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(06/20/00 - Chimerine) Be Not Too Bold; DOJ Should Quit While Ahead

Be Not Too Bold; DOJ Should Quit While Ahead
Larry Chimerine
823 words
20 June 2000
The Washington Times
2
A21
English
(Copyright 2000)


While the U.S. Department of Justice (DOJ) ended the 20th century with an antitrust victory in its case against Microsoft, the department begins the 21st century with another case that one has to scratch one's head to understand.

The new courtroom pits the U.S. Department of Justice, acting on a complaint apparently initiated by American Express, against MasterCard and Visa. Although the implications of the lawsuit could have significant adverse consequences for the consumer, equally troubling is the fact that the lawsuit arises out of the thwarted ambitions of a highly successful competitor.

The facts of the case target the basic framework of the U.S. credit card industry. The department's complaint challenges the current industry structure under which banks that are members of the MasterCard network or the Visa network have the ability to issue both MasterCard and Visa cards. It also seeks to overturn association policies prohibiting the issuance by member banks of competing cards like American Express or Discover. The suit claims that MasterCard and Visa have breached the Sherman Antitrust Act, blunting competition and thereby harming consumers.

After years of lobbying, American Express finally convinced the government to bring the suit. American Express claims it's unable to reach consumers with its product - that the Visa and MasterCard policies are significant barriers to its ability to reach consumers.

The government's suit would clearly benefit American Express. Whether consumers would benefit - indeed, whether consumers are harmed at all by the current structure - is a different story - particularly in light of American Express' long-standing history of being the high-priced provider.

Today, 7,000 card issuers compete in the industry, offering more than 27,000 different types of payment-card programs. Each of the individual banks that issues MasterCard and Visa cards compete vigorously with each other and with American Express for consumers. The two associations also compete against each other for banks, brand awareness, etc.

The result of the competition has benefited consumers. With consumers getting more than 3 billion mail solicitations a year aimed at encouraging consumers to switch from other credit cards and other forms of payment, offering no-fee cards, cards with low- or variable- interest rates, complete with everything from airline miles to insurance on rental cars, it's difficult to comprehend who has been harmed. MasterCard's U.S. general counsel, Noah Hanft, framed the question clearly in testimony at a Senate Banking subcommittee hearing last month: "Choices abound. Where, then, is the consumer harm that is a necessary predicate for a federal antitrust action? We contend there is none."

Meanwhile, DOJ faces a daunting task in showing how American Express has been injured. In the past five years, American Express' annual credit card volume increased from $131 to $186 billion, making it the largest card issuer in the United States. And like all other issuers, American Express has unrestricted ability to offer its card to consumers, primarily through the mail. In fact, in 1999, 86 percent of credit card applications were generated in response to a mail solicitation.

For their part, MasterCard and Visa don't issue cards. They are associations of banks who do issue cards, set the terms and rates. The associations contend that they would be undermined if American Express, a direct competitor of its member banks, were allowed to handpick a few banks, and thus get the benefits of its higher merchant fees. This ultimately would result in higher rates and fees, and potentially force smaller banks out of the card business altogether.

American Express has always approached the card business differently than MasterCard or Visa. While MasterCard and Visa spent the past 30 years building their respective networks of banks, American Express successfully marketed its card to the high-end business customer, and dominated the industry. But as banks began to market cards to customers successfully, American Express' policy began to take its toll.

But building a network of banks is a lengthy process. So today, instead of cutting prices and expanding their own bank network, American Express has decided its best course is to get access to MasterCard's and Visa's respective networks. As MasterCard's general counsel put it at the Senate hearing: "It's as if Burger King decided it wasn't selling enough French fries, and to reach more consumers would start selling Burger King fries at a few of the most successful McDonalds' franchises. And if McDonalds doesn't like it, well, let them take it up with the antitrust division."

In this federal antitrust case, DOJ has to prove that the current system has harmed consumers. With the amount of choices available to consumers and with the strength of American Express' business, it's not even close.

Larry Chimerine is senior vice president and chief economist of the Economic Strategy Institute.

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