Feds Sue Visa And MasterCard

Visa and MasterCard are stifling product innovation in the credit card industry, the Justice Department charged Wednesday in a suit filed in a federal court in New York.

The allegations against the two largest credit card companies respond to complaints brought by rival American Express (AXP) more than two years ago. Shares of American Express, a component of the Dow Jones Industrial Average, gained nearly 3 percent after trading was briefly halted as the suit was announced. Morgan Stanley (MWD), owner of the Discover card, fell 1 7/16 to 40 1/4.

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The suit charged Visa and MasterCard - which are cooperatives owned and managed by the biggest U.S. banks - with refusing to compete against each other and with killing off competition in the industry by refusing to let their member banks issue American Express, Discover or other credit cards.

Banks that issue Visa cards are allowed to issue MasterCard cards and vice versa.

"These two groups .. really don't compete with each other," said Assistant Attorney General Joel I. Klein, who heads the Justice Department's antitrust division.

"America's consumers have lost out," said Attorney General Janet Reno, who said the lack of competition had delayed new products, such as smart cards or secure Internet transactions, by up to a decade.

The Justice Department isn't charging the two companies, which control about 75 percent of U.S. credit cards, with forcing consumers to pay higher prices. "Interest rates are set by member banks," Klein said.

Klein said the two companies had admitted to the lack of competition in sworn statements or communications with the government. He quoted one MasterCard executive as saying, "MasterCard and Visa simply do not 'compete' in any conventional business sense."

Klein said the government had not fully fleshed out its proposed remedy. He said a trial is probably a year away, depending on the schedule of U.S. District Judge Milton Pollack. The government isn't seeking a preliminary injunction.

Klein said antitrust regulators in Europe, Canda and South America have blocked Visa and MasterCard from imposing the "do-not-compete" rules in their markets, with the result that the two companies aggressively target each other in their marketing.

Written By Rex Nutting, Washington bureau chief for CBS MarketWatch