House of Cards?

By Eric Roston/New York

Judging from the cascade of credit-card offers in your mailbox, you would think there is plenty of competition in the industry. Banks have been leaping over one another to grab more of what industry types call "wallet share"--a bigger chunk of the 80% of U.S. households that already carry plastic. So banks pick fights with other banks. Special, predatory offers abound--2.87 billion mailings in 1999 alone. "Competition doesn't get any better than this," says David Robertson, president of the Nilson Report, a credit-card-industry newsletter.

Oh, yes, it does. And so far as the Department of Justice is concerned, maybe a lot better. Its antitrust division spent the summer trying a complex--some argue convoluted--case against Visa USA and MasterCard International in the U.S. Southern District of New York, in Manhattan. The two-year-old suit alleges that the associations, which together control more than 75% of the credit-card market, have conspired to keep Americans frozen in a sort of mid-'80s dark age of consumer-payment mechanisms.

Justice asserts that the big brands' coziness limits competition and that together they unfairly keep other teams (read American Express and Discover) off the playing field. Since 1976--after a Justice Department review nudged the brands toward so-called duality--banks have been able to issue both Visa and MasterCard. The brands are actually joint ventures owned by the banks that issue cards. Trouble is, the government says, the same powerful banks control both associations. The biggest banks have been able to sit on one brand's board of directors and hold great sway in the other. That's not all. Visa and MasterCard restrict their member banks from issuing competing cards from Amex and Discover as well. This circle of control, the feds say, bars real competition from the marketplace, and it has kept technological leaps and new credit services from benefiting American wallets.

Consumer advocates like former Senator Howard Metzenbaum, chairman of the Consumer Federation of America, hope that a government win might lead to a shake-up in interest rates, which this summer hit a six-year peak of 17.8%. Interest rates and penalty fees have shot up over the past several years, as issuers scramble to compensate for the growing number of Americans--now a majority--who clear their balances every month to avoid such charges. The fee system is at issue in several other cases involving the behemoths:

--In August, a federal judge in Seattle granted class-action status to a suit alleging that Bank One's First USA, the nation's second largest issuer, deceived customers by raising interest rates beyond the fixed level that was advertised. The class of cardholders is expected to swell to more than 10 million, and a loss could squeeze First USA for more than $1 billion.

--In July, Citigroup, whose Citibank is the largest issuer, said it would settle a class action accusing two Citi-owned banks of declaring many payments late and assessing late charges even if they were received on the due date. The bank pleaded innocent, but to avoid litigation, it is shelling out a $45 million settlement, $18 million of which will go to cardholders who file claims.

--A phalanx of the nation's largest retailers--Wal-Mart, Sears, Roebuck & Co., and the Limited among them--are suing Visa and MasterCard, saying they too were overcharged. The merchants will argue before a federal judge in Brooklyn that they are forced to accept and pay an artificially high fee on debit-card sales. They hope to wring $8.1 billion from the defendants in this class action--a number that would triple, if they win, under federal antitrust law.

The current hour, though, belongs to Federal Judge Barbara Jones. During 10 weeks of testimony ending Aug. 22, trustbusters tried to persuade her to make the big banks align themselves with one brand if they'd like a board seat. They also asked the court to allow their banks to issue cards with Amex or Discover. The goal: increase competition between brands without impeding competition between banks.

In their defense, the associations claim that letting banks work with Amex and Discover would undermine a legitimate advantage--like forcing McDonald's to sell Burger King's fries. They say many banks have already pledged to commit more than 80% of their card business to one brand, thereby reducing their self-interest in the other and increasing competition. The defendants also wonder why Justice's proposal contradicts its expert witness, who testified that banks dedicated to one brand should be allowed to issue a small percentage of the other's cards.

Jones has kept her cards, so to speak, close to her vest. She has bypassed defense motions to toss the case, yet her pointed questions to the plaintiff sometimes mimic remarks by its critics--for example, that banks are already lining up behind individual brands. "If the market is going that way anyway, why do you want me to do anything?" she asked U.S. attorney Melvin Schwarz. To prevent a return to duality, he said. That might or might not happen, but as a former card executive puts it, "this is definitely a case where everyone's a little guilty and a little innocent."

The government hopes Jones will find the associations more than a little guilty, and it has even used Visa's archrival, American Express, for help. Justice opened its current investigation in 1993; by 1996, Amex had enlisted, arguing that the restrictive by-laws should go. In other countries, the company points out, it is free to issue credit cards through banks. As MasterCard general counsel Noah Hanft says of Justice's fix, however, "it's a remedy that seems catered to suit the needs of Amex." Amex is not an official party to the suit, though its lawyers attend and--an envious Visa official points out--bring seat cushions for the courtroom's wooden pews.

Making top banks choose brands or giving them the option to work with other brands "would not result in massive changes in credit cards for consumers," says Anita Boomstein, an attorney with Hughes, Hubbard & Reed. Analysts who follow the case say that with 27,000 types of credit cards available in the U.S. from more than 6,000 banks, the addition of a joint "Your Bank-Amex" credit card would not make a big difference to consumers numbed by interest rates and fees.

Indeed, one of the competitors the suit seeks to help, Discover, is worried that a U.S. victory might make things harder. Some experts argue in sympathy that forcing the card giants to share banks might make the market less competitive because such players as Discover, and theoretically even MasterCard, might be crushed. If the government wins, the consequences would fall harder on MasterCard. Because it has just half of Visa's market share, banks would be more likely to pick the bigger brand if forced to choose one over the other. "Either way, Visa wins," Robertson says.

And either way, 30 years of regulatory head scratching over duality will come to an end. So too will the Clinton Justice Department's antitrust division, which will leave behind a legacy of ambition. But for the moment, Judge Jones, like Federal Judge Thomas Penfield Jackson, who presided over the Microsoft trial, must decide whether or not that ambition has been justified.