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Burden of Proof

Justice Department Takes Visa and MasterCard to Court for Antitrust Violations

Aired June 13, 2000 - 12:30 p.m. ET



UNIDENTIFIED FEMALE: Well, it would be nice if there were more card companies instead of MasterCard and Visa. I think so. A little competition would never hurt.

KEVIN ARQUIT, COUNSEL TO MASTERCARD: There are thousands of different card products. Some are offered with low interest rates, some are offered at no fee, some give you cash rebates. If anything, people complain that they get too many choices in their mailboxes, not too few.

FRANK TORRES, LEGISLATIVE COUNSEL, CONSUMERS UNION: If the banks were allowed to issue other products -- and I think that's what this suit is all about, is who ultimately gets to control the payment system. And should there be one or two companies that dominate, or should there be a lot of companies that can get into that market?


ROGER COSSACK, CO-HOST: Today on BURDEN OF PROOF: The Justice Department says Visa and MasterCard are blocking out competition and takes the credit card giants to court.

ANNOUNCER: This is BURDEN OF PROOF, with Greta Van Susteren and Roger Cossack.

COSSACK: Hello and welcome to BURDEN OF PROOF.

Yesterday in New York, the U.S. Justice Department took on the nation's two largest credit card companies. Government lawyers claim Visa and MasterCard act as a duopoly.

GRETA VAN SUSTEREN, CO-HOST: In its federal antitrust lawsuit, the Justice Department charges that the two credit card companies have agreements with banks which squeeze out competitors. Lawyers for Visa and MasterCard deny those charges and stress that they're in competition against each other.

COSSACK: Joining us today here in Washington, Dan Carney of "Business Week"; former federal prosecutor Steve Berk; and Kevin Arquit, counsel to MasterCard.

VAN SUSTEREN: And in our back row, Rebecca Avery (ph), Merritt Johnson (ph), and Summers Mattern (ph).

Also joining us here in Washington is CNN national correspondent Bob Franken, who was in court yesterday.

Dan, first to you: I read the Justice Department complaint. It describes MasterCard and Visa as nonprofits. Explain this corporate entity to me.

DAN CARNEY, "BUSINESS WEEK": Well, it's a pretty complex structure. They're joint ventures of their member banks, unlike American Express, which is a publicly traded for-profit company. And the Visa and MasterCard themselves, the brands, are not set up to make profits, but the banks that use them use these brands to make profits for themselves.

VAN SUSTEREN: But yet they are individual, corporate entities so that they are capable of being sued?

CARNEY: They're -- the Justice Department is bringing suit against them, yes. I mean, they're independent enough that they can be sued.

COSSACK: Kevin, first of all, I want to say that I mispronounced your name. It's not "Aquit," it's Arquit. So I wanted to straighten that out right now.

And then I want to go to Bob Franken.

Bob, tell us about the trial. What's going on? You were up there.

BOB FRANKEN, CNN NATIONAL CORRESPONDENT: Well, of course, this is the next big antitrust action on the part of the Justice Department following its Microsoft venture which, at this point so far, has been a victory for the Justice Department.

They're taking on now these two credit card companies because they're saying that because of the arrangement with the banks, they almost amount to one: the member banks of one credit card or the member banks of another for all practical purpose. The government calls it, as you said, a "duopoly." They prefer to call it "dual governance."

The government charges that as a result of this duopoly, decisions are made that benefit each other to the detriment of competitors and to the detriment of the consumers. Consumers are denied services when they're deemed too expensive to be gone into by the two companies acting in collusion, says the government, and there's a fundamental part of this case which has to do with the decision by the member banks to not allow these member banks to issue American Express or Discover Cards. And the government says that that restrains trade, it violates the antitrust laws, again, to the detriment of the consumers.

VAN SUSTEREN: Kevin, I'm reading the Justice Department complaint and it says Visa and MasterCard account for approximately 75 percent of general purpose card dollar volume. Is this a competitive market?

ARQUIT: It's a very competitive market. And it's so easy for the Justice Department to contrive something they call a "market" and then say it's 75 percent. The fact of the matter is that neither Visa nor MasterCard sets the interest rates, sets the fees, all those things that consumers care about.

