On the first day of MasterCard International's defense, its top executive offered under oath a warning it has repeated throughout the trial, in and out of court: that its very existence could be threatened if banks must choose between it and Visa.

That could happen if Judge Barbara S. Jones accepted the U.S. government's argument that the current model of dual governance stifles competition, and if she rules that banks should have to swear allegiance to one association or the other to maintain input at the board level.

Robert Selander, president and chief executive of MasterCard, testified Thursday that if the court limited MasterCard's board to banks with 80% of their portfolios skewed toward MasterCard, that alone would be "potentially devastating."

"It is a lot easier to go to 80% from [Visa's] 66% than [MasterCard's] 34%" market share, Mr. Selander said. "If I were a banker, it would be very simple for me."

MasterCard has repeatedly asserted that as the smaller association, an unfavorable verdict would hurt it much more than Visa. The differing views of the two associations on some of the case's central topics were of enough concern that Visa asked its own questions of Mr. Selander in court.

While one of Visa's concerns in the trial is the possible abolishment of its bylaw 2.10e, which bans members from issuing American Express or Discover cards, some of its witnesses have expressed enthusiasm for extending the prohibition to MasterCard. One of them testified Tuesday, U.S. Bancorp president and Visa board chairman Philip Heasley.

"Some Visa executives said it wouldn't be a bad thing if duality went away," Mr. Selander said. "I'd be thinking the same thing if I was sitting in the executive suite there."

Visa lawyer M. Lawrence Popofsky asked, "Even if your views [on dual issuance] differ, don't you think that should be sorted out in the market, not in the court of law?" And Mr. Selander said he agreed.

Both Visa and MasterCard have established programs that offer incentives to banks that agree to dedicate their business to one brand or the other. Visa's "partnership program" states that a bank needs to reach a skew of about 90% over a certain period of time, while MasterCard's "membership business agreements" are more flexible and vary depending on the bank.

While MasterCard has worked hard throughout the case to prove its vulnerability, it has recently won over some of the largest and most influential banks in the credit card industry, namely Citigroup Inc. and Chase Manhattan Corp. Under cross-examination, lead prosecutor Melvin Schwarz made much of this fact.

"MasterCard is able to compete in bidding to obtain loyalty with large banks to sign membership agreements?" Mr. Schwarz asked, referring to agreements MasterCard has with Citi, Chase, Household International, and Metris Corp.

"We are having success," Mr. Selander replied. "They'll make more money with us over the next few years."

Mr. Schwarz tried to prove that the card associations have banded together to keep American Express out, by asking how it differs if Visa instead of American Express wins the loyalty of a former MasterCard issuer. The card associations have claimed throughout the case that if banks were able to issue Amex cards, American Express would take away their biggest banks.

"Visa has taken Wells Fargo, Providian, and Fleet," Mr. Schwarz said. "Would you use 'cherry picking' to describe this?"

Mr. Selander said the competition between the two associations is on equal footing because both companies have the same structure. "We're competing [with Visa] hand in hand, day to day," he said.

MasterCard also sought to defend the 1998 reorganization of its board of directors, reducing its size from 31 bank executives to 10, and giving more seats to larger banks. The Justice Department has tried to prove throughout the trial that though Visa and MasterCard claim their structure and bylaws are in place to help smaller banks, they are actually only catering to the larger banks.

Under questioning from MasterCard lawyer Kenneth Gallo, Mr. Selander explained that MasterCard needed to decrease the size of its board to attract large issuers.

"There was massive consolidation and fewer and fewer players," Mr. Selander said. "Consolidation caused concern."

"You want to make sure you have adequate share of business with those that are big in the market," he said. "You need them to create scale so you can serve all 20,000 members."

Though MasterCard has 20,000 members around the world, the largest 100 financial institutions represent 70% of its business, Mr. Selander said.

MasterCard needed to decrease the size of its board so it could make quicker decisions, he said. "We looked at the `best practices' companies and they all had smaller boards."

Three of its current board members, MBNA Corp. (52%), Capital One Financial Corp. (33%), and USAA Federal Savings Bank (69%), have less than 70% of their portfolios with MasterCard. The rest have at least 80% and some have signed agreements to move towards 100% over a period of time. At one time Providian Financial Corp., which is predominately a Visa issuer, occupied a board seat at MasterCard.

Mr. Selander said allowing those who do not issue mostly MasterCard to sit on the board is essential to increasing its business because it offers banks a chance to learn MasterCard's strategy and may encourage them to issue more MasterCards in the future. In some cases MasterCard would prefer to attract a bank with a 20% portfolio skew to its brand than an already dedicated issuer, Mr. Selander said.

"We look at our board as an opportunity to expand and enrich our relationships," he said. "It's a business development opportunity."


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