Antitrust clouds are darkening over MasterCard and Visa.

In the wake of a controversial product announcement by Visa, both bank- owned associations have acknowledged receiving formal notices that their debit card rules are under investigation by the Federal Trade Commission.

The FTC's involvement in turn has sparked the interest of a group of state attorneys general who have shown signs of activism on various antitrust matters, including payments issues and Microsoft Corp.'s alleged coercion of computer manufacturers.

The government activities, on top of litigation initiated in 1996 by retailers complaining about the costs of debit card acceptance, put MasterCard International Inc. and Visa U.S.A. Inc. under more legal pressure than they have experienced in years.

Officially, the Federal Trade Commission is not commenting about the status of any probe. MasterCard and Visa, which have a long history of deflecting accusations of monopolistic practices or price-fixing, said they have been complying with requests for information from the FTC and are confident that their facts will win out.

Spokesmen for the bank card groups said they were unaware of what the states are doing, but a Wisconsin official made clear that they have concerns about how MasterCard and Visa rules affect competition in the debit business.

"We are very interested in what the FTC is doing and expect to be talking to them about it," said Wisconsin Assistant Attorney General Kevin O'Connor.

The FTC, which shares federal antitrust jurisdiction with the Department of Justice, has been communicating with state-level officials in a series of conference calls.

As powerful joint ventures, MasterCard and Visa have continually weathered storms on the antitrust-law front. The current one was stirred up by the retailers' October 1996 filing in U.S. District Court for the Eastern District of New York, which has class-action status to represent the likes of Wal-Mart Stores, The Limited, Safeway, and Sears, Roebuck and Co.

Visa may have lit a fire under federal investigators when it announced five weeks ago that it planned to launch a new debit card. Scheduled to be available in October, the service would combine off-line and on-line transaction features that currently do not coexist on a single Visa card.

Visa U.S.A.'s most popular debit product, the off-line Visa check, operates almost exactly like a credit card, with a delay of up to a few days in the posting of the transaction to the cardholder's account. In the case of debit, though, the money is taken from a checking balance rather than a line of credit.

Adding on-line, instantaneous debit capability, Visa said, would enable the card to piggyback on the fast-growing network of transaction terminals in supermarkets and other high-volume retail locations. Customers would verify their identities with personal identification numbers rather than signatures.

The on-line, PIN-based procedure is seen as posing a threat to regional automated teller machine networks such as Star, MAC, and NYCE, whose debit prices historically tended to be lower than those of the MasterCard and Visa networks. The regionals have similarly been subpoenaed by the FTC.

If the government investigators want to block the Visa offering or otherwise move to take the card associations to court, Visa's product release date in October serves as a natural deadline, according to sources familiar with the probe.

For the government to be fully effective-and to preserve the competitiveness of the regional electronic banking networks- "it will have to be act before the Oct. 1 start date," said David B. Lipkin, a partner at Drinker, Biddle & Reath of Philadelphia. Mr. Lipkin is a former attorney for Electronic Payment Services Inc.'s MAC network.

The retailers' pending lawsuit foreshadowed the current government flurry. It accuses Visa and MasterCard of forcing merchants to accept debit cards at about the same prices charged for credit cards. The retailers claim that debit transactions are less risky and should, therefore, cost less to process.

But card association rules require merchants to accept all cards carrying their international logos without discrimination. The retailers say this is a tying arrangement that violates antitrust laws.

Adding fuel to the fire, Visa is prohibiting regional network marks like MAC, Pulse, and Honor from residing on the back of its new debit card. This would effectively force merchants to route the transactions through Visa's network, foreclosing a regional alternative.

Executives of regional networks, joint bank-owned ventures on a smaller scale than MasterCard and Visa, have been fighting to keep their brand power from eroding in the face of Visa check, MasterMoney, and the on-line programs Interlink (Visa) and Maestro (MasterCard).

If there is no latitude for regional logos, as with the new Visa product, the networks could find themselves battling for survival.

