Credit card ruling ripples

The big boys in the credit card business, along with the federal government, have been engaged in a multi-year court battle. But guess who comes out the big losers in the end? That’s right, consumers and small businesses.

It started in 1998 when the U.S. Department of Justice sued Visa and MasterCard for supposedly anti-competitive behavior. It seems that the government didn’t like that Visa and MasterCard would not allow their member banks to issue other cards, like American Express or Discover, for example.

Was there some kind of outcry from consumers that drove the government to action? After all, antitrust law is supposed to protect consumers. No, it wasn’t consumers. Nonetheless, perhaps there was something grossly anti-competitive in the marketplace? Well, that would be hard to say given that consumers have so many payment options, including a flood of credit card offers with varying credit lines, terms, fees and incentives from seemingly countless banks — competitors like American Express, Optima, Discover, Diner’s Club, and retailers with their own credit cards, not to mention debit cards, checks and, oh yes, cash.

For good measure, there’s nothing unusual about this relationship between Visa, for example, and its member banks. It seems obvious that such a partnership would be exclusive. It’s similar to Coca-Cola not allowing its distributors to also sell Pepsi. Besides, no bank was forced by law or at gunpoint to join with Visa or MasterCard.

Contrary to the formidable evidence of a vibrant and competitive market, the court ruled in favor of the government, requiring that Visa and MasterCard allow member banks to issue competing cards. In early October, the U.S. Supreme Court refused to take the case, and thereby allowed the lower court ruling to stand.

So, who really benefits? Well, it is illuminating to note which companies have now brought lawsuits. In October, Discover Financial Services sued Visa and MasterCard for damages, and American Express followed on November 15 with a case against Visa, MasterCard and eight banks for so-called anti-competitive behavior. As so often is the case with antitrust, this wasn’t about consumers, but about competitors using the government to gain ground in the marketplace.

Meanwhile, the court mandate for Visa and MasterCard to allow banks to offer other cards easily could translate into higher fees for merchants. After all, if Card Issuer A cuts a more lucrative deal with a bank at higher fees, then wouldn’t that bank have an incentive to push more customers to Card Issuer A and away from the lower priced transactions charged by Card Issuer B? Wouldn’t Card Issuer B be compelled to raise its fees and provide a bigger chunk to the bank? Meanwhile, the merchants, including countless small businesses, would face higher costs.

Now add in the potential of billions of dollars being awarded in the lawsuits brought by Discover and American Express. If Visa, MasterCard and the banks lose, those costs will be passed along to merchants and consumers.

This case, along with countless others, point to the need to dramatically reform the nation’s antitrust laws. Particularly with the changes we’ve seen in our dynamic economy in recent times, rethinking is needed regarding antitrust in areas like properly defining markets, protection of intellectual property, mergers and acquisitions, and issues of joint ventures, alliances and exclusive dealings, as in the Visa/MasterCard case.

When such partnerships in the marketplace are deemed to “lessen competition,” they are prohibited by law. However, this vague and arbitrary “lessen competition” guide can be exploited by competitors. As a result, productive alliances that help consumers and the economy can be lost due to legal action and significant damages.

In so many ways, our nation’s antitrust laws not only are antiquated, but are abused to the detriment of consumers, entrepreneurship and economic growth. Too often, government antitrust bureaucrats, lawyers and judges forget that, in the end, consumers decide what ventures succeed and which ones fail in the marketplace. Consumers have the ultimate power, and that power should not be overridden by government antitrust actions.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.