Perhaps the most significant effect of the judge's decision this week in the Visa-MasterCard antitrust trial will be to throw the battle for market share among the four major card brands up in the air.
Assuming that Judge Barbara S. Jones' ruling stands and that U.S. banks will from now on be able to issue the American Express and Discover card brands, the major question will be whether American Express Co. is able to use this newly opened distribution network to grab a substantial number of customers away from Visa and MasterCard.
A secondary question is whether the Discover Financial Services unit of Morgan Stanley Dean Witter & Co. will be able to forge partnerships with banks and capture more market share. Even executives at Visa U.S.A. have been known to say that Discover, with its cash-back rewards feature, offers consumers the best value proposition.
In either case, the aggressive but gentlemanly competition between Visa and MasterCard - in which MasterCard has been making some recent gains on Visa's commanding lead - is likely to get thrown out of kilter by the addition of two fresh combatants. In her decision Judge Jones seems to have acknowledged - in not altogether disapproving tones - that Visa and MasterCard have both fought and worked side by side, much like the sheepdog and coyote in the old Warner Brothers cartoons who sip coffee together and punch a time clock before scrapping over control of the sheep herd.
So far, Visa and MasterCard are in denial of what may be the new reality. Both associations have said that they will probably appeal the parts of the judge's decision that would permit their members to work with American Express and Discover. Visa's general counsel, Paul Allen, pointed out that the ruling does not take effect for 90 days and said, "Assuming we get a stay and an appeal, nothing changes for the duration of the appellate process, which could be two and a half years."
Judge Jones was adamant on the point that Visa's bylaw 2.10(e) and MasterCard's competitive programs policy have stifled the credit card market. She did not buy the oft-repeated argument of the card associations that the clutter of solicitations in U.S. mailboxes proved that all the companies had equal access to consumers.
"The member banks are a unique distribution source for general-purpose card products because of their experience and expertise," she wrote in her opinion. "They also control access to the primary financial relationship in America - the checking account. No amount of effort by American Express and Discover to issue through nonmember banks, retailers, or other organizations will provide consumers with the range of choices to which they are entitled."
According to trial documents, in 1999 Visa claimed 47% of the dollar volume of U.S. credit and charge card transactions; MasterCard accounted for 26%, American Express had 20%, and Discover had 6%. In her opinion the judge cited the statistics that Visa and MasterCard control over 73% of the volume of transactions on general-purpose cards and 85% of the market of cards issued.
In a news release whose timing cannot be accidental, MasterCard issued its "performance results" for the first half on Thursday and said that during the six months, "financial institutions increased their issuance of MasterCard cards around the world at the highest rate in 10 years." On June 30 there were 475.3 million MasterCards issued worldwide, up 18.6% from the same date in 2000, and in the United States there were 256.2 million cards issued, up 20%.
Only a few weeks earlier, The Nilson Report had published midyear results for both MasterCard and Visa, showing that MasterCard was gaining on Visa. The Nilson Report's numbers had Visa's cards in force down 0.2% at midyear, to 249.1 million, and MasterCard's up 21.4%, to 217.9 million. In transaction volume Visa was up 4.9%, to nearly $3 trillion, and MasterCard was up 17.1%, to nearly $1.9 trillion.
In debit cards, however, Visa made greater gains, with 108.7 million cards in force (up 17.5%) versus MasterCard's 38.2 million (up 12.6%).
MasterCard was quick to link its double-digit growth rates to a policy, begun about two years ago, of giving customized service, more flexibility, and price breaks to banks that dedicated certain percentages of their portfolio to the brand. Not coincidentally, the policy was introduced at the time the world's largest card issuer, Citigroup Inc., elected to switch its allegiance from Visa - which had not been cutting it the deal it wanted - to MasterCard.
The "customer-focused strategy" is "kicking in very nicely," said David Ruth, a MasterCard spokesman. Not only are transaction volume and cards-in-force numbers going up, he said, but banks are expressing greater satisfaction with MasterCard.
Mr. Ruth would not specify whether Citibank's recent zeal in pumping out MasterCards was a major element behind the increases, saying that he could not comment on any individual issuer's share.
Whatever may now be working in MasterCard's favor - its "Priceless" ad campaign, Citibank's backing, its decision to convert to a private-share corporation - there may also be factors working in favor of the other card brands. For example, only recently did FleetBoston Financial Group change its primary loyalty from MasterCard to Visa, and in an era when the largest card issuers have enough muscle to move market share, that company's switch could have an impact.
In the longer term, if American Express is able to cut deals with any or all of the credit card banks it has talked with in the past - which include such powerhouses as Bank One Corp. and MBNA Corp. - the market share breakdowns could start to look quite different.
As Judge Jones spelled out in her decision, battles between Visa and MasterCard over market share have played a big role in shaping the way the industry looks today - in particular the way the two associations are governed. As emphatic as she was in rejecting Visa's and MasterCard's arguments about why they exclude American Express and Discover, she was equally forceful in rejecting the Justice Department's arguments about why the governing structures of Visa and MasterCard are unfair. In a lengthy part of her 157-page decision she refutes the government's points about the supposedly anticompetitive nature of the associations' board structures and argues about the ways in which the two bodies do compete.
Indeed, the decision offers a thorough documentation of the recent history of Visa-MasterCard squabbling over market share. In the 1980s, when MasterCard's share fell, the association began permitting nonbanks such as AT&T, General Motors, and General Electric to enter the credit card business and welcoming the nascent monolines. Visa, Judge Jones notes, "was less willing to allow new entrants to join the associations, because of questions about whether this would be fair to the existing members that built the association."
While Visa declared a membership moratorium, MasterCard welcomed all comers and encouraged creative cobranding deals, which Visa's rules discouraged.
In 1993, when Visa U.S.A. lost share to MasterCard, the board grew concerned and hired Carl Pascarella, the current president and chief executive officer, who testified that he had agreed to accept the job only if Visa would take steps to compete more vigorously against MasterCard. Judge Jones was apparently impressed by the testimony that, at Mr. Pascarella's first board meeting, programs were approved to encourage cobranding, as well as by a video clip shown in court of Mr. Pascarella telling Visa employees, "The message is simple: Kill MasterCard."
As Judge Jones' decision documents, the cobranding craze heightened competition between Visa and MasterCard for members' market share, and the cash incentives that both associations were paying to banks began escalating and spreading to other areas, such as direct mail solicitations.
Concerns that banks were playing the associations off each other to be compensated for issuing their brand led both Visa and MasterCard to begin demanding that banks pledge certain percentages of their portfolios in return for special service and price breaks. Thus Visa welcomed banks to its "partnership program," and MasterCard signed "member business agreements" with its most dedicated issuers.
In this way Visa's board came to be dominated by banks that predominantly issue Visa and MasterCard's board came to be dominated by MasterCard-issuing banks.
A major complaint of the government had been that the associations gave board seats to banks whose portfolios were tilted against them.
Judge Jones went out of her way to say in the decision that the current situation was the result of a natural evolution, not something that was triggered by the antitrust lawsuit, as the Justice Department contended. "Both associations were exploring possible loyalty agreements long before this action commenced," she wrote.
