is contained on Chart 2, is revealing.
"These rules reduce consumer choice and further harm competition among the major credit and charge card systems. Significantly, when these policies were questioned by antitrust authorities in other parts of the world -- in Europe and South America, for example -- Visa and MasterCard backed off and decided not to adopt them there. The result has been more competition with better options for consumers and businesses. We look forward to the same results here once these restrictive, anti-consumer rules are knocked out.
"Credit and charge cards -- now, and probably even more so in the future -- are simply too important to limp along in an industry that is competitively impaired. This lawsuit is designed to bring full competition so that America's consumers and businesses can be assured of the very best, most innovative credit and charge card products at the lowest possible prices."
PREPARED REMARKS OF ATTORNEY GENERAL JANET RENO ON DOJ CASE AGAINST VISA AND MASTERCARD
"This morning the Justice Department filed a civil lawsuit in federal district court in Manhattan charging Visa and MasterCard, the world's two largest credit card networks, with violating Section 1 of the Sherman Antitrust Act. Visa and MasterCard jointly account for more than 75% of credit and charge card purchases in America. What many consumers do not know is that both credit cards are controlled by the same large banks.
"This suit grows out of an extensive investigation. The Justice Department's Antitrust Division found persuasive and systematic evidence of the harm done to competition in the credit card market. Credit cards are not just luxuries. They are an important financial tool for many Americans. For millions of people, competition in the credit card industry is vital. "Our complaint today focuses on two activities. First, the same set of banks governs both credit card networks. That is simply not competitive. In numerous instances, key officials of both networks have admitted that the banks that govern them have limited competition between Visa and MasterCard. They also admit that this arrangement has curbed investment in innovation and advertising -- investments that they would have made in a truly competitive environment.
"Second, Visa, MasterCard and their member banks have agreed not to issue cards on smaller competing credit card networks, such as Discover and American Express. These exclusionary rules deny consumers the ability to choose among a maximum variety of card products.
"America's consumers have lost out. They have lost the benefit of vigorous competition between the two largest credit card networks, which means that they have not enjoyed the innovation that competition brings. For example, smart cards -- cards that use a computer chip that will expand the ways consumers can make purchases -- have been delayed for about a decade.
"Second, consumers have lost the benefits of competition among the entire credit card industry, including not only Visa and MasterCard but also their smaller rivals. Some consumers, for example, prefer to get their credit card of choice from their bank -- but are unable to. Some of these banks want to offer cards from smaller networks -- but they are unable to.
"Every American consumer has a vital stake in a competitive credit card industry. There is simply no substitute for real competition."
