Cover Story

   The Visa and MasterCard settlements of the class-action, antitrust lawsuit brought against the associations by US Retailers, commonly referred to as the "Wal-Mart suit" will mean lower debit rates for merchants and according to Mallory Duncan, Senior Vice President and General Counsel for the Washington, D.C.-based National Retail Federation, which counts as direct or indirect members, retailers of all sizes and types across the country.
   Visa agreed to pay approximately $2 billion, while MasterCard will pay about $1 billion, under the "memo of understanding." In exchange for settlement of all claims, MasterCard agreed to pay ten annual installments of $100 million each into a settlement fund account, except for the first year when the payment will be $125 million.
   Neither card issuer admitted to any violations as part of the agreement. The legal preliminary settlement was to be announced in mid-June, with final settlement in August. A handful of large retailers, including Home Depot, opted out of the class and were continuing separate legal actions against the card issuers.
   Visa and MasterCard will each pay $50 million before making any changes in the interchange fees. It was expected to take the issuers a few months to actually change the fees due to technical complications, according to a spokesman for merchant attorney Lloyd Constantine.
   The legal action of those in and out of the class in the so-called Wal-Mart suit, started in 1996 when certain retailers and retail trade associations filed suit against Visa and MasterCard International. The plaintiffs claimed that the card issuers and their member banks have violated federal antitrust laws by forcing merchants who accept either company's credit cards to also accept their debit cards. The merchants claim this has caused them to pay excessive fees on debit transactions, and "have injured the competition, merchants and consumers."
   When MasterCard filed in late April for a separate trial, it provided the "first crack in the wall" of the defendants' case, according to a spokesman for Constantine.
   The plaintiffs sought an injunction prohibiting Visa and MasterCard from engaging in the alleged violations and the recovery of damages for the alleged excess portion of fees paid on Visa and MasterCard credit and debit transactions, as well as costs and attorneys' fees.
   The total payments of close to $3 billion will be made over 10 years. According to a spokesman for Constantine, a 10-year payment isn't uncommon with awards that exceed $1 billion.
   Judge John Gleeson was closely involved in the negotiations that brought about the settlement, the spokesman added.
   MasterCard, which previously blended credit and debit into a single interchange rate, will establish a separate interchange rate for MasterCard debit transactions by August 1. The new interchange rate for debit will be at least one-third lower than the existing interchange rate.
   Visa will drop is rates charged to supermarkets from a flat 40 cents to no more than 26 cents per transaction. The non-supermarket, standard rate will be reduced by 48 basis points from its current 1.25 percent of the purchase price plus 10 cents per transaction.
   The exact effect on interchange rates is unknown because the rates above are those that the card issuers charge to processors, who then set buy rates for ISOs. The ISOs then mark this up and set the price for merchants.
   According to Duncan, some merchants will quickly demand lower rates from ISOs, but others will continue to pay higher rates for some time. Duncan likens the situation to that of the ruling that ended the AT&T; telephone monopoly in the mid-1980s. Even though people could then buy phones rather than renting them from AT&T;, many continued to pay AT&T; phone rental fees for several months.
   First Annapolis consultant Marc Abbey agrees. Merchants with more than $30 million in annual sales will see most or all of the rate declines, but smaller merchants will see much less. Similarly, Abbey expects to see ISO buy rates to go down some, though the exact amount is still largely an unknown.
   Duncan added that the settlement could mean a sharp increase in the use of debit cards. As proof he points to Europe, where debit cards are much preferred over credit cards. Since a debit transaction takes money directly out of a checking account, there's less chance that the bill will be unpaid, Duncan explained.
   Richard Crone, Vice President of Dove Consulting, has a different take on the effects of the settlement. He expects the ruling to lead to a sharp upsurge in debit payments in the recurring payments market.
   Debit payments will be less costly and more secure for the issuers, so there should be a sharp uptick, Crone explained.
   "Now credit card issuers, mortgage companies and other lenders can accept 'only' debit cards, thus increasing the opportunities for further exponential increases in electronic payments. This is especially true for biller direct electronic bill presentment and payment," Crone said.
   Therefore, Crone recommended that enterprising ISOs seek out recurring billers for potential business.
   The loss of debit revenues could mean a loss of as much as 1.5 to 2% to issuers' earnings, though Crone expects any initial decline to be recovered for those issuers who reposition themselves to benefit from the expected growth in the recurring payment market.
   Visa has 124 million offline debit cards in circulation generating $260 billion in sales, and customers use the card 11 times a month, according to Crone. Visa controls 48 percent of the total debit market, and 80 percent of the offline market.
   "Because the $3 billion settlement was so low, we anticipate that offline interchange will drop closer to PIN fees," Crone added. "Offline will always be more expensive, but it will now be in the ball park."
   The most likely scenario going forward, according to Crone is that offline rates will come down significantly, which could slow the growth of online debit. Merchants may become more agnostic about which debit transaction occurs. If differential between PIN and offline is narrow, banks may push customers to use online debit because the #transaction is "safer and cheaper".
   Additionally, debit cards will make big inroads in online markets, Crone predicted.