VAN SUSTEREN: Who sets these interest rates?

ARQUIT: The individual banks. What Visa and MasterCard do is that they provide the network, if you will, the railroad tracks, so that if you have a card issued by one bank, you can go in a store and use it and not worry about whether it's the same bank that issued the card there. And what the associations do is provide this network so that you know when you go in you can make this purchase.

But all of these terms are set individually by the banks, and that's why it's so important to know that there's over 7,000 different banks that issue cards and over 20,000 card products. It's hard to imagine an industry that's more competitive.

VAN SUSTEREN: I got to tell you, though, Kevin -- and let me go to you, Steve. It's very -- I mean, obviously we're just at the sort of -- at least I am -- at the beginning of studying this particular case. For some reason, I don't have a particular amount of sympathy for the banks when the interest rates don't seem to be going down on the cards. Kevin says it's very competitive. Do you agree?

STEVE BERK, FORMER FEDERAL PROSECUTOR: Well, you know, it's interesting, Greta. If the interest rates were an issue here, I think consumers would be all excited about that, right? I mean, no one likes to pay 18 or 19 percent interest rates on their credit cards. But that's really -- and Kevin's absolutely right -- that's not the issue here.

But what your viewers also have to understand is that the 75 percent market share, even if that's a true marketshare, is not in and of itself a problem either. To violate the antitrust rules, you have to do something wrong with your marketshare. You have to do something that's improper. You have to use it...

VAN SUSTEREN: Squeezing out competitors improperly would be wrong. Having the best mousetrap is not wrong.

BERK: Exactly, Greta. That's exactly right.

COSSACK: And, Dan, that's -- to go back to the Microsoft case, no one has ever said that Microsoft was wrong simply because they were a monopoly. Microsoft got in trouble because this judge found that they acted illegally as a monopoly.

So in this situation, what are MasterCard and Visa doing that is so illegal? I mean, we've heard allegations that they've gone to the banks and said, listen, you either do it this way, or don't work with other people. Sounds a little bit reminiscent, I suppose, of what Microsoft is accused of doing. CARNEY: Well, there are essentially two elements to Justice's case. One is that the member banks are not allowed to deal with American Express and Discover. And over and above that, there's an issue that's sometimes called "duality" or "duopoly" or "dual governance," in that the structure of the two brands is built, Justice would say, in such a way that any kind of competition between the two brands or any kind of innovative new products are stifled.

VAN SUSTEREN: Steve, is there anything wrong with the banks telling them not to deal with -- member banks -- telling them not to deal with American Express and Discover?

COSSACK: Or you won't be able to deal with us -- that's the comma end of it.

BERK: It's a pretty close call, Greta. It really is. I mean, if you're telling companies that you cannot deal with and even negotiate with competitors of ours, that could be a potential problem. But they're going to have to prove that, and they're also going to have to prove some harm to the consumers, which is really, you know, the essence of an antitrust case. I mean, the antitrust laws are the government saying, we're going to protect the consumers by these laws.

FRANKEN: The government also gets into the "smart chip" aspect. These are the very sophisticated credit cards. And the government says that MasterCard and Visa agreed not to develop that technology, stifled innovation as a result, and that it's only now coming out through American Express. And the government, of course, says that's collusion which, in fact, did harm the consumer, they say.

COSSACK: I just want to say, Kevin, but isn't it a fact -- is in Microsoft one of the things that the government was successful in proving was that, one, that Microsoft acted in a way somewhat like they're alleging Visa in doing -- MasterCard and Visa in doing, and they said the competition was -- we can't show you that there wasn't innovation done, but we can show you that there was not innovation being done, and therefore we can imply that things were stifled?

ARQUIT: Well, huge differences between this and Microsoft. I mean, in Microsoft, when you turn on your PC, you've got one operating system. Here when you open your purse or wallet, you've got any number of choices of credit cards; you've got cash or check with which to make a purchase.

But the fact of the matter is, in going to this whole smart card issue, what the evidence will show there -- this is all stuff from 10 years ago, by the way. If the government's got such great stuff, why did they wait 10 years -- all this stuff way back over a decade?

