A Discover Visa card combination almost made its way into the U.S. market a little more than 25 years ago. To understand the history of how this nearly happened let’s refresh your understanding of the basics of the credit card industry.
The U.S. general-purpose bank credit card market consists of four major brands and thousands of issuers. There are of course millions of other limited-use credit cards or retail and commercial cards used in stores, gas stations, etc. As well as special-use cards linked to commercial purposes, access to health lines of credit or insurance benefits, etc.
There are also four primary types of payments cards: credit cards, debit cards, prepaid cards and charge cards. As a result Americans have the choice of paying for purchases immediately as with a debit card, or in advance as with a prepaid card, paying in-full with a 30 to 60 day window as with charge cards, and paying over time as with a credit card.
Most consumers in the U.S. basically understand the types of cards and major brands or networks, and are generally familiar with wide range of choices.
However, many credit cards today, not just store or gas cards offer additional ways to pay over-time, for example you could designate the purchase as part of your credit line, or you could designate a period of time you want to spread the purchase, usually major purchases, similar to an installment account repaid in equal aounts.
Eventually you’ll be able to do make purchases and decide how to pay them all on one card. It’s all technically possible now to offer this type of solution and in fact there are apps available enabling you do this in an indirect way.
Layer on top of all this cards offering special benefits like discounts, points, miles and cash-back. We’ll explore this big area more fully in anther episode.
The point of today’s discussion however, are the brands or major networks, namely Visa, Mastercard, American Express and Discover. Is there a difference among the four? Definitely.
First is acceptance, which simply means how many places you can use these four cards. Visa and Mastercard are accepted universally in the U.S., however overseas there are countries where a Visa or a Mastercard may be more widely accepted than the other. In the U.S. American Express and Discover are widely accepted but not universally accepted by all businesses. Outside the U.S. ,America Express acceptance is very strong and Discover is very weak.
In a nutshell you could probably say Visa and Mastercard are truly global cards, American Express is more of an upper class domestic and international card, while Discover is more of a domestic card for the working middle class. It should be noted Discover also owns the Diners Club network which helps to broad international acceptance.
Also, there is one more big differentiator. Visa and Mastercard are payment networks and do not issue cards to consumers, as all their products are issued by banks or financial institutions.By contrast American Express and Discover are both. They are payment networks but they also issue nearly all of their card products directly through their own financial institutions, but also through partnerships with other banks or financial institutions.
Again these are big areas we will explain in more detail in future episodes and why you as a consumer might prefer one brand over the other.
Let’s talk about potential mergers between the brands or networks.
In the U.S. Visa and Mastercard capture about 76% of payments volume among the top 4, Visa at 53%, Mastercard around 23% with American Express around 20% and Discover approximately 4%.
At one time, there were rumors Mastercard and Discover were exploring a merger or a merger between Visa and American Express which would help close the gap in market volume in the U.S. between Visa and Mastercard.
Any merger with Discover by Mastercard would not really be meaningful but a merger with American Express would be very significant closing the market share gap between Visa and Mastercard to about 10% in the U.S. Globally, Visa has about a 60% share and Mastercard abut 31%, and American Express about 8%. such a merger would close the gap to about 20%.
Additionally, Mastercard is growing at a much faster pace than Visa in nearly all regions and especially in the U.S.
Further fueling the speculation is Mastercard would less likely run into market power objections in the U.S. for any merger. But there could be regulatory resistance.
Regardless some kind a merger could emerge in the next year or two.
Discover Visa Card
But did you know that Discover tried to become a Visa issuer with plans to issue a card nationally?
Let me share with this story in which I was deeply involved.
In 1992, Visa requested I testify in a major antitrust lawsuit filed against them by Discover which was Dean Witter at the time. Discover bought a bank in Utah, Mountain West Financial, which owned a Visa issuing license. Under Utah law, all assets, including licenses at the time, would flow from the existing entity to the acquiring entity.
So Discover made plans to issue a national Visa card. They prepared all the promotional materials, applications, etc. to launch the card quickly. Fortunately a Visa clerk in the backroom uncovered documents being filed with Visa by Mountain West Financial, linking it back to Discover or Dean Witter
Visa was furious, as by all appearances Discover was trying to sneak into the back door to issue cards on its network. If Discover had been successful, it could have exploded their acceptance network from less than a million merchants to more than four million overnight. A process taking Visa decades to build.
With Visa uncovering the scheme and blocking it, Discover filed an antitrust lawsuit in Federal Court in Salt Lake City, asserting Visa was stifling competition and using its market power to prevent Americans from saving with a less expensive card offering more benefits.
Visa knew I had the in depth research and understanding regarding pricing and current market competition as well as the national credibility to support their contention such a Discover/Visa card would have not have the effect Discover claimed it would have on the market.
Visa contacted me and offered me three choices: testify as a highly-paid expert witness, testify for expenses only, or be forced to testify. I chose door #2 to testify for expenses only, as both Discover and Visa were subscribers or clients of my business. Furthermore it would go against my impartiality status as a independent third-party provider of market intelligence and surveillance.
Understandably this had great weight to my testimony.
