WASHINGTON Everybody in the credit card industry wants to know why last summers intense, three-month showdown between the Justice Department and the credit card associations ended not with a bang but a whimper, and several of the most curious and concerned gathered here last week to puzzle it out.
Judge Barbara Jones, who presided over the antitrust trial in U.S. District Court for the Southern District of New York, abruptly cancelled closing arguments in October apparently signaling that she had heard enough and has not said a public word about the case since then. A lot of people who followed the trial or were involved in it are yearning for some closure.
Though the matter has receded from headlines, the stakes are still big, and Judge Jones decision, whenever it comes, could potentially reconfigure the industry along any number of permutations. Among other things, it could force Visa U.S.A. and MasterCard International to let banks work with American Express Co. and Discover Financial Services.
At the Credit Card Forum 2001 conference here last week, some of the familiar faces from last summers courtroom drama gathered to swap theories and rehash some of the arguments in the trial, both for old times sake and to try to make sense of the judges loud silence.
A few have moved on to new jobs, but many of them gathered nonetheless at the conference, which was sponsored by Thomson Financial Media, parent company of American Banker.
Most notably, Melvin A. Schwarz, the Justice Departments chief litigator in the case, has left the government and become a partner in the Washington antitrust group of Dechert, a U.K. law firm previously known as Dechert Price & Rhoads.
Since no date is in sight for a decision to be handed down, lawyers and card industry executives have had no choice but to speculate a lot. Circulating theories include: One of Judge Jones clerks left last fall, and the judge is overloaded with other cases; she wants to see the outcome of the Wal-Mart trial; she is leaning against the government, but still has to sort through all the documents; she favors the government, but will write a very complicated decision.
I would not begin to be able to tell you why no decision has yet been made, Mr. Schwarz said at the conference Thursday. I have no idea. Federal judges have complete discretion.
Hes right ditto, said Stephen Bomse, a partner at Heller Ehrman White & McAullife in San Francisco and a longtime counsel for Visa U.S.A., who argued the associations case last summer.
Also on the panel were Gary R. Carney Jr., an attorney at Clifford Chance Rogers & Wells LLP who represents MasterCard, and David Balto, who recently left his job as policy director for the Federal Trade Commission for a partnership at White & Case LLP in Washington. Mr. Balto has investigated competitive issues in the payments industry for several years.
The only point of agreement among the panelists who spent years clashing during the pretrial and trial proceedings was that nobody knows why the decision is taking so long.
Indeed, the waiting has put stress on everyone: A public relations executive for one company that could be affected by the outcome said recently that her firm has prepared different public statements for every likely outcome, and reviews them every month to make sure they are up to date.
With no answers to the judge conundrum, the panelists spent more than an hour debating the familiar issue of whether Visa and MasterCard exert market dominance over the networked payments industry and unfairly restrict competition from American Express, Discover, and others.
There is a tremendous perception by merchants that they have to accept credit cards, that they have no competitive choice, Mr. Schwarz said.
Reviving a key piece of evidence from the governments case last summer, he pointed to the introduction of the American Express Blue card, after which Visa and MasterCard renewed their interest in microchip technology, which both associations had investigated and long ago abandoned in concert, he contended.
Why didnt smart cards come out earlier? Mr. Schwarz asked the audience, transformed during the panel into an ad hoc jury. After Blue was launched, Visa and MasterCard renewed their interest in smart cards, despite the fact that for 20 years they said there wasnt a business case for the products, he said.
If Visa and MasterCard were truly competitors, they would have competed on the smart card front long before the arrival of Blue, Mr. Schwarz said. Thats what competition is about. Sometimes youre forced to do things you dont want to because your competitor is doing it.
Mr. Schwarz also brought up the subject of interchange fees, the interbank fees paid by merchants when they accept credit and debit cards. The fees which are higher for Visa/MasterCard debit cards than for nonassociation ones are the central issue in the pending Wal-Mart lawsuit, which pits the nations biggest retailers against Visa and MasterCard, but they also came up during the Justice Department trial.
Mr. Schwarz argued that because interchange is not transparent to cardholders, and because merchants have no choice but to pay it, the fee represents another testament to the associations market dominance.
In the last two to three years the interchange was raised 10% to 15%, and merchants still have no choice, Mr. Schwarz said. That, to a regulator, screams market power.
Mr. Balto, who has repeatedly challenged the legitimacy of interchange fees, agreed. The antitrust question for the court to decide is whether or not you can raise the price without losing volume, he said. Visa and MasterCard have raised it without substantially losing business, and that shows they have market power.
Mr. Bomse, speaking for Visa, countered that the proprietary networks American Express and Discover charge even higher interchange fees than the associations. Never mind that American Express has a much higher fee and gets a free pass from antitrust laws, while Visa gets sued over and over again, he said.
With a weary voice, Mr. Bomse said that he had already litigated and won this issue in the landmark National Bancard Co. (NaBanco) case of 1984, in which the court effectively legalized interchange fees. I feel like someone in a dream slaying the same dragon over and over again, he said. Every night, the dragon comes back with more of his cousins.
Saying his opponents had an overly formalistic mind and a competition ax to grind, Mr. Bomse said the governments case is biased against his client and in favor of Amex not consumers.
The government does not have the real interest in pursuing these matters, Mr. Bomse said. American Express is the driving force, and it persuaded the government to try the case in the first place, he said.
Mr. Schwarz flatly denied this. The governments interest was not that we cared about whether American Express or Discover succeeds.
Competitive concerns about Visa and MasterCard are embedded in the structure of the market, which demands the participation of issuers, merchants, and consumers, Mr. Schwarz said. Those conditions already dictate a tight market, he said.
The problem is there are very few networks, and there are not likely to be many more in the future, Mr. Schwarz said. We have to make sure the existing networks are viable, and that they compete. You now have a lack of competition between 1 and 2, and weakened competition against 3 and 4.
The Wal-Mart suit, which will be scheduled pending an appeals court decision that will either uphold or strike down the plaintiffs class-action status, shows that the associations market power is so great that they can push around giants like Wal-Mart Stores Inc., he said.
The Wal-Marts of the world normally have the power to tell their suppliers what they would or would not like to buy, but they are forced to take Visa and MasterCard offline debit cards, even when they may not want to, Mr. Schwarz said.
Mr. Balto called the Wal-Mart suit the most interesting case, and said its outcome will determine what are the kinds of markets Visa and MasterCard can expand in.
Lloyd Constantine of Constantine & Partners in New York, the lead counsel for the plaintiffs in the Wal-Mart suit, was not on the panel, but in a telephone interview following it he said his clients and the Justice Department have similar aims.
The belief in the governments and the retailers case is that if they are successful, there will be a salutatory effect on all of the factors that would create healthy competition, he said. There are two ways to measure that: price and quality. Certainly, if our case is successful, there will be massive improvement in both.
As for interchange fees, Mr. Constantine said the issue is not raised in the Wal-Mart suit except as a measure of damages. But, he warned, as sure as night follows day, it will be an issue in the future.