The Justice Department is beefing up its antitrust case against the two bank credit card associations by taking over a debit card investigation that was begun by the Federal Trade Commission.
MasterCard International and Visa U.S.A. were notified Friday that the year-old FTC probe is being transferred to Justice. The unusual handoff from one regulator of competition policy to the other could strengthen the government's hand-assuming that Justice gets a judge's approval to broaden its complaint.
"We are aware of this and Visa will cooperate fully, as we always do," said Visa spokesman Kelly Presta.
The Justice lawsuit, filed in October, pertained to credit cards. Sources familiar with the cases said that allegations of anticompetitive conduct and harm to consumers could be bolstered by debit card evidence.
Some critics of the Justice Department's case have said it needs more concrete examples of how Visa and MasterCard policies are costly to consumers. Both the FTC's debit card probe and private antitrust litigation initiated by major retailers in 1996 seek to prove just that.
The retailers' challenge to debit-card acceptance requirements is pending in U.S. District Court for the Eastern District of New York. The bank card associations have argued that the merchants want to violate the "honor all cards" principle, according to which any type of MasterCard or Visa card must be accepted wherever the logo is displayed.
In practice, this rule forces merchants to pay debit cards fees that are very close to those for credit card processing. Debit transactions, the retailers contend, are less risky because the funds come not from an unsecured credit line but from a consumer's deposit account, as would be the case with a check payment.
The FTC became interested about a year after the private suit was filed, but it stepped up its investigation last July when Visa said it would introduce a new debit product, Visa Check 2, in October. VC2, as it is known, was perceived as a threat to the regional debit programs associated with automated teller machine networks.
Visa said the new debit cards may not carry the logos of regional networks, leading regional ATM network executive Stan Paur to say "Visa would appear to be establishing itself as the Microsoft of the payments business."
Mr. Paur, president and chief executive officer of Pulse EFT Association of Houston, also said he believes a recent increase in Visa merchant fees "intensified the attention of the regulators."
The regional networks, which are primarily bank-owned joint ventures, are broadly opposed to VC2 but have been hardly affected by it. Just one bank, Saratoga National in California, has announced it will offer the product.
"VC2 has been just a concept so far," said James Hayes, executive vice president and general counsel of Cash Station Inc., the regional ATM and point of sale system based in Chicago.
The first indication of Justice's interest in debit card pricing issues came about two months ago, when the agency asked for the documents Visa and MasterCard produced for the plaintiffs in the retailer case. The card associations resisted at first but ended up handing over their files.
Lloyd Constantine, the lead counsel representing the retailers, said his case and Justice's are "closely related" and the consolidation with the FTC probe recognizes that. Moreover, he said, "It doesn't make sense for two federal agencies to be looking at the same issue."
The FTC tends to move more slowly on investigations because the three commissioners must all agree on a decision to proceed. Only in the Microsoft case, currently at trial in Washington, did the FTC previously transfer an active investigation to Justice.
Procedurally, according to lawyers, Justice may end up amending the complaint against MasterCard and Visa to take in the debit issue. But Donald I. Baker, a Washington-based attorney who once headed Justice's antitrust division and now represents Visa, said Justice risks getting the judge so annoyed with "amending and expanding the case that they may very well start another case. It takes months to complete an investigation."
Judge Barbara S. Jones of U.S. District Court for the Southern District of New York is presiding over the case. She took over in November after Senior Judge Milton Pollack removed himself because of a possible conflict of interest.
The only current mention of debit cards in Justice's complaint is in the context of how American Express Co. and Morgan Stanley Dean Witter & Co., which issues the Discover card, are excluded from the debit market because they are unable to issue cards through banks.
Justice wants to eliminate the bank card association rules that prevent banks from entering into marketing or cobranding partnerships with Amex and Discover.
In its complaint, Justice says that debit cards will become the predominant form of payment in the future.
Mr. Constantine, of the New York firm Constantine & Partners, contended Justice will "reference the things in our complaint. It is a benefit to our case and it is difficult for Visa and MasterCard" because "all the retailers in the United States and the government will be trying to prove the same thing at the same time."
Though the government's activism tends to support the regional network point of view, Mr. Paur of the Pulse system sees it as a doubled-edged sword, simultaneously marking a governmental intrusion into the payments business.
"The likelihood that you are going to get some kind of constraints or limits on the industry is great," he said. "I think the industry, to the extent possible, should operate in a free-market environment."