Discover was rattled and dispatched their most senior lawyer representative from Kirkland & Ellis, one of nation’s top law firms, to depose me for eight solid hours. This was only the second time I was ever deposed. The first time it was for a workmen’s comp claim regarding a job-related injury and involved around $80,000. It was a piece of cake – took about an hour and simply stated the facts.
However, this deposition involved $2 billion in potential damages. My deposition took more than eight grueling hours and covered just about everything and anything, personal or professional, that could potentially be used to undermine my testimony.
In preparation for the deposition it was clear to me their product was a middling among the cards currently available. Furthermore, Discover used an interest calculation method, called the two-cycle average daily balance method, which was complicated for consumer to understand but is terribly anti-consumer, in some instances doubling the interest charges for the account, unlike 95% of the cards in the marketplace. I, and most consumer groups, agreed this was far from a best practice.
Therefore, while the deposing attorney was hitting a brick wall trying to discredit my potential testimony, he was totally unprepared with the passion I displayed in the final two hours of questions. Even the Visa lawyers attending the deposition where blown away with how I systemically and completely dismantled every one of their arguments.
Leaving with his tail between his legs, It was abundantly clear to him why Discover knew I was a serious threat to their case. Discover executives were fuming and I suppose why in retaliation they cancelled all their subscriptions to my business services shortly after the deposition.
When the case began in Federal Court in Salt Lake City, I was the first of seven witnesses called by Visa. Visa had so many lawyers there they took over a complete hotel floor. Attorneys streamed in from other companies including American Express, which had no involvement.
As the trial began Discover presented its arguments via highly-paid expert witnessers with endless credentials in antitrust law, market power etc. Their parade of experts put the mostly Mormon working class jury to sleep, as most had no idea what was being discussed. Their last witness offered a complete course in economics and competition and made reference to what I heard as “intergalactic economics.”
After a short break it was Visa’s turn and I was their first witness, or star witness. I was totally intimated by the whole process: I never had testified before a jury, in a courtroom filled with the best legal minds in the U.S., with a media pool outside the courtroom and I had no college degree. Surveying the landscape I wondered what the fishing was like in Utah and how it would be so awesome to bring my sons there.
In my down-home country-boy style I explained I was not there to debate “intergalactic economics,” just to share my knowledge with exhibits and tell the truth. The jury became alive, laughing at my economics joke. Unlike all the testimony they had been subjected too.
In laying the foundation for my testimony the Visa attorneys asked me personal questions as they knew I was the married father with five children. I then offered surprise testimony as I had just found out earlier in the day my wife was pregnant with our sixth child. The jury perked up even more. They then learned that instead of going to college after high school I spent a few years in a volunteer missionary work. They started looking at each other, presumably thinking maybe was I one of “them.” I was not a Mormon.
The bond with the jury was being established but even more so when I presented exhibits explaining the wide variety of credit cards available in Utah at nearly all combinations of interest rates and fees. After establishing the local landscape I moved on to the national landscape.
Need I say, no one fell asleep during my testimony and the local press reported I had the jury on “the edge of their seats.” They fully understood my testimony.
On the second day of testimony I explained Discover’s interest calculation methods and its inherent unfairness to consumers. They obviously never heard of such a thing.
Unbeknownst to me at the time, the judge was apparently moved too by my testimony.
Following Visa’s six other expert witnesses who countered all the intergalactic economics testimony of Discover attorneys, the trial ended.
Despite Visa’s strong defense, the jury voted in favor of Discover, presumably influenced by Discover’s major presence including jobs with its largest processing center nearby.
However, while the jury voted in favor of Discover, the presiding Federal judge wrote in his statement he seriously considered setting the jury verdict aside largely based on my testimony. (This is rare in a Federal court case of this magnitude).
The case then went to the Federal appeals court in Denver where it was quickly and unanimously reversed in favor of Visa. Discover then took it the U.S. Supreme Court. The U.S. Supreme Court refused to hear the case, presumably based on the comments of presiding federal judge and the appellate court ruling. Therefore Visa prevailed and that is why the Discover Visa card never happened.
While I requested only expense money from Visa, they did invite me to various social and business events afterwards. I was also able to help them on some minor projects and of course they maintained their subscriptions to my business services. I already knew most of the PR staff but also knew the CEO(s_, who appreciated my advice on new projects or emerging projects.
As far as Discover is concerned – – -They later reinstated all their subscriptions and invited me to social events i.e. a celebrity art auction of Radio City Music Hall where my teenage son got to meet a few celebrities, including Kathy Ireland. They also hired me to help them improve their Diners Club marketing in the U.S. While I had some contact with the President of the Discover division, I never had the privilege of meeting the C-Suite executives of the parent corporation.
Obviously my story is sorta a David and Goliath type but it shows if you know your stuff all the paper credentials can be just window dressing. Also lawyers are highly trained professionals in their field but they also perceive honesty and passion when it appears.
For me, playing a major part in saving Visa $2 billion and keeping the market competitive and fair for consumers, was a satisfying personal experience.
In a final twist, I will share in a later episode, I ended up testifying against Visa in a $10 billion lawsuit brought by the U.S. Department of Justice.
By the way I never got to take my sons to Utah to fish.