STRATEGIC PARTNERS
April 30, 2003
NEW YORK -- Visa USA Inc. agreed on April 30 to pay retailers $2 billion to settle a lawsuit over debit-card fees, according to a Wall Street Journal report.
Visa's settlement comes on the heels of a similar deal made by co-defendant MasterCard Internationalon April 28. MasterCard reportedly agreed to a $1 billion settlement.
(See related storiesMasterCard settles in debit case,Debit settlement reportedly will cost MasterCard $1 billion and Visa in talks to settle with retailers over interchange)
Citing "people familiar with the case," the Journalreported that both Visa and MasterCard agreed to pay $25 million upfront, with the balance paid out over multiple years, and lower their interchange fees beginning Aug. 1.
Industry experts expect the case to trigger changes in the way retailers process plastic -- which could include higher credit-card fees, as well as a strong business opportunity for regional EFT networks like Star, NYCE and Pulse.
The settlements reportedly require both card associations to drop their "honor all cards" policies, which had required merchants accepting Visa and MasterCard credit cards to accept their debit cards as well. It was unclear what the new policies will be.
"There's blood in the water," said David Schneider, executive vice president of corporate development for Pulse. "The retailers are going to seize on that."
The settlements will likely make pricier signature-based debit transactions far less viable in the marketplace. Merchants will gain more freedom to run debit-card transactions through networks like Star, Pulse or NYCE, whose PIN-based debit costs average about one-third as much as the signature-based fees.
Analyst Howard K. Mason, of Sanford C. Bernstein & Co., believes signature-based transactions may become a mere niche in the marketplace, favored perhaps by restaurants or retailers that choose not to offer PIN systems.
An end to the ability of Visa and MasterCard to force signature transactions on retailers is likely to create intense competition among the networks that process PIN transactions, leading to lower fees.
"This could have the same potential as the AT&T breakup had for telecommunications," said Dallas banking attorney Steve Camp in a Business Week report. "We're going to see a proliferation of competitors that will be able to undercut Visa and MasterCard with lower costs."
The biggest beneficiary, according to Business Week, may be First Data, the credit-card processor whose pending acquisition of Concord EFS will give it a 20 percent share of all debit transactions -- roughly equal to that held by MasterCard.
By combining its 3 million retail clients with the thousands of banks that Concord services, First Data has already begun mapping plans to offer both parties an alternative processing service that completely bypasses Visa and MasterCard. "First Data is the biggest winner here," Robert G. Markey Jr., a director with management consultants Bain & Co., told Business Week.
According to the Journal, some industry experts expect the card associations and their member banks to compensate for eroding debit-card fee revenue by increasing fees charged to merchants on credit-card transactions.
Merchants are less likely to protest such increases, Mason said, because credit cards allow consumers to make larger purchases. Others say the card companies could now be vulnerable in the core credit-card market as well.
The current court case has "galvanized the merchant community," said Pulse's Schneider. It has "created a coalition of merchants who are now very focused on these issues and it will be difficult to shake that going forward."
It is unclear whether the thousands of banks that own the two credit-card associations will be tapped to help pay for either of the settlements. The two associations have their own reserves and credit lines.
If Visa had gone forward with a trial and won, the verdict could have been delayed for years by appeals. That might have placed Visa at a competitive disadvantage because merchants might have steered retailers to dump Visa in favor of MasterCard.
