A Hot Prelude To the Debit Trial

  Newly released documents and opinions about those documents show just how heated the upcoming debit card trial pitting retailers against Visa and MasterCard will be.
  The trial in the merchants' class-action antitrust lawsuit challenging Visa U.S.A.'s and MasterCard International's "honor-all-cards" rules is not scheduled to begin until next April. But a federal court's decision late last year to unseal thousands of documents in the six-year-old case helped fuel debate in the court of public opinion.
  Indeed, The Wall Street Journal, which had petitioned the U.S. District Court in Brooklyn, N.Y., to release case documents, and The New York Times were quick to report on the filings, which retailers say prove Visa and MasterCard colluded to build up their signature-based, or offline, debit card programs at the expense of regional networks' personal identification number-based, or online, debit initiatives. But the documents also portray activities one might expect in a competitive marketplace.
  If nothing else, they illustrate how gung-ho Visa in particular has been in trying to compete with the regional electronic funds transfer networks. "It's time to declare war and stop capitulating," Glenn Carlson, director of Visa's Interlink PIN-based point-of-sale debit network, noted in a June 1997 strategy outline.
  In the document, Carlson cites as an "immediate tactic" a 75-cent "tax" for off-premise Plus automated teller machine transactions to "beat 'em at their own game," believed to be a reference to regional ATM network policies.
  A separate Visa memo dated July 18, 1994, offers "discussion points" about forming a joint venture with The Exchange network as well as forming a comprehensive processing service to offer to financial institutions. That memo cites a Visa objective to prevent the consolidation of debit business into the hands of third-party processors, and to "block or disrupt the consolidation of super regional networks that may undercut Visa's debit brand dominance and revenue stream." Another document cites $30 million Visa supplied to Bank of America for its Visa check card program.
  Tom Brown, an attorney representing Visa in the case, says such activities do not portray anything illegal. He notes, for example, that the payment to BofA, which had just merged with NationsBank Corp., came as Visa competed with MasterCard for the bank's offline debit business.
  "Hot documents like the ones the plaintiffs point to just demonstrate vigorous competition," he says. "(The merchants' lawyers) don't want to talk about what the case is about, and these documents and their quotes have nothing to do with the case."
  Noah Hanft, MasterCard general counsel, says Lloyd Constantine, the merchants' lead attorney, is cherry-picking which documents to highlight in the press. "It really distorts the facts and diverts attention away from merchants' efforts to take away choice from consumers," he says. "Rather than talk about the challenge to the honor-all-cards rule, he talks about MasterCard's efforts to suppress online debit, which is absurd."
  While Visa was pushing offline debit a decade ago, MasterCard was spending millions to try to convince the financial community to support online debit, Hanft says. But issuers preferred offline debit because of its relative revenue potential, and most merchants refused to install PIN pads to help online debit grow, he says.
  "We went two different paths, so for (Constantine) to imply that MasterCard tried to suppress regional networks is absurd," Hanft says.
  Constantine agrees that MasterCard once supported PIN-based debit. But, he says, when Alex W. "Pete" Hart left as its president nine years ago, "MasterCard did a 180-degree about face and fell in line with Visa's strategy."
  Documents in which association executives declare war may illustrate intention, but they are not as significant as real conduct, Constantine says. "In this case, there's lots of specific intentions to monopolize the debit card market and lots of illegal actions taken in furtherance of that," he says. "What we have is real conduct by Visa and MasterCard to destroy the regional networks."