MasterCard and Visa are pondering their next moves following last month's ruling in the antitrust case brought by the Justice Department on behalf of American Express and Discover.
The decision, issued by Judge Barbara Jones of the U.S. District Court, Southern District of New York, ordered Visa and MasterCard to abolish "exclusivity rules" prohibiting member banks from issuing American Express and Discover cards. But it upheld Visa and MasterCard's policy of dual governance, the practice by which banks with a controlling interest in either the Visa or MasterCard associations may issue both Visa- and MasterCard-branded cards.
The decision was a blow to Visa and MasterCard. "We are dismayed that the Court has seen fit to change the structure of the business with untested remedies," said Kelly Presta, a spokesman for Visa U.S.A.
Both Visa and MasterCard are considering appeals.
The Court found that the exclusivity rules-Visa's bylaw 2.10(e) and MasterCard's Competitive Programs Policy-weaken competition and harm consumers by limiting the output of American Express and Discover cards, and by limiting banks to participating in two card networks instead of four.
Visa and MasterCard had argued that without the exclusivity rules, American Express and Discover would "cherry pick" banks with the best credit card portfolios, leaving the associations supporting thousands of smaller banks, including community banks. They also argued that the exclusivity rules were necessary to prevent American Express and Discover from getting a "free ride" on the Visa and MasterCard networks. After the decision, American Express announced that it would move aggressively to broaden its distribution. "We plan to resume our conversations with a number of banks-now free to make a choice-about possible card-issuing ventures," said Kenneth Chenault, chairman and CEO of American Express, in a statement. The decision, he added, "illustrates how Visa and MasterCard have broken the law over a long period of time."
The ruling clears the way for banks to partner with American Express and Discover, and could even lead to some banks leaving the Visa and MasterCard brands entirely. "Some large issuer like Citigroup might break away from Visa and MasterCard," said Diogo Teixeira, CEO at Fiducite, a Boston consulting firm. "That would be a fascinating development. The network problem was insoluble before, but now they could piggyback off American Express."
Some observers said that the judge awarded the decision on dual governance to Visa and MasterCard as a consolation prize after awarding the more important decision on exclusivity to American Express and Discover. The Justice Department had argued that dual governance stifles competition by making banks that play a governing role in the Visa association reluctant to take steps that could adversely impact the MasterCard brand, and vice versa. However, Judge Jones said that the government had failed to prove its claim.
"The dual governance decision confirms that the associations' governance structure has helped foster a competitive environment that is pro-consumer," said Noah Hanft, general counsel of MasterCard International, in a statement.
The decision on dual governance surprised some observers. "The government did seem to make the case that there would be more competition if duality were ended," said Teixeira. "Had Visa and MasterCard been ordered to separate, they might have decided to merge."
Some observers had noted an inconsistency in the government's case against the card associations. If it's wrong to allow a bank that sits on the Visa board to issue MasterCard, they said, isn't it just as wrong to allow it to issue American Express?
The ruling implied that the government had confused dual governance with dual issuance-the practice by which any bank may belong to both card associations. "If competition between Visa and MasterCard has been jeopardized in the past, it is at least as likely that dual issuance and the influence of the major dual issuers has been to blame as has dual governance," said the ruling. "If this is so, the only remedy may well be the separation of the major banks as owner/issuers into one association or the other."
That is precisely the direction the industry has taken, the Court noted. "During the last three years, most of the top banks and monoline issuers have already chosen to enter into dedication agreements with either Visa or MasterCard which provide that the issuer must solicit 100% of its new cards in the association with which it has contracted."