|EXCEEDING THEIR LIMIT?|
November 26, 1998
Do Mastercard and Visa have an unfair lock on the credit card business? Phil Ponce leads a discussion on this topic, following a background report.
PHIL PONCE: With me are Kevin Arquit, who serves as outside legal counsel for MasterCard International, and Lloyd Constantine, an attorney who has filed a lawsuit similar to the Justice Department's on behalf of some major retail companies. And welcome both. Mr. Arquit, we just heard that each of the two credit cards - Visa and MasterCard - has a network behind them and that these networks are owned by the same basic group of banks. What does a network do?
KEVIN ARQUIT: Well, think of the network as the railroad tracks. When you have a credit card, you want to go to a store and very quickly you want to walk out with your purchase, leaving behind the IOU to pay for that purchase. The retailer has a relationship with the bank. You, as the cardholder, have a relationship with the bank. And there needs to be a processing which occurs in order that the ultimate payment occurs. And what MasterCard does as an association is it provides the railroad tracks through which these individual banks can run in an network.
PHIL PONCE: And Visa has its own network that's similar to the one that MasterCard has, that operates in the same kind of a railroad track kind of a fashion?
KEVIN ARQUIT: Roughly the same, yes.
PHIL PONCE: And both railroad tracks are owned by sort of the same group of banks, is that so?
KEVIN ARQUIT: Yes, they're owned by the same group of banks. But what's important to realize in this context is that the banks are really the customers of the associations. The government has it backwards. They're concerned that the same owners control both, and they same in industries we wouldn't allow that. But in this situation, where these owners are the customers, the customers have every incentive to play one association off the other because they want to have the best competitive offer made available to them.
PHIL PONCE: How about this, is it two competing railroad tracks, or basically part of the same system?
LLOYD CONSTANTINE: It's really sort of a two-headed dragon. The banks are the owners of both associations. The banks are the governors of both associations. And the banks issue both of the cards. And, therefore, there's very, very little real competition between the two associations.
PHIL PONCE: No competition between the two associations?
KEVIN ARQUIT: Of course, there's incredible competition between the two associations, but we also have to take into account another point. What is it that consumers care about? They want to have low interest rates. They want to have annual fees that are low or nothing at all. They want to have rewards. And depending on what you want, you have incredible choices available to you, 27,000 different products. And the reason is because individual banks compete. Each one of them issues the cards. So when we look at competition in this area, we really have to look to the 6,000 plus banks that issue the cards and the 27,000 products they're offering. It's hard to imagine an industry that's more competitive.
PHIL PONCE: Mr. Constantine, how about that? Consumers seem to be deluged with these solicitations in the mail for credit cards. Is that evidence of competition?
LLOYD CONSTANTINE: That's evidence of a kind of competition. But at the same time, the two associations also charge retailers around the United States fees as well. 3.5 million retailers in the United States pay virtually the exact same fees to Visa, and MasterCard. And those fees are set by the exact same members, Visa and MasterCard, and the exact same banks, CitiBank, Bank of America, Wells Fargo, Chase, First Chicago, Bank One of Columbus - they sit together, and they set fees that are charged to retailers by MasterCard. And then the next day they turn around and they set virtually the exact same fees, which are charged to retailers by Visa. So there's a great uniformity and very little competition. And that also ultimately is reflected in the price of goods and services charged by every retailer in the United States.
PHIL PONCE: So you're saying that even though a consumer might get ten of these a week, that the choice as far as the kinds of terms and conditions are not that great?
LLOYD CONSTANTINE: And it's also important to point out there was very little competition even on rates to consumers until around 10 years ago. Until around 1987, there were very, very high interest rates, very uniform interest rates, and very rigid interest rates. And that started to change when competition came in the market in the form of the Discover Card and in the form of the American Express Optima Card. But that was only the result of antitrust intervention by the government, the kind of intervention which is being tried by the United States Government today.
PHIL PONCE: So how would you summarize that consumers are being affected by this current arrangement right now?
LLOYD CONSTANTINE: Right now, consumers are paying higher prices for every good and every service that they buy at every retailer in the United States, because of the lack of competition between Visa and MasterCard, and because Visa and MasterCard have gotten together and ganged up on American Express, on Discover, and any other company that would like to get into the market. Back in 1989, when AT&T was deciding whether or not it would get into the credit card industry, it had a choice: to start its own network or to come in through Visa and MasterCard. And when it looked at what Visa and MasterCard had done to American Express and had done to Discover, it said, I'll just go in and I'll issue Visa Cards and MasterCards. That's the same thing that General Motors did; that's the same thing that Ford did; that's the same thing that General Electric Did. And that's why there's much less competition than in virtually any other industry. Visa and MasterCard are probably the most longstanding and most effective cartel in the history of the United States.
KEVIN ARQUIT: May I respond to that? What Lloyd may be talking about is case, but not the government's case. The government makes no allegation of any kind of price competition being affected. And the reason is obvious - because that's not the situation. Each individual bank negotiates the rate that the retailer pays, and it's very - it's very interesting that we'd even bring that subject up, because historically the highest rate of all has been charged not by individual members of MasterCard or Visa, but by American Express, historically the high cost provider, and yet, that's the company that the government is protecting in this case.
