The Department of Justice is pushing to make debit cards a central issue in its antitrust case against Visa and MasterCard.
Last week the card associations reluctantly agreed to produce documents submitted in a debit card lawsuit they are fighting against the nation's major retailers.
In a Dec. 3 court filing, the government says issues raised by the retailers relate to the "core of this litigation," which was begun in October. The Department of Justice claims various practices by Visa and MasterCard have stifled competition and innovation in the cards market.
In a closed-door hearing last Friday, prosecutors told Judge Barbara S. Jones that there are major similarities between their case and the suit filed in 1996 by Wal-Mart Stores Inc., Sears Roebuck & Co., and other major retailers. The retailers are disputing a Visa and MasterCard requirement that stores accepting credit cards also accept debit products.
In a brief requesting the debit card documents, the government also explained where it believes the cards industry is heading: to a "unified product-one piece of plastic-that includes multiple functions, such as the ability to debit a cardholder's bank account as well as extend credit."
Under the government's argument, this vision of the future would put nonbank card issuers-specifically, American Express Co. and the Discover unit of Morgan Stanley Dean Witter & Co.-at a great disadvantage. Neither nonbank offers direct deposit accounts (to which debit cards are tied). Therefore, the prosecutors say, those companies would be precluded from offering competitive products in a world where a "unified" card prevailed.
The government's brief states that Visa and MasterCard rules "prevent banks, as the purchasers of network products and services, from obtaining competitive offers from Discover/Novus and American Express as a way to spur better products and services from each of the networks, including Visa and MasterCard."
The associations' member banks have "nearly complete control over" deposit accounts and, by extension, the debit card market, the Justice Department wrote.
The tone of the memo, said a senior Washington antitrust attorney, seems to be, "If we don't do something about it, the same group of banks that control the credit card market will control every other kind of card market in the future, including debit cards."
Visa and MasterCard deny the government's charges. They have tried to prevent federal prosecutors from getting the documents in the debit card case, arguing they were not germane.
But the Justice Department subpoenaed Wal-Mart for the files, and the associations relented.
Sources close to the card associations say the government is being inconsistent by defining competition in the credit card market as the focus of its complaint, then introducing the debit card market as an area of concern.
"The government has brought this case based on a theory of lessening competition in credit cards, then it is suddenly talking about losses of competition in other markets outside of the main market that it originally alleged," said the senior antitrust attorney, who wanted to remain anonymous.
In a prepared statement, Noah Hanft, senior vice president and U.S. counsel for MasterCard said:
"The notion that American Express can't compete is simply ludicrous. An effort is being made to concoct a speculative theory that American Express won't be able to compete at some point in the future, based on a guess as to what the payments industry will look like down the road. With the advent of stored value, the payment card of the future need not be linked to a depository relationship."
Justice Department attorneys argue that there are overlapping issues in the two lawsuits. The store chains claim Visa and MasterCard are abusing their market power by forcing retailers to accept their debit cards, which carry higher interchange rates than some other payment options.
The government's memo says both cases are based on the premise that Visa and MasterCard "exercise market power jointly," that the governing banks of the associations are the "unnamed co-conspirators, which control that market power," and that the banks "collectively restrain network-level competition by enacting exclusionary rules."
The government also used its brief to rebut a claim MasterCard has been making: that the volume of mail solicitations proves the "the intense competition that exists between issuers of payment cards."
The Justice Department memo said such arguments "entirely miss the point of this suit."
According to the government, it is not in Visa's and MasterCard's best interest to spend money to develop network products to attract consumers from one bank's brand to another; therefore, consumers lose. The prosecutors wrote, "Innovation and competitive development in network products and services are stifled, product quality suffers, and ultimately, the value received is diminished."
The government's suit is scheduled for trial in October 1999. But the date was set by Judge Milton Pollack, who withdrew from the case last month. The government wants to keep the date; Visa and MasterCard want to postpone it.
The retailers' suit is in the discovery phase, and no trial date has been set.
Lloyd Constantine, lead attorney for the retailers, applauded the government's strategy. "Debit cards should be the linchpin of DOJ's case," said Mr. Constantine, a former New York assistant attorney general in charge of antitrust. He is principal of the New York firm of Constantine & Partners.
Mr. Constantine said the files in the debit card case represent a "shortcut for DOJ to get a lot of meaningful information that would take them at least six months to get on their own."
Similarly, Mr. Constantine tried unsuccessfully to get the documents Visa and MasterCard produced for the Department of Justice. The associations resisted, and U.S. Magistrate Judge Roanne L. Mann sided with them.
In a ruling on Tuesday, Judge Mann, of U.S. District Court in Brooklyn, wrote: "The fact that DOJ expanded its inquiry and demanded of (Visa and MasterCard) all documents produced in this litigation does not mean that every document touching upon issues in the DOJ case is necessarily relevant to this litigation."
Judge Mann's decision is seen as a victory for the card associations, validating their efforts to keep the two cases separate.