In trial testimony Thursday, Visa U.S.A. defended not introducing smart cards broadly to the U.S. public, arguing that its decision was reached only after an extensive analysis that showed no business justification for rolling out smart cards here.

A major complaint of the Justice Department is that collaboration between Visa and MasterCard International hindered the introduction of innovative products and services, most notably smart cards.

But Diana Knox, senior vice president for smart card applications and market development at Visa, testified that an extensive analysis done by Visa in late 1998 and early 1999 persuaded the association not to convert its card base from magnetic stripe to chip in the United States.

"We were unable to identify benefits to offset the costs of migrating to chip, especially the high costs for merchants," Ms. Knox said. The analysis showed that benefits to banks would outweigh the costs, but it also showed that merchants would incur costs of $6.3 billion, which would far outweigh any benefit to them.

Ms. Knox said most analyses of chip migration neglect to consider the costs merchants would incur to replace their back-end systems - usually, only terminal upgrades are taken into consideration. "In the U.S. market we have large national retailers with huge back-end systems," she said. "Kmart, for example, might have smart card-accepting terminals, but it's simplistic to think the only cost merchants incur is the terminal cost."

Because of the study, Visa decided to switch its smart card strategy to focus on multiapplication cards that could offer more value to merchants, like loyalty applications combined with payment.

However, "only in the last couple of years has it become feasible to have multiapplication cards, because of new technological developments," Ms. Knox said.

Ms. Knox went on to describe in detail a number of Visa chip tests in progress. She said she believes chip cards will eventually become mainstream in the United States but not for a while.

In cross-examination, Justice Department attorney Bill Stallings tried to show that consumers and banks would benefit from chip cards. For example, he said, a card issuer like MBNA Corp. that has strong affinity programs could use chip cards to enhance the loyalty applications in its relationship programs.

Mr. Stallings also tried to show that the card associations' hold on the banks hampered other companies that were interested in the smart card market from developing extensive programs.

"Banks have developed a position of trust, and no one else has this trust," Mr. Stallings said.

Ms. Knox answered, "Banks are at the top, but others approach their level of trust."

Mr. Stallings asked how Visa reacted to American Express' Blue card, and Ms. Knox said Visa is working on a product that can do more than Blue.

"If we were going to deliver a multiapplication program, we wanted to make sure members could exceed Blue's capability, not match it," she said.

Mr. Stallings also sought to show that American Express, which has already come out with a chip product, would have benefited from working with banks. "Do you see Visa's multiple bank network as having a benefit in your response to Blue?" he asked.

Ms. Knox said, "I see having a broad distribution network as a benefit."

Late Wednesday afternoon, Vincent Boston, research and development project manager at Visa International, testified that in 1985 Visa studied the viability of chip cards - at the time called "integrated circuit cards." That study also found that the benefits of adding chips to Visa's cards would not outweigh the costs.

"At the present time, a business justification from a Visa International mandate for the addition of an IC [integrated circuit] to all Visa cards does not exist," the report concluded.

The government has tried to prove that Visa held up MasterCard chip development in the 1980s because it did not have a product of its own. Justice Department lawyer David Kully sought to show that if Visa had come out with a chip card in 1985 consumers would have been much better off and the infrastructure expenses would have been much lower because there were fewer terminals to upgrade.

Mr. Kully asked Mr. Boston, "You would agree that in 1985 far fewer merchants would have had to replace or upgrade their terminals from magnetic stripe to chip cards, wouldn't you?"

Mr. Boston replied, "The total amount, yes, probably would have been less, but you don't just wave a magic wand and replace terminals. You do a certain percentage in a given year, and that would have ameliorated the factor of having to convert everything in one fell swoop."

Mr. Kully pointed to a place in the report where Mr. Boston had said smart cards held great potential for income-generating services. Under cross-examination, Mr. Boston said that in retrospect he understood that there had been disagreement over when smart cards should be introduced and that MasterCard wanted to move forward immediately. But he said that at the time he completed the study for Visa he was unaware of MasterCard's activities.

Late Thursday, Judge Barbara Jones was scheduled to hear oral arguments from Discover Financial Services Inc., the credit card subsidiary of Morgan Stanley Dean Witter & Co. The card company is seeking to join the Justice Department as a plaintiff in the antitrust case.

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