But on the smart card, there'll be a study that's shown MasterCard did long before this lawsuit was ever considered that suggested it would cost a billion dollars to develop it; it would take at least 10 years before it turned a profit. That's not a good business proposition. That's why there wasn't a smart card at the time. Amex, American Express, tried to develop a smart card. Their head guy, Harvey Golub, says over 300 experiments, none of them has turned a profit. So that's the reason that up until now you haven't seen a lot of smart card presence.

VAN SUSTEREN: We're going to take a break.

Up next: With all this talk about monopolies, duopolies and competition, what will it mean to the U.S. consumer? Stay with us.


For the first time ever, an African-American man will be the foreman of a grand jury impaneled in California's Orange County. With three Latinos and two Asians on the panel as well, it is the most racially diverse Orange County grand jury in years.



COSSACK: Good news for our Internet-savvy viewers: You can now watch BURDEN OF PROOF live on the World Wide Web. Just log-on to We now provide a live video feed, Monday through Friday, at 12:30 p.m. Eastern time. And if you miss that live show, the program is available on the site at any time via video-on-demand. You can also interact with our show, and even join our chatroom.

VAN SUSTEREN: The Justice Department is suing Visa and MasterCard, claiming the credit card companies are squeezing out competitors with their marketing campaigns and keeping options out of the wallets of the American consumer. But the credit card companies say consumers have thousands of choices in cards, with varying interest rates, and some with no annual fees.

Dan, Kevin says that there's lots of competition, lots of card, Steve says this isn't about interest rates on credit card. Why should I care as a consumer? what difference does this lawsuit make to me?

CARNEY: Well, an interesting way of looking at it is comparing it to the automobile industry, and the argument here is that maybe there are lots of dealerships, but there is only two basic products they have to offer, and Justice would say they are kind of like the Ford Taurus and the Mercury Sable, they are basically two sides of the same coin.

If Justice wins, the argument is that there will be a lot more, not just dealerships offering cars, but cars themselves.

VAN SUSTEREN: Yeah, but the way it seems to be set up, there will be more Ford Taurus types out there. I mean, there will be more credit card, so my wallet will be six inches fatter with 10 more card, you know, big deal. I mean, like, how does it really affect me in terms of money? I mean, does it really make a difference to me as a consumer? CARNEY: Well, long-term, I think this is more really about debit cards than credit cards in a way. There already is some competition between the various credit card makers. What American Express would like to do is form relationships with banks, and one of the things this would do it would allow them to do debit cards. They can't debit cards very well now because they don't have bank accounts.

VAN SUSTEREN: Kevin, let me interrupt for one second, which raises another issue, is that it isn't just the Justice Department going after these credit card companies, the retailers have filed a class-action dealing with these debit cards. Is that something that is going to more directly impact the consumers?

ARQUIT: The -- well, there is another lawsuit that has been brought by the retailers, but the fact of the matter is what they challenge is something called an "honor all cards" rule. If you walk into a store with a MasterCard, you have seen the logo outside, you want to be able to use your card, and you don't necessarily want to decide whether it is a credit card, a debit card or from a particular issuer, you need to know you can use your card. And MasterCard has a rule that requires the store to honor that. That is what that lawsuit is about, but it is a different one from what the Department of Justice is bringing.

COSSACK: Kevin, how do you respond to the allegation that Visa and MasterCard stop other credit card companies from making -- having relationships with banks? Isn't that a direct consequence to me as a consumer?

ARQUIT: What -- again, you have to look at what the reality is versus the allegations. This is what American Express has said in their years of lobbying to get the Justice Department to bring this case. But the fact of the matter is, Roger, that when you look at how credit cards are actually issued, over 85 percent of them are done by the mail, OK? And American Express has the same access to the consumers' mailbox as does Visa or MasterCard. Something like only six percent of the cards are issued by banks where people actually hold their account. So this is really a red herring.

What American...

COSSACK: You are not saying there is no benefit in having a bank -- having a relationship with a bank, then, are you? I mean, that is not your argument.

ARQUIT: No, no, not at all.

COSSACK: So there is a benefit. So then, if you deny that benefit to another company, aren't you denying them something that would help the consumer?

