The Bottom Line - Isracard's Credit Runs Out

Dror Strum finally declared the Isracard credit card company a monopoly for the Isracard and Mastercard brands.

Seven years after the Visa credit card market opened up the competition, the Antitrust Commissioner, Dror Strum, finally declared the Isracard credit card company a monopoly for the Isracard and Mastercard brands.

This was one of those cases where the regulator threatened for years to declare the company a monopoly in the hope that something might change, but in the end the antitrust authority realized that threats were not enough, that is was necessary to take action.

The credit card industry has been controlled for years by the three biggest banks: Hapoalim, Leumi and Discount. Seven years ago the business got a shot of adrenaline when the First International Bank set up in conjunction with Aurec the Alfa Card credit card firm with a franchise from Visa International.

The new card's entry into the marketplace breathed life into the two areas that produce the most revenue in the credit card business: revenues from credit card users, which include interest and fees; and revenues from businesses for clearing transactions.

Alfa Card didn't survive for long because Bank Leumi and Bank Hapoalim both defended themselves and responded aggressively to the newcomer by cutting prices. The result: Alfa Card disappeared and the market reorganized, with Leumi controlling its own Leumi Card Visa card; while Discount and the First International owned Visa Cal; and Hapoalim was left out of all the brouhaha, holding its own Isracard conglomerate.

The results showed up clearly in the banks financial reports: while the Visa market has been competitive for years since businesses switch between the two competitors (Cal and Leumi Card); in the Isracard and Mastercard market business goes on peacefully - without any competition.

Hidden cost

For the businessman the meaning is simple: if we buy something with a Visa card, the business pays Visa an average of 2 percent for clearing services. If we make the same purchase with an Isracard, the business pays 2.6 percent on the deal.

While Isracard can clear purchases made with a Visa card (thereby improving businesses market power), the Visa companies are prevented from clearing Isracard purchases. Therefore, the business must do business with Isracard for clearing its transactions, because no one else is allowed to clear the Isracard payments.

The business loses twice: first when it must pay Isracard more than it pays Visa; and second when it is prevented from clearing all its transactions through a single company and being able to pressure the firms for better conditions.

The naming of the Isracard as a monopoly is intended to give the antitrust commissioner more tools that will allow him open up the Isracard market to competition. It is hard to tell whether Bank Hapoalim made a mistake when it refused to open the Isracard market to competition, since during those years that the authority threatened but did nothing, the bank's revenues grew and grew and generated enormous profits for Hapoalim - much more than its competitors made in the Visa business.

What is clear is that Hapoalim's grace period is over, and it will have to adapt to a new era of competition. Now consumers and businesses will finally profit.