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Credit Card Ethics

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On October 7, 1998 the Department of Justice announced it's intent to sue Visa and MasterCard on antitrust grounds. U.S. Attorney General Janet Reno said, "The Justice Department's antitrust division found persuasive and systematic evidence of the harm done to competition in the credit card market. Competitive initiatives that could benefit consumers have been abandoned, delayed or suppressed. Consumer choice has been reduced, and competition among card networks has been substantially restrained"(American Express Company, 2000, 1).

The suit is being issued by the DOJ, but clearly being driven by American Express and Discover respectively. These companies, the two remaining credit card brands that make up the main players in the industry, have much to gain in a judgement against Visa and MasterCard. To understand the issues, and stakes a basic understanding of the current industry structure is necessary.

Visa and MasterCard are non-stock, not for profit membership corporations owned by thousands of diverse financial institutions (i.e.- banks, credit unions etc.). The Visa association was formed by a group of American banks in the late 1960's to assist its members in issuing general-purpose payment cards and signing merchants to accept those cards (Allen, 2000, 2). Visa and MasterCard are considered to be an "open" or joint venture relationship with each other and their association members. In essence, this means any financial institution may join the Visa and MasterCard associations assuming they can meet certain capital adequacy requirements, and comply with certain association rules. In return, Visa and MasterCard provide essential functions to the member banks. They license their members to issue Visa and MasterCard branded credit and debit cards, sign members to accept those cards, market the cards to ensure brand recognition, develop new card products and services, and provide an infrastructure of communications, processing, authorization, and settlement functions necessary for the system to operate. Together Visa and MasterCard account for almost 80% of the overall market share in the credit card industry.

Unlike Visa and MasterCard, American Express and Discover are not joint ventures, but are investor-owned, for-profit corporations. They issue all of their respective brands' cards and they alone determine the pricing and other features of those cards (Allen, 2000, 2). In addition they perform all of the functions Visa and MasterCard perform relating to marketing, developing products and services, and maintaining an infrastructure necessary for running a card network. These networks, in conjunction with the Department of Justice, are attempting to change certain rules enforced by Visa and MasterCard that they deem illegal, unethical, and restrictive of competition. By it's very nature; violations of antitrust laws would be deemed unethical business practice. Therefore determining the guilt or innocence, with respect to antitrust violation, should effectively gauge the behavior involved.

The overriding issue is the legality of a Visa and MasterCard policy whereby, any member institution cannot issue American Express or Discover cards if they also wish to be a Visa/MasterCard issuer. However, at the same time no such restriction is placed upon a member banks ability to distribute Visa if they are a MasterCard association member or MasterCard if the Issuer is a Visa association member. Keep in mind, that Visa and MasterCard consider themselves separate entities competing for the same market share and the favor of the same card issuing institutions. Therefore, Visa and MasterCard effectively allow all financial institutions to conduct business with each other but not with the American Express and Discover networks. The DOJ, as previously stated, sees this as a breach of anti-trust legislation and a violation of the antitrust legislation they are obligated to enforce. For over six decades, the mission of the Antitrust Division has been to promote and protect the competitive process- and the American economy- through the enforcement of the antitrust laws (United States of America Antitrust Division Overview, 2000, 1).

These ethical ramifications go hand-in-hand with the legal determination of guilt or innocence on the part of Visa and MasterCard. Is Visa and MasterCard responsible for developing and perpetuating unethical business practices? American Express believes this is ".... A classic case of two organizations --Visa and MasterCard-- working together to restrict competition in the market." Both organizations have devised rules that lock banks into their networks and lock out competition with their bank payment card system (American Express Company, 2000, 2). The defendants, on the other hand, believe competition is thriving under the current system. Visa, MasterCard, American Express, Discover and the Department of Justice are the obvious stakeholders. However, additional stakeholders exist who have much to lose. The average consumer using credit cards as a form of payment in everyday life, and the hundreds of thousands of merchants accepting credit cards, on a daily basis, also have a major interest in the outcome of the lawsuit in question. This is an issue wherein each stakeholder clearly maintains vastly different points of view. I will attempt to clarify the differing views each of the stakeholders has.

Visa and MasterCard share a common perspective for the most part so I will discuss their stakeholder position together. To them this is an issue of whether or not the consumer has been adversely affected by the existing industry structure. They argue that some 7,000 U. S. card issuers exist today, and that competition is thriving. Paul Allen, Executive Vice President and General Consul for Visa U.S.A., Inc. says, "...thousands of Visa member banks issue Visa cards in competition with each other, with MasterCard issuers, and with the proprietary brands, American Express and Discover" (Allen, 2000, 2). They claim competition is fierce and point to the fact mailboxes are constantly stuffed with credit card applications around the country. David Evan from the National Economic Research Association states, "The Visa and MasterCard associations have played important roles in promoting and ensuring competition in the credit-card industry. Almost every financial institution can join Visa and MasterCard and issue credit cards. Members compete with each other in every dimension that is important to consumer's" (Evans, 2000, 1).

American Express and Discover have similar views and desires from a stakeholder perspective, but also differ slightly. They would both like to see the bylaws forbidding Visa/MasterCard association members from issuing Discover or Amex cards abolished. They have both championed



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