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Get Four
|  | OCTOBER 5, 2004
By Mara Der Hovanesian A Whole New World for Big Plastic The Supreme Court's rejection of Visa's and MasterCard's antitrust appeal opens the way for AmEx and Discover to pounce In one of its first orders of business as it reconvened on Oct. 4, the Supreme Court opted not to hear the appeal of Visa USA and MasterCard International of the government's antitrust lawsuit against them. By bringing the six-year legal case to a close, the court will usher in a new era of competition in the $2.1 trillion card industry. U.S. banks are now free to partner with competing payment networks, such as those operated by American Express (AXP ) and Discover Financial Services. "It's the beginning of a seismic change in the credit- and debit-card market," says Attorney David Balto, an antitrust partner with Robins, Kaplan, Miller & Ciresi in Washington, D.C. The ruling's impact had actually preceded the court's decision. Anticipating the decision as early as January, the first bank to strike a deal with American Express was MBNA (KRB ), the largest independent credit-card lender in the world. MBNA plans to issue the new AmEx-branded cards in a few weeks. LOSING BATTLE. "This was all over but the shouting -- everyone was ready for it," says David Robertson, publisher of The Nilson Report, a credit-card industry trade publication. "When you have two first-rate companies [like AmEx and MBNA], you have a possibility of a really strong product coming to the market." The court's decision not to consider the appeal caps a case that began in 1998, when the Justice Dept. sued Visa and MasterCard for limiting competition in the U.S. credit-card market. In October, 2001, U.S. District Judge Barbara Jones ruled that Justice's antitrust case against Visa and MasterCard was valid and that the card associations could no longer bar member banks in the U.S. from issuing cards on rival networks. Card-association networks, such as Visa and MasterCard, process credit- and debit-card transactions through networks that link merchants and banks. In that ruling, Jones found that Visa and MasterCard were illegally requiring banks to sign exclusionary contracts that restrained competition in the network market because they prevented other networks such as Discover and American Express from offering their respective network services to those same banks. Over the years, Visa and MasterCard continued to fight Jones's ruling and attempted to have it overturned. DAMAGES SUIT. As a last resort, they petitioned the Supreme Court last year. "The rejection by the Supreme Court of Visa's and MasterCard's appeal means that they have lost every attempt to salvage their illegal barriers that have stifled competition for more than a decade," said David W. Nelms, chairman and CEO of Morgan Stanley's (MWD ) Discover Financial Services unit, in a prepared statement. "Visa and MasterCard lost in the trial court, lost in the court of appeals, and now they have lost their appeal to the Supreme Court." In a written statement, and in interviews with BusinessWeek, both San Francisco-based Visa and MasterCard touted their respective strengths in the number of cards issued and the low cost of their networks. MasterCard, based in Purchase, N.Y., said it would continue to "compete vigorously" and brushed off any potential competition as a result of the ruling. Increased competition may not be the card groups' only fallout from the high court's ruling. Immediately following the decision, Discover filed a lawsuit in federal court in New York seeking damages from Visa and MasterCard as compensation for harm caused by anticompetitive business practices of the two associations. Wall Street analysts estimate that the two associations could ultimately be liable for billions in damages. "Liability has been established," says Balto, a former antitrust-policy official with the Federal Trade Commission. "It's only a question of damages and how much they suffered." BIG SPENDERS. American Express told BusinessWeek that it, too, considers a case for damages a viable option, but it has yet to file suit. "Today is an historic day for the card-payments industry in the U.S. The Supreme Court's decision means the end, once and for all, of Visa and MasterCard rules that have prevented banks from issuing cards on rival networks," said Kenneth I. Chenault, AmEx chairman and CEO, in a written statement. "In effect, the court has decided that these rules are illegal and must be abolished." He called it, "a new era of greater choice for U.S. consumers and financial institutions." Better choice is what card customers have had abroad, according to Chenault. Outside of the U.S., the New York-based AmEx has built an expansive network business that includes partnerships with 85 banks in 94 countries. With more than 350 different card products launched so far, the network's partners have added more than 7.2 million bank-issued cards and more than 3 million businesses to the AmEx network. AmEx expects to have the same success in the U.S. in the wake of the ruling. MBNA, in particular, targets the same high-spending customer as AmEx by issuing endorsed credit cards, which are marketed primarily to members of affinity groups, associations, and universities, such as Georgetown University Alumni Assn., the Sierra Club, NASCAR, and the American Trial Lawyers Assn. GREATER ACCESS. MBNA said it would open up the new AmEx cards to about 1,000 of its affinity groups at the start. "Anytime that you can offer another payment vehicle, it's going to be a big benefit to the consumer," explains MBNA Vice-Chairman Ric Struthers. The Wilmington (Del.) issuer hopes not only to convert some of its Visa and MasterCard holders to the new AmEx network but to build on its core target market. Says Struthers: "This product allows us to have more access to that higher-profile customer that in the past we've gone after very successfully."  Der Hovanesian is Finance & Banking editor for BusinessWeek in New York Edited by Beth Belton
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