David Nelms, president and chief operating officer of Discover Financial Services Inc., finds it confounding that the Justice Department has not made his company's predicament a centerpiece of its case against Visa and MasterCard.
"We would think DOJ would want to make us their poster-child," he said in a recent telephone interview.
Mr. Nelms reasons that Discover is the last credit card brand to have entered the market - it was introduced in 1985 - and its hardship story helps show that Visa and MasterCard make it impossible for competitors to start up. Despite an attractive cash-back feature that gives cardholders a small percentage of their purchase volume as a refund, Discover has suffered from a chicken-and-egg problem: Many merchants don't take it, so few consumers use it.
The associations' rules forbid their member banks from working with nonbank companies like Discover, which is owned by Morgan Stanley Dean Witter & Co. Discover, moreover, says Visa and MasterCard have stifled its merchant-acquiring business.
While American Express Co. has played a large role in the government's case against Visa and MasterCard - four Amex executives have testified as government witnesses, and a fifth, chief executive officer Harvey Golub will take the stand this week - Discover executives were dropped from the government's list of witnesses who would testify in person.
About two weeks ago the government notified Judge Barbara S. Jones, who is presiding over the trial in U.S. District Court in Manhattan, that it no longer intended to call its three planned Discover card witnesses to the stand. They were Mr. Nelms, Morgan Stanley chairman and CEO Phillip Purcell, and Roger Hochschild.
The government has changed its mind a bit, now saying it will call Mr. Nelms to the stand but not Mr. Purcell or Mr. Hochschild.
The Justice Department said in a statement that it was "typical trial practice to introduce testimony through deposition and to attempt to narrow the live-witness list once a trial gets under way." But the Discover executives were dropped soon after Mr. Purcell testified at a Senate hearing in May about credit card competition. At the hearing, Mr. Purcell said that the government's case did not go far enough, and that other remedies should be sought. He also said the government's winning the case could actually hurt Discover.
Discover and Amex have different beefs with Visa and MasterCard. Discover is primarily interested in having the government force the card associations to let it issue Visa and MasterCard cards. Amex, on the other hand, wants banks to issue Amex cards. The bank card associations' rules do not permit either scenario, but it is Amex's position that the government agrees with - not Discover's.
In 1994, Discover sued Visa over this issue and lost. The government holds that the outcome in this case, known as the MountainWest case, was correct, and it has no desire to revisit that issue in its antitrust trial.
Some legal experts say the government pulled the plug on Mr. Purcell because he has been an outspoken critic of the bank card associations for such a long time, and the public record may reflect too many contradictory statements. These statements could be used by the defendants to undermine his credibility as a witness.
Mr. Nelms, however, has a unique perspective: Until two years ago he was a vice chairman of MBNA Corp., and he would presumably have been rooting for MasterCard and Visa.
During Mr. Nelms' seven-year tenure at MBNA, the third-largest issuer of Visa and MasterCard cards, he also sat on a MasterCard business committee that evaluated various advertising initiatives to promote the MasterCard brand.
Now he sees the bank card companies as his bitter enemies.
Mr. Nelms says Visa and MasterCard have colluded to quash Discover's opportunities to augment its business. The Justice Department's complaint states that Discover controls just under 10% of the number of general purpose cards issued in the United States, which gives it more cards in force than any other card issuer in the country - including Citigroup Inc., the largest bank card issuer. Visa and MasterCard control 86% of the cards in force, while American Express has just 5% (though its transaction volumes and loan receivables are higher than Discover's).
"Certainly when you are exposed to what Visa has done - it has opened my eyes to things," Mr. Nelms said. Discover executives refer to Visa as the "ringleader" of anti-competitive practices. They view MasterCard as the more benign competitor "that has followed Visa" in many instances, Mr. Nelms said.
In Mr. Purcell's Senate testimony, he described four Visa rules that have been implemented since 1988 that were specifically aimed at keeping Discover in check. Ironically, it is Visa's 210.e rule - which prevents members from issuing the cards of competitors, and is the subject of the government's case - that was devised as a result of the MountainWest trial.
Mr. Nelms left MBNA one month after the government filed its lawsuit in October, 1998, but not before he was deposed by the government as a MasterCard business committee member. Mr. Nelms said he does not think his earlier opinions as a bank card executive are inconsistent with his views today. He simply sees the bank card associations differently, he said. "If you are a bank in the [Visa and MasterCard] system, you are not being harmed as much," he said.
Discover argues that because it charges the lowest merchant fee in the credit card industry, it should also follow that merchants would prefer to accept Discover over Visa and MasterCard, which charge higher fees. "Normally you can offer a lower price and gain market share," Mr. Nelms said, "but you don't see instances where a retailer will say `We'll take Discover instead,' because retailers don't feel like they can drop Visa and MasterCard."
Mr. Nelms is frustrated that the government's complaint against Visa and MasterCard does not focus on merchant fees. "Our feeling is that we should be gaining lots of market share, since we are saving millions of dollars to consumers and merchants," Mr. Nelms said.
If the government wins its case and banks begin issuing Amex cards, the result could be detrimental to Discover. The reason, Mr. Nelms said, is that Amex, which charges the highest merchant fee of the four major card brands, is touting its fee as a reason to issue Amex cards. Amex tells banks that they will enjoy greater profits by issuing its cards, because they are more expensive to merchants.
Discover fears that merchant fees "would go up even higher if Amex's market share increases," Mr. Nelms said. "If the structure of the industry is who can raise prices the most, that is not a structure that helps the low-cost issuer."
Discover estimates that retailers and consumers would save more than $5 billion a year if Visa and MasterCard lowered merchant fee rates to the same level as Discover.
Discover also says the bank card associations' rules harm its merchant processing and acquiring businesses. The associations do not allow Discover to process merchant transactions involving Visa and MasterCard cards. Unlike First Data Corp. and other bank card processors, Discover is not allowed to clear Visa and MasterCard transactions. As a result, Discover says, it has been forced into a niche, processing primarily for smaller retailers and letting the biggest merchants go to its competitors.
In an interesting competitive twist, Discover is one of Amex's largest merchant-acquirers. Mr. Nelms said he tells merchants, "We can save you money on Amex and Discover transactions, but here is a number you can call to save money on Visa and MasterCard transactions."