ARQUIT: American Express, for years, bragged about the fact that they didn't distribute through banks, and they let MasterCard build up its network, spent tens of millions of dollars, and now that someone has built the house and paid the mortgage, now American Express wants to move in. But the fact is, it doesn't hurt them anyway because there are thousands of other banks out there that are not members of either MasterCard or Visa, and the fact of the matter is that most cards are distributed through the mail anyway.

VAN SUSTEREN: You know, it is funny, Kevin, that the 18 percent interest on many cards is what sort of sticks with me, which you know I will get back to you -- not all of them are 18 percent either. But let me go to Bob.

Bob, you were in the courtroom yesterday. Tell me, is this a judge- decided case, and not a jury, and how much interest seemed to be by the public?

FRANKEN: Well, first of all, yes, it is a judge-decided case, just like Microsoft. There is no jury, and it is a good thing because this is going to get highly technical before it's all over.

Secondly, the courtroom was packed. There is considerable interest in this because, like Microsoft, this is not just about some arcane legal concept. This is about something that affects just about everybody in the United States. Credit cards have become an absolutely essential part of our society.

VAN SUSTEREN: That's what I'm not -- that's what I still don't get, how that affects everybody in the United States. If it's not going to affect my ability to go in and shop, and if it is not going to change the interest rate. I don't get...

FRANKEN: Here is the fundamental argument, and it was articulated this way in court. On the one hand, you had the government saying, forget about for the moment the American Express experience, that since the banks can decide what innovation is out there, some innovation may be limited. They discussed the smart chip. And the bank cards, that is to say Visa and MasterCard, decided, for whatever reason, that preferable was the magnetic stripe, that it in fact did the job.

Now, on the other hand...

VAN SUSTEREN: Strip versus chip. Big deal. I mean, that's the way I feel. Is there a reason I should care?

FRANKEN: You are right, except for the fact that decision was made by the people that the government argues were doing it for their interest as opposed to necessarily the consumer interest.

On the other side, was the argument that in fact there were very good, solid business decisions that went into this decision, and that it would have come out this way whether or not there was this dual operating system.

COSSACK: Kevin, isn't that sort of the Microsoft argument, that innovation has been stifled by the ability of these two companies to control the way this product progresses? ARQUIT: That's what the government alleged, and there, of course, since there is the one operating system, and it hasn't developed that much over the past several years, it's a pretty good argument. Here you have seen all kinds of innovation, and in fact competition particular Visa and MasterCard. For example, MasterCard decided to have the first joint calling card and credit card with AT&T. That is something Visa had no interest in. MasterCard went out and did that. American Express turned down the opportunity to do it.

COSSACK: What is the relationship between Visa and MasterCard, don't they have some interlocking members on their boards?

ARQUIT: No, that is not true. What they do have, Roger, is that they have the same member banks, the same financial institutions own Visa and MasterCard to a large extent.

VAN SUSTEREN: It's a pretty cozy relationship.

COSSACK: So the profit goes to the same person.

ARQUIT: No, because there is no profit. This is a not for profit. And the government doesn't challenge that.

COSSACK: I need to figure this one out, this not for profit.

VAN SUSTEREN: I have yet to figure this out, but I got to tell you, the fact that the consumers still pay this high interest rate, I don't care whether we have strips or chips, or whatever this is, the bottom line is it doesn't seem to, you know, the consumers are still paying a lot to borrow money off these credit cards, at least I think so.

ARQUIT: I just want to clear up one thing, the government's expert in this case has already testified that the fact of the joint ownership and the joint issuance is actually pro-competitive because it allows each bank to trade off the two associations so they get the best products and services and they have the choice between the two.

What the government is challenging, as Bob was saying, is simply the fact that some of the board members actually issue a large number of cards of the other association. That's the extent of it.

COSSACK: All right, let's take a break.

Up next, a look at how long this trial will take, and how will a judgment affect the marketplace? Stay with us.


Q: On June 13, 1967, President Johnson appointed Thurgood Marshall to the Supreme Court. Whose seat did he fill?

A: Retiring Associate Justice Tom. C. Clark. Thurgood's nomination was confirmed by a vote of 69-11.


