Visa USA Inc. and MasterCard International Inc. have dominated the U.S. credit-card market ever since bank-issued plastic invaded consumer wallets two decades ago. The two nonprofit bank associations have ridden the wave of the credit-card business, now estimated at $707 billion in U.S. purchases in 1996.
But now the giants may be in for a rude awakening. BUSINESS WEEK has learned that the Justice Dept. is broadening an ongoing investigation of the twin towers of plastic. The inquiry now will include questions that could force a top-down restructuring of the entire credit-card industry--a breakup of the Visa-MasterCard "duopoly" that, analysts say, might reshape the industry the way the breakup of AT&T changed telecommunications. Meanwhile, the Federal Trade Commission is mulling its own probe of alleged efforts by Visa to make merchants accept its debit cards as a condition for using the association's popular credit card.
The FTC and Justice decline to comment on their activities. But, says New York antitrust attorney Lloyd Constantine, who has filed an antitrust lawsuit against Visa in federal court in Brooklyn: "All these efforts are manifestations of the same issue: Visa and MasterCard's market power."
Together, Visa and MasterCard account for three-quarters of credit-card purchases by U.S. cardholders--with Visa at a 50% share and MasterCard at 24% as of mid-1996, according to newsletter The Nilson Report. That clout piqued the interest of regulators last summer, when Justice intensified its inquiry into conditions that Visa and MasterCard place on issuing banks. The agency has been looking into their policies that prevent rival card issuers, such as American Express Co. and Discover, from getting banks to issue their cards, too. AmEx and Discover won't comment on the pending investigation. Visa and MasterCard say their rivals have thrived without commercial banks.
STRONG-ARMS? According to knowledgeable sources, the FTC is now entering the fray, looking closely at allegations against Visa brought by Constantine last December on behalf of Wal-Mart Stores Inc. and The Limited Inc. The retailers say Visa makes them accept its debit card, for which Visa charges $1.10 per $100 in transactions, if they wish to use its credit card. But other debit card issuers charge much lower prices, and the retailers would rather use those. "Why would any store accept something for $1.10 when they could buy a better service for less than 10 cents? They wouldn't unless forced to," Wal-Mart charges in a statement. The Limited will not comment on the suit. Visa USA says it is not aware of any FTC inquiry.
Meanwhile, Justice's probe is expanding to take in the whole structure of the credit-card industry, according to sources close to the inquiry. They say Justice is looking beyond internal Visa and MasterCard policies to the interlocking ownership of the two associations by the nation's biggest banks. As cooperative associations, the bank members of Visa and MasterCard are also owners. And since they are member-owners of both Visa and MasterCard, the banks may be unwilling to urge Visa and MasterCard to undermine each other with fierce competition. Ideally, say antitrust experts, Visa and MasterCard should have separate owners. As rivals, they'd have less of an incentive to combine forces against AmEx and Discover.
Visa and MasterCard acknowledge Justice is concerned about the industry structure, but they aren't buying the argument. Visa USA General Counsel Paul Allen says Justice "has failed to identify any competitive problem in the industry." Adds MasterCard Senior Vice-President Charlotte Rush: "The current industry structure has given rise to extraordinarily intense competition." But if Justice decides to bust up the credit-card industry framework, it could be as significant as the 1984 consent decree that AT&T accepted to settle a federal antitrust suit--and which led to the restructuring of the telecommunications industry.
"CASE OF THE DECADE." At the most extreme, Justice may force banks to choose between issuing Visa or MasterCard. Or the agency could forbid large owners of Visa to offer MasterCard to promote competition. But the banks would be in an uproar over the lack of choice. It would be "the case of the decade," says William E. Kovacic, an antitrust law professor at George Mason University.
The two giants say they're prepared to fight Justice in court--for years, if necessary. And industry experts note that unraveling the associations' tangled interlocking ownership would be no easy task. "Breaking up Visa and MasterCard is more difficult by a factor of 1,000 than breaking up AT&T, which took 10 years," says David Robertson, president of The Nilson Report.
That's why agency trustbusters may not make a decision on this case until Acting Assistant Attorney General Joel I. Klein, who has taken the lead on the matter, is confirmed in his new post by the Senate. Klein is slated to meet with the parties to discuss the case in early April. And if regulators decide to bust up the card associations, lawyers for Visa and MasterCard may be learning more about what happened to old Ma Bell than they ever imagined.