Next Antitrust Battle: Plastic

© 2000 3:20 p.m. Jun. 7, 2000 PDT

NEW YORK -- Visa and MasterCard, the top two credit card networks, will do battle in court with the U.S. Justice Department next week to ward off accusations that they hamper competition by excluding other competitors through their exclusive relationships with banks.

The Justice Department sued the card networks in late 1998, alleging they violated antitrust laws by curbing competition. Visa and MasterCard together control more than 75 percent of the U.S. credit card market and are owned by major banks.

Visa and MasterCard will argue to a federal court here on June 12 that their practices do not harm merchants, consumers, or smaller rivals such as American Express or Morgan Stanley Dean Witter's Discover unit.

"It's a huge deal for the financial system," said Mark Alpert, a credit card industry analyst at Deutsche Banc Alex Brown in New York. "It could force the restructuring of Visa and MasterCard in any number of ways."

The Justice Department will take aim at a rule known as exclusivity, which now bars banks that issue Visa and MasterCard cards from also issuing American Express and Discover cards.

Another point of contention is banks that issue Visa and MasterCard also own and sit on the governing boards of both networks -- a practice referred to as duality.

"These exclusionary rules and policies eliminate certain forms of competition among the Visa and MasterCard member banks, and have effectively precluded American Express and Discover/Novus from competing to enlist banks in the United States to issue their cards," the Justice Department wrote in its 1998 suit.

Visa and MasterCard, for their part, say a Justice Department victory would allow competitors like American Express free entry into a system the card networks built at their own cost. The case itself is the result of lobbying by American Express, they contend.

"We are very confident, as we approach the beginning of the trial, that it will become very clear that MasterCard policies and structure are highly competitive and the consumers are the beneficiaries of the present structure," said Noah Hanft, U.S. counsel for MasterCard.

If the Justice Department wins, banks may be forced to also issue American Express and Discover cards -- a boon to those companies. The court might also insist banks choose to govern only one of the networks, not both.

"If the government succeeds in ending dual governance, banks would be able to issue both Visa and MasterCard but would have to choose which of those networks they would want to be primary in," said Harry Davis, a partner at law firm Schulte Roth & Zabel in New York. "They could only participate in the governance of one of the networks."

Banks forced to choose would prefer to govern the larger Visa network, which might in turn weaken MasterCard's clout, Davis said. Visa announced last month it now has 1 billion cards circulating worldwide.

Visa and MasterCard also are going head to head with a formidable foe, Deutsche Banc's Alpert said.

"The DOJ must think they have a compelling case to bring it to trial," Alpert said. "It has either never lost, or seldom loses, an antitrust trial."

The Justice Department has taken a particularly strong stand against alleged antitrust violators. As a result of its closely-watched case against Microsoft, a U.S. judge on Wednesday ordered the software maker to break into two companies and said the company had proven itself "untrustworthy."