he U.S. Department of Justice Antitrust Division and seven states filed a lawsuit seeking to block First Data Corp.'s proposed $7.8 billion acquisition of competitor Concord EFS, Inc. The DOJ said the merger would reduce competition among PIN debit networks and increase prices for debit card transactions.

First Data and Concord EFS operate the NYCE and STAR debit networks, respectively (NYCE is the third largest and STAR is the largest). By joining these two networks, analysts have speculated that the combined companies would then have about 70% control of the market.

First Data said the DOJ's complaint focuses on the proposed merger of the two networks, but is limited to the alleged market for PIN debit services at the point-of-sale.

"It seems that the DOJ has either misinterpreted or ignored both rapidly changing industry dynamics as well as a common-sense interpretation of a marketplace that clearly encompasses both PIN and signature debit," Charlie Fote, First Data Chairman and CEO said in a statement.

"For instance, they seem to have ignored recent wins by competitors for some of the largest banks in the U.S."

"I find it ironic that the DOJ is acting against a transaction where the combined company would handle less than 45% of PIN debit transactions, when only two years ago, the DOJ approved Concord's acquisition of STAR, which resulted in Concord handling approximately 60% of exactly the same transactions," Fote said.

Days before the DOJ filed the lawsuit, Wells Fargo & Co. said it would not renew its contract with Concord EFS, which processes transactions for the bank's estimated 15 million debit card accounts through its STAR network. Wells Fargo selected Visa's PLUS network instead.

Concord EFS' contract with Wells Fargo expires in 2004, the Wall Street Journal reported. And as many as nine of Concord's contracts with top banks are up for renewal at the end of 2004.

Wells Fargo will also use Visa's Interlink network for processing point-of-sale transactions and will still continue to issue Visa-branded credit and debit cards.

First Data announced its acquisition strategy in April 2003. It has long argued that the merger would enable it to better compete with Visa and MasterCard's signature-based debit card networks (First Data has only a quarter of signature-based debit market share). First Data also claims that it would provide consumers and merchants with greater choices in the PIN debit market.

The DOJ's complaint, filed on Oct. 23, stated that PIN debit networks are becoming a more important method of payment for consumers and retailers because "PIN debit is the least expensive, most efficient and most secure form of card payment." In 2002, consumers used PIN debit networks to pay for $150 billion in goods and services, the DOJ stated.

"If allowed to proceed, this merger of two of the three largest PIN debit networks will lead to higher prices to merchants, forcing them to pass on those price increases to many consumers throughout the United States in the form of higher prices for general merchandise," R. Hewitt Pate, Assistant Attorney General in charge of the Department's Antitrust Division said in a statement.

"In filing this lawsuit, the Department is seeking to preserve the benefits to American consumers of competition among PIN debit networks."

The DOJ and the seven states filed the civil antitrust lawsuit in the U.S. District Court in Washington, D.C. The participating states are Connecticut, Illinois, Louisiana, Massachusetts, New York, Ohio and Texas and the District of Columbia.

The news probably came as a surprise to First Data, which has remained confident that the deal would close before the end of 2003. In the third quarter, First Data trimmed 740 jobs in anticipation of an upcoming consolidation with Concord EFS.

Strangely, on October 9, 2003, the DOJ informed the Federal Deposit Insurance Corporation (FDIC), that the application from First Financial Bank, whose parent is First Data, to purchase certain assets and assume liability to pay certain deposits of Concord EFS National Bank would not have a "significantly adverse effect on competition."

In an interview with The Denver Post, Fote said that First Data is "a little confused on the whole issue." He also said that First Data has no plans to sell NYCE.

Analysts have long speculated that First Data will have to purge its NYCE network in order for the deal to be approved.

In October, Hispanic groups opposing the merger, such as the Latino Coalition and the Hispanic Business Roundtable, sent a letter to the DOJ stating that the deal "will adversely affect competition and result in higher prices and fewer services." The groups are concerned that the combined companies will give First Data's Western Union division even more control over the $20 billion Latin America money transfer market.

Shareholders of First Data and Concord EFS approved the merger plans at separate meetings on October 28.

A hearing on the DOJ's motion for a preliminary injunction is scheduled to begin Dec. 15, 2003. U.S. District Court Judge Rosemary Collyer entered a scheduling order in the litigation.