Credit card conspiracy?

Joe Klein of the Justice Department is at it again, striking out at
successful businesses while claiming to be protecting the public. As the
man behind the attack on Microsoft, he now claims the market can’t be
trusted to handle credit-card distribution either.

His target this time is the supposed monopoly held by Visa and
MasterCard. Together they comprise 75 percent of the market, a share
that has fallen over the decades as American Express and Discover have
made some inroads. But because of Amex’s higher fees for retailers, its
18 percent share has slipped of late. So Klein wants to take a baseball
bat to Visa and MC, saying they have stifled competition, innovation,
and consumer choice.

As with Microsoft, Klein’s claims are absurd. Never have banks issuing
credit cards comprised a larger share of the junk-mail market. Consumers
with good credit can receive a solicitation a day offering lower rates,
larger credit limits, bigger cash advances, and ever more perks
(frequent flyer miles and insurance and other financial services).
Owning and using a credit card is cheaper than it’s ever been. For
example, anyone paying a fee to use one isn’t being a careful shopper.

As for innovation, it’s for consumers to decide which gizmos they want
and do not want on their credit cards. The “smart card” beloved by
government bureaucrats hasn’t caught on. It’s not Klein’s place to say
it should have. Besides, if government were in charge, we’d all be using
the stupid card. Klein also complains that secure web ordering isn’t
developing. Is something wrong with the Justice Department’s net
connection?

As for competition, Klein admits there’s plenty of competition between
banks issuing Visa and MasterCard. What’s lacking is competition between
these two companies, he says; they are conspiring to crush rivals in the
bank market.

But he has a strange definition of “competition,” by which he seems to
mean prevailing market share (and he gets to define the market). The
competitive process reflects consumer preferences and entrepreneurial
skills, and thus shifts over time. For example, Diners Club was the
original credit card and held 100 percent of the market. Now it holds 1
percent. You cannot measure competition as you measure temperature.

What government officials call collusion is actually imitation. Visa has
an effective formula for success, and MC has long shown a facility for
riding its coattails. Indeed, the companies share interlocking boards.
But many retail companies (particularly in groceries and clothing)
produce identical products under different names to maximize market
share. Klein implies that should be prevented.

Klein responds that Visa and MC have intimidated banks, threatening to
withdraw their business if banks flirt with other companies. Think about
it: if the consuming public were to shift away from the old standbys to
new cards, would banks sit by and lose profits? Not a chance. They would
be begging to issue the new cards. In the meantime, Visa and MC are
compelled to offer better and better services by the mere threat of new
entries into their traditional market.

The idea that competition is lacking in credit is as preposterous as the
idea that it’s lacking in software. Besides, why limit the analysis to
credit cards? They not only compete with each other, but also against
cash, checks, debit cards, and cards issued by retailers.

In the course of the investigation, the Justice Department will produce
a flurry of memos from bankcard executives saying nasty things about the
competition. These will be cited as evidence of an emerging cartel, when
they are only evidence of intense rivalry.

There’s a seedy underside to this Justice Department suit. It turns out
that the Clinton administration is complaining about nonexistent
conspiracies while erecting its own. Amex, whose executives are thrilled
with the attack they call “a major step,” is working closely with the
government on the case.

The entire lawsuit was initiated by a complaint from Amex two years ago.
Indeed, Amex is to Visa as Netscape is to Microsoft, another case of a
politically connected company colluding with the government to garner
legal privileges. Instead of changing its credit terms and managerial
strategy to compete, Amex has been spending the last 24 months demanding
government intervention in its favor as its market share has slipped.

There is a special place in Hell reserved for once-successful businesses
that connive with the antitrust department to kill free enterprise. But
the ultimate blame should go to the Clinton administration for
prosecuting absurd cases to benefit its special interests. As usual, the
government isn’t helping consumers; it’s protecting firms popular in the
Oval Office.

If the lawsuit is successful at compelling banks to deal with Amex and
Discover as a condition for issuing MC and Visa, banks will attempt to
pass on the new fees to retailers and retailers to consumers. The market
for consumer credit will be hampered, which can only make the consumer
worse off, as government intervention always does. The Justice
Department is the real monopoly that needs to be prosecuted.