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Antitrust suit strikes Visa, MasterCard

Government claims practices hurt consumers

— Los Angeles Times

WASHINGTON -- 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.

Attorney General 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 very little impact on average credit card users. It does not, for example, address interest rates or ATM fees, which individual banks set.

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. These rules also restrict competitors' access to automatic 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 Attorney General 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 percent 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, Calif., company that tracks the credit card industry. MasterCard accounts for 25 percent of the market, and other cards are divided among the rest.

A Justice Department lawyer said he gives no credence to that prediction.

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 percent 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 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 accept 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 Justice alleged that it has taken more than a decade to make progress.

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

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 issue only Visa and MasterCard would be able to issue American Express, Discover and other cards.