Visa, MasterCard antitrust suit could provide more card options for credit unions

NEW YORK - Having made relatively quick work of Microsoft, the Justice Department's antitrust suit against Visa and MasterCard has moved to center stage. Depending on the outcome, the antitrust suit against Visa and MasterCard could change the landscape of the credit card industry forever. The lawsuit, filed back in October `98, alleges that Visa USA and MasterCard International Inc. are violating antitrust law by limiting competition with other card networks. The trial, which many experts believe will be a long drawn out battle, began on June 12. At issue is the Justice Department's charge that the same group of banks control both Visa and MasterCard which lessens competition between the two networks and slows technological innovations while the rules and bylaws adopted by both credit card associations restricts the ability of banks to do business with other card networks such as American Express and Morgan Stanley Dean Witter & Co.'s Discover Card. Visa and MasterCard have repeatedly denied the allegations and in the June 12 USA Today Visa issued the following statement in its open letter to the public: "This case is really about helping one company gain an edge over its competitors. The government has gone to court asking for changes that will clearly benefit American Express. Thousands of Visa banks compete daily among themselves and with others giving consumers literally thousands of choices in payment cards. In this robust environment, Visa member banks made our brand the strongest in the industry by following a basic rule of business: they listened to you the consumer and offered innovative products that met your needs." American Express and Morgan Stanley Dean Witter & Co. have argued that there is a conspiracy to limit competition since neither Visa nor MasterCard allows any of its U.S. members to issue cards that can run on the American Express or Discover networks. In his prepared statement to the Senate Banking Committee at the Hearing on Competition and Innovation in the Credit Card Industry American Express Chairman and CEO Harvey Golub said, "Essentially, what Visa and MasterCard say to their members is - in order to do business with us, you can only work with whom we allow. The United States is the only place in the world where such barriers still exist. Visa and MasterCard have a complete monopoly in offline debit cards. Only banks can issue cards that directly debit a consumer's bank account - and Visa and MasterCard have all the banks tied up. If there were true network competition, Visa and MasterCard could never get away with the prices they charge for debit transactions." Morgan Stanley Dean Witter Chairman and CEO Phillip Purcell also provided prepared testimony to the Senate Banking Committee at the same Hearing which said, "What is ultimately at stake is competitive pricing, innovation and consumer choice. Strong competition in the network business is vital for America's retail merchants. Since our inception in 1985, Discover has been the low-cost competitor in terms of merchant fees. Over the past couple of years, the associations have implemented several significant rate increases for merchants. The fact is that merchants have very few options today." Visa and MasterCard currently control about 75% of the credit card market in the United States and at this time there are no U.S. credit unions that issue the American Express card. Arguments have been made that suggest Visa and MasterCard both have become less responsive to the small issuer and that if the government were successful it could then create a scenario where the focus returns to the small issuer. Credit union credit card providers generally agree that there is currently a real and fierce competition between Visa and MasterCard and that American Express is trying to broaden and co-brand a product. However, depending on the final ruling each card provider is ready to provide the service requested by their consumers. The impact on credit unions is still not clear according to industry players following the case. "We, like many others, were subpoenaed to supply documents but found we had very little that had any real bearing on this case and we concluded that credit unions don't have a major stake in the outcome of the case," said CUNA General Counsel Eric Richard. "What is important is that credit unions are well-represented in the internal decision process of Visa and MasterCard on how they conduct business. There seem to be very few credit unions interested in issuing American Express at this point." Experts agree that if the government were to win there is a possibility that American Express and other independent card companies could have access to financial institution customers. This could increase the potential to provide credit union members more options. Right now Visa and MasterCard dominate the credit unions' credit card portfolios. Members that want American Express or Discover cards are forced to go directly to the card companies or via some other affinity relationship. But according to CUNA & Affiliates "Credit Union Members Today and Tomorrow - A Guide to Future Marketing Opportunities and Threats" credit union members are using Discover and American Express cards. The study shows that 30% of members own Discover cards,10% own American Express charge cards and 9% own American Express Optima cards. Yet, credit unions have yet to tap into those members interested in Discover and American Express. However, according to NAFCU Director of Research and Analyst Tun Wai size is important when reviewing the statistics. "We are in a general sense small players in this suit. So credit unions would only have a secondary stake in this case," said Wai. "Of course any cost savings to our members would be appreciated and we hope the government will make the market more efficient. Whether credit unions would see the benefits trickle down may or may not be the case." -mbourjolly@cutimes.com