Is Visa Keeping AmEx out of Wallets?

Remember those television ads for Visa credit cards that show a trendy cafe in some remote backwater with great ambiance and wonderful cuisine - but it won't take American Express?

Now we may know why.

According to trustbusting lawyers at the Justice Department, Visa and MasterCard have been using their market clout to keep American Express, Discover, and other smaller networks from directly competing for a larger share of the $800 billion annual credit-card market.

They are doing it through two nationwide merchant networks set up by major American banks to process charge-card payments on behalf of Visa and MasterCard, according to a lawsuit filed this week in New York City.

It is not clear yet what the suit could mean for consumers. But most analysts say it is likely to benefit credit-card customers. "Consumers benefit from a competitive marketplace," says Frank Torres of Consumers Union in Washington. He says greater competition among credit-card companies could bring lower annual fees, lower interest rates, and more innovation through new products like debit cards.

Although from the outside the two bank-run networks appear to compete with each other, federal antitrust lawyers argue that in reality they operate hand in hand. Each network is governed by its own association, but both of the associations are run by officials from the same major banks.

"As of year end 1996," the lawsuit says, "approximately 19 banks - including Chase Manhattan, Citibank, First Chicago, Bank of America, and NationsBank - had representatives on the board of directors of one association and on at least one important committee of the other association," the lawsuit says.

Because most of the banks offer both Visa and MasterCard, these banks have "diminished incentives to support competition between the two networks," the suit says.

For example, Visa ads target American Express, but never mention MasterCard.

In addition, most of the banks have agreed not to allow their Visa and MasterCard networks to be used by smaller credit-card networks like American Express and Discover. This effectively excludes competing cards from the larger market, the suit says.

At present, Visa accounts for 50 percent of credit-card sales and MasterCard 25 percent. In comparison, American Express has an 18 percent market share and Discover Card has 6 percent.

Officials at Visa and MasterCard deny any wrongdoing. They say the credit-card industry is intensely competitive and that the Justice Department's own lawyers approved the current structure of the industry more than 20 years ago.

They suggest the antitrust suit is a result of sour grapes at American Express because it failed to recognize the growth potential of low- or no-fee credit cards (which loan money to consumers to pay their bills) as opposed to high-fee charge cards, like the green American Express card that must be paid off each month.

In addition, Visa and MasterCard say they invested effort and money into establishing their nationwide networks and should reap the rewards now for the risks they took in the past. Instead, they say, American Express is attempting to persuade the government to allow it to profit from the hard work of Visa and MasterCard.

"What is really going on here is that American Express would like to have access to the Visa and MasterCard system so it could become a major player in that system by offering its own [credit] card, too. But Visa and MasterCard don't think that is such a good idea," says David Sheffman, an economics professor at Vanderbilt University in Nashville, Tenn., who has worked as a consultant on the case for MasterCard.

Professor Sheffman concedes that Visa and MasterCard are linked by virtue of their relationship to the bank networks. "Visa and MasterCard are a joint venture; they are creatures of the member banks, and most member banks belong to both [the Visa network association and MasterCard network association.]"

But, the professor adds, "the evidence is clear that Visa and MasterCard compete pretty heavily against each other."

THAT competition is evident in mailboxes across America. Potential credit-card customers are flooded with Visa and MasterCard offers from banks. But the card terms - like interest rates and annual fees - are set by the offering banks, not the credit-card companies. Some critics say that while this activity does represent competition between the banks for credit-card customers it is not competition between Visa and MasterCard.

Steven Salop, an economics and law professor at Georgetown University in Washington who is a consultant on this case for Discover Card, argues that the Justice Department suit is not an attempt to penalize Visa and MasterCard for their success.

Rather, he says, it is an effort to hold both credit-card companies to the rules of fair competition. "This complaint is saying one of the causes of [Visa-MasterCard] success was their illegal conduct," Professor Salop says.