PHIL PONCE: Excuse me. Are you saying that the current arrangement has not contributed to higher interest rates for consumers?
KEVIN ARQUIT: No, each individual bank sets it own interest rate. And that's why when you go to your mailbox and you look, you'll see some that offer no or low introductory rates; you see some that offer rewards in the form of airplane miles. That's set by each individual issuer. The association has nothing to do with that. Remember, the association is the railroad track. It does the processing, the authorization. It does marketing in terms of the overall brand. It simply does not set interest rates or fees. That's done by each individual member.
PHIL PONCE: So consumers, how much choice do consumers have, as far as interest rates are concerned?
LLOYD CONSTANTINE: They have some choice on interest rates. The government is really focusing not just on the present but on the future. The government is focusing on the debit card market as well. Right now, there are a lot more transactions on credit cards. By the year 2005, just seven years from now, there will be over a trillion dollars in transactions on debit cards. And the government believes that a lack of competition between Visa and MasterCard and the way that Visa and MasterCard have acted to disadvantage American Express and Discover has eliminated and reduced competition in the debit card market. If you go anyplace else in the world - if you go to Asia, you go to Europe, you just go North in Canada, you'll see that there is a much more prevalent use of debit cards, much lower prices in the United States. So this is not just about credit cards. It's about overall competition in the payment systems of the United States.
PHIL PONCE: And very quick point of information, what is a debit card, as opposed to a credit card?
LLOYD CONSTANTINE: A debit card is a card which accesses a depository account, like your checking account or your savings account. At the point of sale, right at a retailer, the money is swept out of your checking account, and soon thereafter, it's swept into the checking account or into the savings account of the retailer.
PHIL PONCE: So it's sort of like writing a check?
LLOYD CONSTANTINE: It's like an electronic check or electronic cash. And still over 90 percent of the retail transactions in the United States are done with cash and checks. That is the market. That's the future market. That's the market which Visa and MasterCard have moved to constrain. And it's one of the major reasons why the Justice Department has sued Visa and MasterCard in this case.
PHIL PONCE: Mr. Arquit, let's talk very briefly about this - the so-called exclusionary rules, where banks are told, yes, you can have Visa and you can have MasterCard, but you can't have other - you can't have other competing credit cards. What's the industry's position or explanation for that?
KEVIN ARQUIT: Well, I'll talk about that. I think, though, in terms of the discussion we just had on the debit card, the fact of the matter is the government's alleged no effect in that market. To the extent they talk about the future is something nobody can identify, and they haven't tried to, does that really justify a radical restructuring of this industry on the hope of what might occur in the future? Returning to your question in terms of this so-called "exclusionary rule," if I want to drive your car, I'd love to do it because it's a lot cheaper than buying my own, but the fact is if I want to drive a car, I have to pay for it. And what we have in the situation here is MasterCard over the years has spent millions and millions of dollars building up a network. American Express said we're going to go it ourselves; we don't need to be part of your network; we're going to do it all within our own self-contained system. Now, down the road, they see how successful the MasterCard system is with its issuing banks and the like, and they want in. They want to move in to the House after the mortgage has been paid.
PHIL PONCE: So are you saying they want to take advantage of the railroad track that somebody else has built?
KEVIN ARQUIT: Sure. And they want in for free. And there's nothing in the antitrust laws that gives them any basis for doing that. There are narrow circumstances where someone has foreclosed from a market where the government will say, or where a court would say, yes, you have to provide access, but that's not the situation. There's not a single consumer American Express can point to they don't have access to, because they have access to people's mailboxes, and that's how more than 80 percent of the people pick their credit cards.
PHIL PONCE: Mr. Constantine, what does the Justice Department want to happen?
LLOYD CONSTANTINE: The Justice Department wants the breakup of Visa and MasterCard so there's two separate entities: Visa on the one hand, and MasterCard on the other hand. There are now 6,000 banks, which are members of both, which own both, and which govern both. They'd like to end up with a situation where perhaps two or three thousand are in one association, two or three thousand are in another association.
PHIL PONCE: And would that help consumers? How?
LLOYD CONSTANTINE: Of course, it would help consumers. It would also allow American Express and Discover to sell their products in those banks. Banks are supermarkets for financial products. If American Express and Discover and JCB and any other new entrant could have access to those banks, they don't want to ride on MasterCard's tracks or Visa's tracks. What they want is access to the customers in those financial supermarkets, in those banks, and that's really all the Justice Department is trying to achieve here.
PHIL PONCE: Mr. Arquit, a quick response.
KEVIN ARQUIT: Yes. The fact is if you eliminate this trade-off that exists now because one bank can play off one association against the other, consumers are harmed. Now, MasterCard goes in and says we have a great new fraud feature. The member, the bank, is able to go over to Visa and say, you'd better come up with something better, or we're going to MasterCard, competition banging head on head with each other. That will be lost if they have to pick one association over the other.
PHIL PONCE: Gentlemen, I thank you both for being here.
LLOYD CONSTANTINE: Thank you.