A former high-ranking Visa executive who is considered one of the architects of the bank card industry said in trial testimony Monday that competition between MasterCard and Visa is still tepid, and that consumers and merchants suffer as a result.
Bennett Katz, who resigned last year as general counsel of Visa International after 29 years, testified that board members of Visa and MasterCard have leaked confidential information to the other association, and that there have been situations in which conflicts of interest have arisen.
Mr. Katz, now a consultant for Visa International, seemed to provide some of the most potent testimony so far for the Justice Department, which is seeking to prove that the governing structures of Visa and MasterCard give them an unfair advantage in the credit card industry.
Mr. Katz told the court that the bank card associations are not true competitors because they allow their members to issue the cards of the other brand. In other words, Mr. Katz blames what is known as duality when a bank offers both Visa and MasterCard cards for the lack of competition between Visa and MasterCard.
Mr. Katzs testimony also revealed that the remedies the government is seeking in its lawsuit are similar to plans that Visa nearly enacted about five years ago to ensure banks loyalty to the Visa brand. The government wants Visa and MasterCard to be run by banks that are dedicated to each brand, meaning that at least 75% of their card portfolios should be comprised of either Visa or MasterCard cards. The government is not seeking the end of duality, rather the end of dual governance, in which board members of one association have close ties or a strong interest in the other association.
Mr. Katz talked about a 1991 Visa proposal called the membership project, which would have required Visas board members to issue Visa cards only. It would have effectively ended duality, he said.
Justice Department lawyer Melvin A. Schwarz introduced as evidence numerous memoranda, letters, and board meeting minutes in which Mr. Katz described Visa and MasterCard as competitors whose hands are tied behind their backs.
There is a different kind of competition [between Visa and MasterCard] because of the effects of duality, Mr. Katz wrote in 1995. Banks are not thrilled to see Visa and MasterCard beat up on each other, he wrote in another memo. Mr. Katz described competition between Visa and MasterCard as having diminished materially after duality was allowed in the 1970s, and competition between the two associations had grown tepid.
In a memo entitled The Impacts of Prohibiting Duality, Visa executives called ending duality the only feasible way to achieve brand differentiation from MasterCard. Without duality, the memo said, Visa would be able to implement innovation without [being concerned] about the impact on MasterCard.
Ultimately, Visa did not phase out duality or require its members to be exclusive, Mr. Katz said, because its members feared that it would be too costly. Mr. Katz said his past statements about consumers and merchants being harmed by the lack of competition between Visa and MasterCard are still true today.
Mr. Katz also offered another version of why a deal between Visa and Microsoft Corp. to develop the Secure Electronic Transactions protocol for Internet payments, or SET, fell through. He said Microsoft objected to plans for Visa and MasterCard to work together to develop SET. Katz said Microsoft felt it would be fruitless to work with Visa if MasterCard was also part of the deal, partly because MasterCard was already working with Microsofts competitor, Netscape Communications Corp.
In an interview, MasterCards general counsel, Noah Hanft, suggested that Mr. Katzs testimony conflicted with the governments contention that duality in card issuance is not harmful.
Visa spokesman Kelly Presta said Mr. Katzs testimony speaks more to the past. Mr. Presta said in an interview, duality has died a natural death.
Andrea Cooper contributed to this article