Two years ago this week the Supreme Court's refusal to hear an appeal by MasterCard International and Visa U.S.A. Inc. in the Department of Justice antitrust case freed U.S. banks to partner with other networks.
Many experts agree that banks have benefited the most from increased network competition for their business. Visa and MasterCard (which has since gone public and renamed itself MasterCard Inc.) have been spurred to offer more compelling rewards, particularly for cards aimed at affluent consumers. Bank issuers have found they can bide their time in negotiations to an unprecedented extent, though consolidation may have helped them in that regard as well.
But some industry experts said the initial boost to interchange rates was short-lived, as pressure on Visa and MasterCard from merchant lawsuits and legislative hearings offset competitive considerations.
There have been other changes. Morgan Stanley's Discover Financial Services LLC says the end of exclusionary rules permitted a domestic debit deal that in turn led to international partnerships. Even though American Express Co. has been touting the benefits of its closed-loop model (which Visa has tried to mimic), Discover has become more like MasterCard and Visa by signing up third-party acquirers.
Anticipating a favorable outcome, Amex was negotiating with banks even before the decision opened the doors for it to partner with banks. MBNA Corp. signed on with Amex in January 2004. (A year later Bank of America Corp. bought MBNA.)
Peter Godfrey, the president of Amex's global network services division, which works with third-party issuers, said that even though MasterCard and Visa had a "tremendous head start," his company "has made up for the lost time" by signing seven of the top 14 American banks.
It is hard to tell how much business has shifted to the Amex and Discover networks. In the second quarter there were 13 million Amex cards in force worldwide issued by third parties, and the cards handled $7.6 billion of transactions. Both figures almost doubled from the third quarter of 2004, but Amex does not break out card or volume figures for the United States.
Morgan Stanley does not disclose third-party issuance results for Discover.
Gwenn Bezard, a research director at Aite Group LLC in Boston, assessed the situation with a Zen-style paradox: Not much has happened, and a lot has happened at the same time.
"In the overall scheme of things, it's not like American Express has been able to gain lots of new transaction volume through its partnerships with banks," Mr. Bezard said. However, the Justice Department case managed to "tilt a little bit further the balance of power in the hands of issuers" and away from the card networks. "The DOJ decision puts banks in a better position to negotiate with both Visa and MasterCard."
He pointed out that Visa announced this week that it had renewed its contract with B of A, its largest issuer, months after it had lapsed. The six-year renewal was retroactive to the beginning of this year.
The lateness of the renewal shows that the Justice Department case gave B of A "more options," Mr. Bezard said.
Bruce Cundiff, an analyst at Javelin Strategy and Research, said only large issuers such as B of A have the power to delay a contract with a network. The acquisition of MBNA, and that issuer's work with Amex, could have played a role in the delay, he said.
Jim McCarthy, Visa's senior vice president of credit product management, said consolidation has had more of an impact on the industry than anything else.
GE Consumer Finance has partnered with Discover and Amex. "Every [retail] partner has a different complexion of customer base, and as the largest issuer of private-label store cards, we have the option of using any of the four," said Mark Begor, the General Electric Co. unit's president and chief executive for the Americas.
But Thomas Brown, a partner in the San Francisco office of O'Melveny & Myers LLP and a former legal counsel to Visa, said the competition spurred by the Department of Justice case brought an unintended consequence. He and other observers said that in the face of new competition, Visa and MasterCard initially hiked interchange rates to discourage banks from sending business to Amex.
Those hikes "contributed to the unhappiness that culminated" in the lawsuits merchants filed against Visa and MasterCard last year, Mr. Brown said.
Aaron McPherson, the research manager of payments at Financial Insights, a Framingham, Mass., unit of International Data Group Inc., also said the Justice Department case has "probably been somewhat of a negative" for merchants, because they are now dealing with more Amex cards, which carry higher merchant discount fees.
However, in March both Visa and MasterCard said they would hold most credit card interchange rates steady this year.
Tom A. Wimsett, the president and chief executive of Iron Triangle Payment Systems LLC, a Louisville merchant processor and acquirer, said "some of the litigation and the threat of litigation" has slowed the growth of interchange rates over the past few years.
Interchange aside, Visa and MasterCard adjusted to the new environment by introducing services and products.
Last month MasterCard introduced a World Elite card aimed at consumers earning more than $250,000 a year - a demographic often associated with Amex.
Last year Visa launched the Visa Incentive Network, which offers merchants data on consumer spending habits from issuers of its traditional reward and high-end Signature cards. The network was meant partly to counter Amex's pitch that its closed-loop model gives it unique access to information from both sides of a card transaction.
Also, in late 2004 Visa relaunched its Signature card for affluent consumers with more advertising and rewards, though Mr. McCarthy said this move was unrelated to the court decision.
"I think we've seen a lot more pressure on Visa and MasterCard to beef up their loyalty programs, so I think on balance it's definitely made the environment tougher for Visa and MasterCard," Mr. McPherson said.
Roger Hochschild, Discover's chief operating officer, said that working with banks is a "brand-new business" for the Riverwoods, Ill., unit. "It would take a while for that to grow."
However, he also said the end of exclusionary rules allowed Discover to enter the fast-growing debit market last year by acquiring Pulse EFT Association LP.
The ability to play in the debit market paved the way for Discover to make deals with two foreign networks, China UnionPay Ltd. and JCB Co. Ltd. of Japan. When those companies' cardholders make purchases in the United States, the transactions go through the Discover network.
"We said at the time" when the Supreme Court decided not to hear the Department of Justice case that "it's going to be transformational, that this is going to be like the breakup of AT&T for our industry, but I think it's been more transformational that we thought," Mr. Hochschild said. "China UnionPay will give us better acceptance in China than Visa and MasterCard. It couldn't have happened without the Department of Justice lawsuit, because Discover got the China UnionPay because it owned Pulse."
Paul R. Garcia, the chairman and president of Global Payment Systems LLC in Atlanta, said some people speculated two years ago that banks would issue cards on the closed-loop Amex and Discover networks in large quantities, and that merchant processors like his would get cut out.
"That didn't happen," he said.
For one thing, banks did not issue as many cards as some speculated, Mr. Garcia said. "I think part of that is American Express has some issues of coverage. … if you go by the dry cleaning or the barber, chances are they're not going to take American Express."
(Amex has been promoting everyday spending on its cards.)
Moreover, Discover has signaled that it considers expanding acceptance more important than the advantages of a closed loop. Since July, it signed up the acquirers Global Payments, First Data Corp., TSYS Acquiring Solutions and Royal Bank of Scotland Group PLC's RBS Lynk to reach more merchants, particularly small ones.
