TRUSTBUSTERS TARGET VISA AND MASTERCARD

After more than two years of investigation, the Justice Dept. has charged Visa International Corp. and MasterCard International Corp. with violating antitrust laws and stifling competition. The government took aim at rules that prohibit banks that offer Visa and MasterCard from also offering cards from smaller competitors, such as American Express and Discover/Novus.

Beyond harming smaller rivals, the government charged Oct. 7, the rules also restrict competition between Visa and MasterCard, since the same banks own and serve on the governing bodies of both credit card networks. Attorney General Janet Reno said in a press conference that this interlocking ownership "has curbed investment in innovation and advertising -- investments that they would have made in a truly innovative environment." Visa and MasterCard now have 75% of the credit card market share in dollar volume.

Justice officials are seeking to end rules that prohibit banks from offering other cards. The biggest beneficiary from a favorable court ruling would be American Express, which has an 18.4% market share and has been seeking access to bank distribution for years.

The government wants to ban banks that hold top governance positions in one network from issuing cards from the other network. Some credit-card consultants argue that such a move would mean huge costs for big banks that issue both cards.

In effect, a bank would have to drop one network, and convert all those cardholders to the other network. It also could be a headache for nonbank companies that offer affinity cards, such as airlines, says Michael Auriemma, president of Auriemma Consulting Group Inc., a credit-card consulting firm in Westbury N.Y. These companies, he says, would have "to convince customers to change their brand of plastic. That is not the kind of brand marketing that they want to do. They want to sell their products."

The Justice Dept. argues that joint ownership, known in the trade as "duality," has harmed innovation in the credit-card market. For instance, officials charge, the introduction of the "smart card," which uses computer chips to expand the way consumers make purchases, was delayed a decade. Justice documents say that MasterCard had proposed introducing a smart card in 1987, but that the banks that oversaw the network refused to approve the initiative without Visa's agreement. When Visa declined, the MasterCard board refused to allow MasterCard to go forward, the government charges.

Justice documents quote Visa and MasterCard officials as saying that joint ownership makes it difficult for one brand to compete effectively with the other.

Visa and MasterCard officials say such quotes were taken out of context. Calling the Justice suit misguided, officials noted that competition in the credit-card industry is intense -- both between Visa and MasterCard and between the networks and the other cards. "All issuers of credit cards, including American Express and Discover, have the same access to consumers and are free to market any type of legitimate competitive product, and they do so in large numbers," says Alan J. Heuer, president of MasterCard's U.S. region. "No one understands that more than any American consumer who has a mailbox."

By Susan B. Garland in Washington

EDITED BY DOUGLAS HARBRECHT