One state attorney general, quoted here on condition of anonymity, said Visa has "engaged in a pattern of conduct which is geared at excluding rivals. We have been looking at the industry for 10 years now."

That passage of time discourages Lloyd Constantine, the lawyer who is the lead counsel representing the retailers in their suit against Visa and MasterCard.

Because government people "have been aware of these issues for years," he said, he wonders how swiftly the FTC and the states will act.

Mr. Constantine, of the New York-based firm Constantine & Partners, took MasterCard and Visa on in 1989 when he was New York State's antitrust chief. He coordinated a 12-state effort to prevent the creation of a single national debit card called Entree. They filed an antitrust complaint and the card associations eventually backed down.

"There are people at the FTC who have understood the problem with the tying of these arrangements all along," Mr. Constantine said of the current debit debate. "When Visa made this announcement, it gave the people who understood ammunition to go to others and say, 'See? Visa is trying to completely foreclose competition in this industry.'"

Anything the government does against Visa and MasterCard can only help his retail clients' cause, Mr. Constantine said.

A case that "is in any sense consistent with our case (puts) more pressure on Visa and MasterCard," Mr. Constantine said. "If the government just investigates for a number of years, then it is just another entity pummeling Visa and MasterCard, requiring them to produce documents and their executives to be deposed. I suppose that has some worth."

Visa denies it is trying to antagonize the regional networks. It instead wants to enhance the debit option with PIN security, capitalizing on the 70% annual growth in on-line point of sale terminals, currently at about 1.3 million.

Visa also sees an advantage in an on-line debit card carrying its strong brand name. The company is not heavily promoting the Interlink debit service that it acquired after being launched by California banks in the 1980s.

Some observers view Visa as being politically as well as strategically shrewd, knowing full well that its ownership overlaps with that of the regional rivals.

"Why would you sue Visa?" said an industry source. "You'd be suing your own owners. Visa took a calculated risk that none of us would have the guts to do it."

Visa is also seen as supremely confident, having never lost a major antitrust judgment. Nabanco, a predecessor of First Data Corp., could not overturn card interchange pricing rules a decade ago. More recently, Dean Witter, Discover & Co. was unable to force a rule change that would have permitted it to issue Visa cards.

"If Visa was in any sense concerned about a governmental challenge, do you think they would have done what they did five weeks ago?" Mr. Constantine said.

The merchant community he represents is further agitated about the new Visa check card because of its costs.

According to The Nilson Report, the average regional-network POS transaction costs 7 cents. Visa's new interchange fee, which banks pass on to merchants, will be 25 cents at supermarkets and 10 cents plus 0.55% of a purchase at other stores. In the latter example, a $100 transaction would cost 65 cents.

If all of last year's 1.39 billion on-line transactions were routed through Visa, issuers would have earned another $265 million in interchange, said Nilson, a newsletter based in Oxnard, Calif.

Nevertheless, Visa said it is receiving an "extremely positive" response to the on-line/off-line proposal.

Visa spokesman Kelly Presta said banks have freedom of choice. They do not have to offer the new card and can stick with the current version of Visa check.

He added that "greed should not be the reason consumers are denied choice." If the retailers prevail, he said, consumers would lose the right to use their 58 million Visa check cards in many places.

"Our position is that we intend to cooperate with the FTC," said Noah Hanft, MasterCard's in-house counsel. "We are confident that our honor-all- cards rule that protects universal acceptance is appropriate and lawful."

Some retailers are not waiting for the legal machinery to do its work. The Kroger supermarket chain wants to persuade its banks not to go to the new Visa check card.

"We as a company will be talking to all of our banks about all of this," said Larry Turner, vice president and treasurer of Cincinnati-based Kroger Co. "We don't feel like we can sit around. We need to be aggressive and forthright."

Some merchants are actively encouraging transactions that they can route through regional debit networks at lower cost. They have rigged their POS devices to make debit the first option, rather than credit. Cashiers have been trained to ask customers if they want cash back, which would route the transactions through regional networks.

Sensing a marketing opening, the regionals have concurrently provided stores with promotional materials to strengthen brand awareness at points of sale.

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