With its antitrust trial against Visa and MasterCard only five days away, the Department of Justice appears to be stepping up its investigation of the credit card companies' debit card policies, which raises the question of whether the government will file a second lawsuit against the card associations.
Over the past couple of months, credit card lenders - including Citigroup - have received subpoenas from the government requesting documents about debit cards, say sources close to the banks. The government has also been working closely with lawyers for major U.S. retailers that have filed a class action against Visa's and MasterCard's debit rules and prices.
This is the first time Citigroup, which does not offer Visa or MasterCard-branded debit cards, has been asked for records in the debit card investigation, said a source close to the banking company. The timing seems curious, some legal experts say, because the Justice Department has been investigating Visa's and MasterCard's debit card rules since January 1999, when the matter was transferred there from the Federal Trade Commission, and because the antitrust case against the card associations is scheduled to begin June 12.
Gina Talamona, a Justice Department spokeswoman, confirmed that the agency is continuing its investigation.
There are a number of possible reasons, political ones included, that the government is turning its attention to debit cards with the prosecution of its credit card case so near. Some experts in antitrust speculate that the government is turning up the heat to force a settlement with Visa and MasterCard, but most say there will not be a settlement. A more likely explanation, they say, is that the government is using the debit investigation to reinforce the credit card suit.
Several antitrust experts said the government could file a separate lawsuit to focus on debit cards. That could happen if, for example, the judge presiding over the credit card suit, Barbara S. Jones, gave some indication that the government has a strong case. The Department of Justice "could say, 'We are prepared to sue on the debit card issue; you might as well settle now,'" said an antitrust attorney who did not want to be named.
"There may be some political leveraging going on here. Lawyers are always looking to settle," said Lawrence J. White, a former chief economist with the Justice Department who now teaches economics at New York University's Stern School of Business.Political maneuverings aside, there is little doubt of the government's keen interest in antitrust issues relating to debit cards. In January 2000 the government won the right to obtain the discovery documents in what is known as the Wal-Mart lawsuit - the retailers' class action attacking the Visa and MasterCard debit card rules. It is scheduled to go to trial in November.
The retailers object to the "honor all cards" rule that requires merchants accepting Visa and MasterCard to take those brands of debit cards, too. The merchants say interchange rates on Visa and MasterCard-branded debit cards are too high, and that they would prefer not to accept these cards. The rates are higher for these signature-based cards than for other debit cards, which are authenticated with a personal identification number and do not bear the association logos. Merchants say the associations should lower their rates for debit card transactions, in part because they are less risky than credit card purchases.
In the trial to start next week, the government is seeking to overturn card association rules prohibiting member banks from issuing competing card brands - such as American Express and Discover - and to change the governance of the associations to ensure that each of the largest issuers is aligned with either Visa or MasterCard instead of both.
The government's debit card focus is sharpening, several sources confirm. Lloyd Constantine of Constantine & Partners, the New York law firm representing the retailers, said members of his staff speak with government officials several times a day.
And an attorney on the bank card side who did not want to be identified said, "Somebody is looking at debit cards" at the Department of Justice, "and that person is leading a different team from the team working on the trial."
Still, "It's hard to imagine going through years of litigation and bringing yet another case," said Anita Boomstein, a partner at the New York law firm Hughes, Hubbard & Reed.
Others see debit cards entering the government's arguments in the credit card trial in several ways. For one thing, the complaint notes that American Express and Morgan Stanley Dean Witter are excluded from the debit market because they are unable to issue cards through banks.
In the meantime, momentum is building against Visa and MasterCard from other corners. On Monday three New Yorkers filed an antitrust suit against the card associations accusing them of forcing consumers to pay higher retail prices - echoing the charges in the Wal-Mart case. Another consumer suit, filed against Visa and MasterCard this year in California, focuses on foreign currency conversion fees. That suit says the companies charge exorbitant fees for purchases made abroad.
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