Early in the antitrust trial against Visa and MasterCard, Discover president David Nelms delivered a stunning revelation: former Citigroup co-chairman John Reed had discussed with Discover the possibility of a joint takeover of MasterCard.

On Wednesday, a top Visa executive testified that Visa U.S.A. too, long before the Citi-Discover talks, had come close to its own merger with MasterCard International.

Its rejection of the idea, said Victor W. Dahir, chief financial officer of Visa U.S.A., stemmed from a belief in the importance of continued competition in the marketplace.

According to Mr. Dahir's testimony, the highlight of the second day of Visa's defense presentation, Visa U.S.A. several times in the 1980s flirted with the idea of a merger. The idea was taken seriously enough that the matter was put to votes by the associations' boards of directors.

The idea was first proposed in 1984 by a few undisclosed Visa member banks, which pitched it as a cost-cutting measure, said Mr. Dahir. Consulting firms were hired to perform analyses of the idea, but the boards ultimately turned it down.

"There were some projected cost savings that were identified, but the ultimate decision made by the Visa board was that the benefits of having two competing systems far outweighed the cost savings that could be generated by putting all or part of them together," Mr. Dahir said.

In other testimony, Mr. Dahir attempted to refute the Justice Department's accusation that it was the government's antitrust investigation that spurred Visa to ask banks to commit certain percentages of their card portfolios to its brand. Mr. Dahir said the "partnership program" that includes these signed contracts well predated any government action.

Back in 1984, he said, after Visa and MasterCard decided against a merger, they approved a list of practices "where it was deemed there were some benefits to be derived from cooperation, and there was no benefit to be derived from competition."

The designated practices included a variety of rules, ranging from simple things like allowing the same number of days for chargeback presentment, to more complex issues such as technology. Mr. Dahir said the associations also decided to combine their lobbying efforts to cut the costs of running parallel operations. The joint effort was abandoned long ago, though, and today the associations do separate lobbying.

The merger question was revisited in 1989, but shelved again, and has not been discussed since. Visa's management was never in favor of the idea, Mr. Dahir said.

With his testimony, Visa also sought to prove that it had begun establishing its partnership program - a set of incentives offered to banks willing to dedicate their portfolios to Visa - before October 1998, when the Justice Department filed its antitrust suit against the card associations.

Both Visa and MasterCard have programs in place that offer pricing incentives and "preferred status" membership to banks willing to issue a majority of their cards with one brand. MasterCard's program stipulates that the member bank needs to have 80% of its portfolio dedicated to MasterCard within a certain period, while Visa's says the bank must move 90% of its portfolio over and agree only to issue Visa debit cards.

Mr. Dahir said Visa had been investigating ways to encourage its member banks to increase their loyalty to Visa over the last 10 years. One proposal presented in 1992 to the board, called "Partners in Profit," was rejected because it was deemed too expensive, he said. Then in early 1998, Citigroup encouraged Visa to develop an incentive program, he testified. Later that year, Citi changed its tune, and told Visa that membership in the association was "too expensive." Citigroup executives asked Visa what it would offer Citigroup if the bank moved all of its business to Visa, Mr. Dahir said.

"That got us thinking about this," he said.

Visa has signed partnership agreements with 439 banks, which Mr. Dahir said are responsible for 60% of Visa's current volume.

In fact, Mr. Dahir testified, Visa's current partnership program was actually a competitive response to the financial incentives MasterCard began offering banks and cobranding partners.

After MasterCard started working with non-bank companies like General Motors in the early 90s to issue cobranded cards - a policy which Visa initially rejected - Mr. Dahir said Visa needed a way to play catch-up to MasterCard's sudden jump in market share. When Visa tried to start a cobranding strategy, MasterCard offered its partners financial incentives to stay put. MasterCard had also begun offering financial assistance for certain member banks' mass mailings or other marketing activities.

"If I were working for MasterCard, I would have done the same thing," he said. "I just didn't like it."

Mr. Dahir said Visa began offering cash incentives in 1994 to certain cobranding partners, and that slowly financial incentives became the normal course of business in the credit card industry.

"Issuers knew they could play Visa and MasterCard off against each other and all that would happen would be that bidding would increase," he said.

Mr. Dahir said the incentive wars tied up valuable resources that could have been used more productively. "The size of the money was so large that you had to find the money somewhere," he said. "You had to not do something else that you were doing."

Visa tried to "get out of the practice" of offering financial incentives. That effort led to the creation of the partnership program, he said.

"The partnership program was an attempt to try to put together a program that would be available to everybody, would have benefits that would hopefully eliminate the need for these cash incentives, and they would be benefits that would be ongoing," he said.

In cross-examination, Justice Department attorney Jeffrey I. Steger pointed to an employee incentive policy at Visa to prove the card associations did not compete.

Throughout most of the 90s, Visa had an employee incentive policy that in part measured employees' success by how effectively they were able to increase Visa's market share at the expense of MasterCard. Mr. Dahir said he tried to convince Visa management to discontinue this practice. "Focusing everyone's efforts on [a company] that only had 2.5 percent of the pie seemed ridiculous," he said.

As Mr. Steger put it, "Visa's growth versus MasterCard was not an appropriate measure and the reason was because members owned both Visa and MasterCard."

In 1999, the Visa U.S.A. board decided to change the way it measures financial incentives for employees. The new measure does not include a comparison to MasterCard, Mr. Dahir said.

Separately, Barbara S. Jones, the judge presiding over the credit card trial, agreed to hear oral arguments today at 5 p.m. from Discover Financial Services Inc., a spokeswoman for Discover said.

On July 28, Discover filed a motion to intervene in the trial. Discover's outside counsel from the law firm Kirkland & Ellis will represent the company.

W.A. Lee contributed to this report.

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