The U.S. credit card industry is not only a big $800 billion business, it's also a dirty business. The stakes are high and the payoffs mind-boggling. Last year the industry collected $75 billion from consumers in the form of interest and fees and about $16 billion from merchants. After it was all said and done, the players divided up about $12 billion in pre-tax profits.
This year the industry is a little sluggish as card issuers have tightened up credit standards and consumers have slowed down a bit. Even though the industry will write-off close to $20 billion this year in bad debt the profit pie should still be about the same as last year's.
When there is this kind of money on the table the lawyers are not far behind.
American Express, which has been struggling through most of the 90s to maintain its marketshare, extended an invitation to bankers six months ago to issue American Express alongside their VISA and MasterCard products. But VISA and MasterCard have rules and regulations that prevent its members from issuing competitor's cards, specifically cards from American Express and Dean Witter, Discover & Company. The rules have been around for many years and have not been much of an issue because American Express and the Discover Card people were not interested in having banks issue their products. They always wanted the whole enchilada. Both firms directly issue cards to consumers and have built their own merchant networks. By contrast VISA and MasterCards are associations with thousands of card issuing members and merchant bank members.
In some ways AmEx and Discover wanted more than the whole enchilada. Four years ago Discover tried to sneak into VISA's system and issue VISA cards too. After being caught, Discover cried foul claiming VISA was restricting competition by keeping them out. The result was a very expensive anti-trust trial which Discover ended-up losing. American Express was not a part of the Discover-VISA litigation but its lawyers attended the trial everyday taking lots of notes.
As the card industry reached maturity during this decade it became a challenge to grow. VISA and MasterCard issuers began competing fiercely with one another, creating irresistible offers: low interest rates, no annual fees, rebates, etc. As a result they attracted some cardholders away from American Express and Discover.
Frustrated, American Express decided to compete more aggressively by offering more credit cards, lowering fees and forming marketing partnerships. Likewise Discover launched new cards such as Private Issue and Bravo in response to the competition.
But VISA and MasterCard members were growing much faster in credit cards and were positioning themselves to capture even more transaction volume by displacing checks and cash with debit cards and smart cash cards. Since all VISA and MasterCard issuers are financial institutions, they can conveniently expand relationships with customers to offer these new products. At this point in time the payment card future for American Express and Discover does not look so bright.
So last May the head of American Express extended the invitation to bankers to issue its products too. Realizing VISA and MasterCard's rules would be a barrier, AmEx started a worldwide PR campaign to expose the rules as anti- competitive. AmEx also complained to legislators, regulators and federal investigators. Consequently the Department of Justice has now opened an investigation into VISA and MasterCard's bylaws. Regardless of the outcome most bankers have already made it clear they have no desire to issue American Express or Discover cards.
Another legal battle is brewing over the use of the term "platinum card". American Express has issued a high-end platinum card, with a $300 annual fee, for many years. This year two major VISA and MasterCard issuers, namely MBNA America and First USA, decided to launch a very high credit limit card and call it a platinum card. Although the two bank card versions of the platinum cards are not in the same league as the American Express product, both issuers have been very successful, issuing about 1.6 million platinum cards so far. But American Express didn't like what it was seeing, cried foul and had its lawyers sue First USA for trademark infringement. VISA then decided it would challenge American Express on behalf of all its members.
American Express made the same claim several years ago over use of the term "gold card" and lost. Furthermore American Express did not challenge First National Bank of Omaha's long-term use of the term "platinum". Perhaps American Express should move on to the "Titanium Card".
The most recent litigation comes from Wal-Mart and The Limited over the acceptance of debit cards. Both firms filed suit against VISA on behalf of all retailers. Their beef is VISA credit and VISA debit cards should be treated differently. Furthermore they want the right to decline VISA Check cards (debit cards) while accepting VISA credit cards. Like all merchants Wal-Mart and The Limited have to pay a fee on each card transaction. Under current pricing the merchant fee for VISA Check cards is slightly less than VISA credit cards. Both retailers want merchant fees on national debit cards reduced significantly since they typically pay very small fees to accept other local or regional debit cards.
In the debit world there are two kinds of cards. Off-line debit cards, such as VISA Check cards, behave very much like credit cards except the transaction is debiting a depository account instead of a credit line. Essentially off-line debit cards create an electronic check which takes the normal float period to clear. There are no PIN numbers required to use such cards. From a consumer perspective, at the point-of-sale, there is really no difference between credit cards and off-line debit cards such as VISA Check. However on-line debit cards directly access a depository account, require a PIN number and provide same day settlement. While VISA and MasterCard have on-line cards they do not carry the VISA and MasterCard logo. Most on-line cards in use today are nothing more than glorified ATM cards with the logo of a local or regional system such as MOST, NYCE.
Merchant fee pricing is probably the only real issue in this litigation. If by some miracle retailers prevail on the issue of the right to accept or deny different card products under the same brand name it will have far reaching implications.
Who's next in the "Who Sued Who" column ?
Who knows.
As long as the credit card business throws off juicy profits there will be plenty of lawyers chasing the golden goose.
