On the opening day of the antitrust trial against Visa and MasterCard, lawyers for the card associations sought to turn the tables, recounting what they said were repeated examples of how the government helped create the current competitive environment in the card industry.
Late Monday afternoon, the government called its first witness in the case, Larry B. Kesler, an executive vice president at Banco Popular of San Juan, Puerto Rico.
Because it is outside the 50 states, Banco Popular is exempt from Visa/MasterCard rules prohibiting member banks from working with American Express. It offers Amex cards in Puerto Rico and the Caribbean region. Banco Popular executives have said they would like to issue Amex cards in the United States but cannot because of association rules.
Earlier, Kenneth Gallo, an outside counsel for MasterCard International, accused Visa of wanting "to freeze membership at a level that was good for Visa." He acknowledged it was MasterCard policy to put Visa-dominated banks on its board in order to take market share away from Visa. "As the smaller association, telling us that we can't take share away from Visa in this way is anticompetitive," he said.
M. Laurence Popofsky, the outside counsel for Visa U.S.A., punched back, saying that far from colluding, Visa and MasterCard are bitter adversaries, and he showed a video clip of Visa U.S.A. president Carl Pascarella saying, "Our corporate culture should be to kill MasterCard."
The Justice Department "claims today the problem is dual governance, not dual issuance," Mr. Popofsky said. "This is historical revisionism."
With his boss, Assistant Attorney General Joel Klein, looking on, the lead counsel for the government, Melvin Schwarz, laid out Justice's position. Mr. Schwarz said the card companies have held back smart card technology, avoided advertising that mentions each other, and have blunted competition in the credit card industry by not allowing their member banks to issue competing card product brands such as American Express and Discover.
Mr. Gallo said MasterCard's advertising is "designed to take market share away from Visa."
On Monday, lawyers for the associations delved into what they described as a history of competition between MasterCard and Visa. Mr. Gallo said that in 1990, MasterCard "embarked on a cobranding program because we were losing share to Visa. Visa fired back by giving huge incentive payments."
Visa was paying cobrand partners up to $2 million a deal, Mr. Gallo said. In 1994, MasterCard's board matched Visa's offer, he said, but a year later, MasterCard was "having a hard time keeping up" because Visa had embraced cobranding, and American Express had entered the fray.
Mr. Schwarz used evidence that the card association lawyers said was out of date. At one point, he played a video clip MasterCard's former CEO, Russell Hogg, gave in 1985 on the Today Show. Mr. Hogg praised smart cards, explaining how great they were for consumers.
But it took 15 years before they were launched in the United States, Mr. Schwarz said, because Visa and MasterCard conspired to inhibit them. Moreover, it was Visa's and MasterCard's smaller competitor, Amex, that finally burst through with the Blue card, Mr. Schwarz said.
Lawyers for Visa and MasterCard maintain that smart cards never took off in this country because there is no business case to justify them. Mr. Gallo said the video was misleading - at the time MasterCard had not analyzed the cost of rolling them out.
Mr. Schwarz described a potential market use for smart cards in which a bank such as Citigroup - which offers insurance through Travelers - could provide insurance information on a chip-based card.
Mr. Popofsky, who called smart cards the "poster child for the [government's] lawsuit," disputed the characterization of Amex's Blue card as a smart card. He called it an Internet card that has a chip, which is not functional. Moreover, the chip is based on technology from Mondex, a company in which MasterCard has invested $150 million, Mr. Gallo said.
Further, the card companies pointed to prior statements American Express' chief executive officer, Harvey Golub, has made concurring that "there is no business case" for smart cards.
In another example meant to show that Visa and MasterCard conspire to control the credit card industry, Mr. Schwarz described Visa's scrapped partnership with Microsoft. In 1995, Microsoft had been ready to offer an Internet security program, Mr. Schwarz said, but it did not happen because MasterCard's board objected, allegedly because MasterCard "was so far behind" in that area.
Mr. Gallo disputed this version of history, saying that MasterCard had objected to the proposed partnership because "Microsoft, in cahoots with Visa, would have gotten a 5% fee on every Internet transaction."
Mr. Popofsky of Visa said MasterCard was mistaken about Visa's potential work with Microsoft. "It was going to be an open system," he said.
To show how they compete against each other, the card executives also sought to distance themselves from one another. But in attacking Amex they sounded very much alike.
"The antitrust laws are not designed to help companies when they have made bad business decisions," Mr. Gallo said, referring to Amex.
According to Mr. Gallo, John Reed, the former chief executive of Citigroup, will later testify that Citicorp and Amex were poised for a merger, but the deal was called off because "Harvey [Golub] wanted my job, and it wasn't in the cards."
After Visa's and MasterCard's opening statements, Mr. Schwarz said: "Visa and MasterCard should treat each other as they claim they do. The point is they don't act like competitors."