COSSACK: The nation's two largest credit card companies are being sued in federal court by the U.S. Justice Department. Government lawyers say Visa and MasterCard, both nonprofit organizations, have negotiated deals with U.S. banks, which keep competitors out of the market.

Well, Steve, now you're going to prosecute this case...

BERK: Right.

COSSACK: ... on behalf of the Justice Department. How do you go about doing this? Do you start with the depositions? What do you have to show immediately?

BERK: Well, you know, you have to make it a compelling story. I mean, even though it's a bench trial, you really have to make it compelling. And that's sort of the first job of the prosecutor.

VAN SUSTEREN: How about simple?

BERK: And simple, that's true, compelling and simple. And what you've got to be able to say is: Look, if these two entities did not conspire, or there was not this duality, or there was not this collusion, we would have had a flowering of different companies, different services, different things that would have benefited the consumers. But you then have to back that up, that fluff up with some real substance to it.

COSSACK: That's almost impossible, because you have to prove the negative.

BERK: Well, that's why, Roger, in these cases, it's really a battle of experts. I mean, you get some really smart people that know these industries quite well. And you trot them out. And you try to get them to show what could have been if there wouldn't have been this situation, and what will there be if there's a...

COSSACK: Oh, what could have been.

BERK: ... what could have been and what will there, you know, what will be if, in fact, there is some of resolution in favor of the government.

VAN SUSTEREN: Dan, we're seeing a real aggressive Justice Department, at least with Microsoft, and we have a Democratic administration. We don't know what's going to happen in November. But frankly, looking at this, I see sort of the tip of the iceberg.

Do you think, if we have another Democratic administration, that banks may be next as sort of in the line of fire?

CARNEY: Well, Justice already has so many things on its plate, it's hard to think of them coming up with new cases. They've got five major cases going to trial in the next year or so -- or actually four or five have already been to -- one's already been to trial, Microsoft.

I think they've got more than enough to handle right now.

VAN SUSTEREN: Do you disagree with me, though, about whether this is really a credit card, or if this is really a bank issue. Which is it?

CARNEY: Well, it's both, really. But if you're going to go after banks, you know, which ones are you going to pick? Are you going to sue every single bank that issues a Visa or MasterCard? Are you going to selectively choose some of them? It quickly gets out of hand.

COSSACK: Kevin, I know there's probably a real obvious answer for this, but can you explain to me how these companies or these corporations are non-profit? Where does this nineteen percent interest go?

ARQUIT: Well, you see, it's each bank that actually issues the card. And so when it sets the fee and it sets the interest rate -- and some cards come out of course with no interest rate for an introductory period -- that all goes to the banks. It's not as if there's a profit...

COSSACK: The issuing bank?

ARQUIT: The issuing bank; it doesn't go to MasterCard. And that's the difference between that and American Express, which is a for-profit company, which tries to get money so that it can pay its shareholders. This is, these are...

COSSACK: Well, these banks are getting profit to pay their shareholders?

ARQUIT: Yes, sure, the bank is, but the association isn't. The association is the railroad, the network through which all this runs. And it's the banks that actually set the terms for the card.

VAN SUSTEREN: Bob, in the 20 seconds we have left, what -- give us the progress. How long is this going to take?

FRANKEN: Well, they say it takes four to six weeks. And I have a rule that you should always count on at least twice as long as they say. So figure two to four months.

VAN SUSTEREN: And that's because it's the lawyers that are doing the saying, and you don't like lawyers, right?

Anyway, that's all the time we have for today. Thanks to our guests, and thank you for watching.

Tonight on CNN "NEWSSTAND," "The Boss" is taking on "The Man" in New York City; a controversial song by rocker Bruce Springsteen has Gotham City police pushing for concert boycotts. That's at 10:00 p.m. Eastern time. COSSACK: And today on CNN's "TALKBACK LIVE," the case of a 13- year-old boy accused of killing his teacher after being sent home for throwing water balloons. That's at 3:00 p.m. Eastern time, noon Pacific.

And we'll be back tomorrow with another edition of BURDEN OF PROOF. We'll see you then.



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