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In case you are wondering, this is not a case of the government going after the credit card giants because of those egregious marketing practices we discussed last week. The government's case is based on the fact that Visa and MasterCard don't allow their member banks to issue American Express, Discover, or any other company's credit card. (However, Citibank is allowed to issue its own Diner Club card. When was the last time you ran into that old fogey card?)
You might think that with Visa and MasterCard competing rabidly for each other's customers that there wouldn't be much of an antitrust case here. (Visa and MasterCard are certainly of that opinion.) But things are not as they seem.
MasterCard and Visa are odd sorts of entities. They are each organized as something like the New York Stock Exchange, actually. MasterCard and Visa are not for-profit businesses; they are associations. The members of the association are the banks that issue the credit cards. Each association runs the parts of the credit card infrastructure that the banks have in common -- things like brand advertising, product development, and the huge global data networks -- and receives fees for these services from their members.
The problem, from the Department of Justice's viewpoint, is that association membership is limited to banks that issue MasterCard or Visa cards only. So a bank can issue both Visa and MasterCard, but not American Express or Discover. That's right. I said a bank can issue both Visa and MasterCard.
So you are probably wondering, if the competition is so keen, why Visa doesn't prohibit its members from issuing MasterCard (along with American Express and Discover) or vice versa.
Good question. The reason is that the board of directors of each association is composed of member banks who have a financial interest in both cards. At the top, the same people run both organizations. The government charges that this has effectively limited competition. Again, Visa and MasterCard vigorously deny this, pointing out that just about any creditworthy person can easily get cards from competing banks, or they can select Discover or America Express cards. The hard part is NOT being solicited for multiple credit cards. I got a real chuckle from a statement made by Visa Executive Vice President Michael Beindorff, pointing out that those annoying credit card solicitations are proof of vigorous competition:
"Let's face it, there's no avoiding the mail and phone calls we get almost daily from a multitude of issuers offering new incentives, rates and special offers. The flood of offers may be annoying, but I don't think anyone can say it is anti-competitive."
But I don't think that the government's case is concerned with that aspect of competition. It's the concept of "duality" that bothers the Justice Department. Interestingly, it was the Justice Department that insisted on duality in the '70s. Up until then, the associations were independent and limited their member banks to either Visa or MasterCard. The Justice Department considered that a limitation of consumer choice.
Visa and MasterCard originally opposed duality, but now are fighting vigorously to keep it. As Visa's FAQ puts it, "23 years ago, we didn't like it, but we and the market adjusted." Well, from here it looks like they adjusted by effectively merging their interests.
What the government is charging is that innovation is stifled because whenever Visa decided to offer something that MasterCard couldn't match, the board of directors decided against it. (I wondered why I kept hearing that they have had Smart Cards in Europe for years while they are just now starting to appear here.) So perhaps duality wasn't such a good idea.
Discover is a subsidiary of Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> and, of course, the American Express card is issued by American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %>. As for-profit organizations, these companies are independent and answer ultimately to their shareholders. They, obviously, favor the government's side of the debate. I do as well, although I wish the government were addressing much different issues. I'd rather see more focus on ALL of the credit card companies' marketing and billing techniques.
With some luck, more competition will address those issues. I'm not certain I see how, though. Neither American Express nor Discover has shown much interest in competing on the basis of more consumer-friendly services.
Fool on and prosper!
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