Looks like the Visa/Mastercard grip on issuing consumer credit could soon weaken.
Thursday October 8 8:16 AM ET
Who wins in a credit card crackdown?
By MSNBC's David Bowermaster
When the Department of Justice filed its antitrust lawsuit against Visa and MasterCard on Wednesday, Attorney General Janet Reno said the suit was necessary because "every American consumer has a vital stake in a competitive credit card industry," MSNBC's David Bowermaster reports. While the suit could bring obvious benefits to the issuers of American Express and Discover cards, the potential boon for consumers is harder to discern.
Judging from the mailboxes of most Americans, competition in the credit card business is thriving. Copious direct mail solicitations from banks and specialized card companies, like MBNA Corp. and Capital One Financial Corp., lure consumers with everything from low interest rates to frequent flier miles and charitable contributions.
Nearly all of these offers are for different institutions' MasterCard or Visa cards, however. The Justice Department suit suggests that consumers would be getting even better offers - in the form of new services and alternative payment methods, if not lower interest rates and fees - if those institutions offered something other than MasterCard or Visa.
"Banks that want to offer their customers card choices beyond Visa and MasterCard have been prevented from doing so," said Joel Klein, Assistant Attorney General for Antitrust. "Consumers have had fewer choices in the types of card products available to them, and networks like American Express and Discover have been effectively precluded from competing to enlist banks to issue their cards."
Visa International Inc. and Mastercard International Inc. are associations that are owned and operated by major banks, and many of those banks are on the governing boards or key committees of both associations. One outgrowth of this "duality," as the Justice Department puts it, is that most banks offer both Visa and Mastercard, and the two cards do not compete with one another (Visa, for instance, does not run ads panning MasterCard similar to those highlighting merchants that do not accept American Express). In addition, the two associations expressly prohibit their members from offering cards other than MasterCard or Visa, according to the Justice Department.
But if those prohibitions are ended, and consumers are allowed to sign up for American Express or Discover from their local bank, what will be the impact for
consumers?
"None whatsoever," said Spencer Nilson, publisher of industry newsletter the Nilson Report. "This has nothing to do with consumers at all. It has to do with the industry and brands and marketing."
Consumer advocates are more upbeat about the Justice Department action, though they too, are far from certain it will cause credit card interest rates to fall.
"We have the Justice Department recognizing that some of these folks don't play fair, both with allowing banks to issue other cards and how they work with consumers," said Frank Torrez of Consumers Union.
One of the suit's most important impacts may be on the exploding use of debit cards, some advocates say.
Even though debit card transactions cost Visa and MasterCard issuers far less to process than credit card purchases (because money is instantly transferred from consumers' bank accounts to cover debit purchases), Visa and MasterCard are hitting retailers with the same fee - around 2 to 3 percent - on debit and credit purchases.
"The merchants are outraged," says Ed Mierzwinski, of the U.S. Public Interest Research Group. Consumers are hurt by the charge in the form of higher prices, Mierzwinski says, because "merchants are not just going to eat that fee."
If the Justice Department's antitrust action is successful, it could induce Visa and Mastercard to ease their aggressive posture on debit card fees.
The suit could also help consumers by spurring the introduction of new technologies to make life simpler - if not less expensive. One example: Smart cards, which possess integrated circuits that can carry information such as airline and hotel preferences or medical data. The Justice Department suit alleges that the introduction of smart cards has been delayed by more than a decade because MasterCard and Visa have refused to use the technology to compete against one another.
Still, the most obvious potential benificiaries of Wednesday's filing are Morgan Stanley Dean Witter, which issues Discover cards, and American Express, which triggered the Justice Department investigation when it filed a complaint against MasterCard and Visa two years ago. Both companies stand to gain an important new distribution vehicles for their cards if the Justice Department suit succeeds. Wall Street responded by pushing American Express shares up $2.25, to $73.25, on Wednesday. Shares of Morgan Stanley Dean Witter closed down $3.25 to $38.44, but analysts said the drop was due more to concerns about the company's core investment banking and brokerage businesses rather than the Discover unit. |
