The Industry Talks Back
Rolling Back Consumer Choice

A banking perspective of the VISA/MC, "Wal-mart suit" settlement
by Ken Guenther

   Visa USA and MasterCard International have agreed to settle the class-action antitrust lawsuit brought by Wal-Mart, Sears, and other retailers in 1996. Wal-Mart contended that the card associations, through the "Honor All Cards" rule, used their credit card position to advance merchant acceptance of signature debit cards and charged excessive fees.
   Under the separate settlements, over a ten-year period MasterCard will pay $1 billion and Visa will pay $2 billion; each will pay $25 million immediately. It is not expected that banks will be assessed for the settlement given the ten-year payment period; however, annual membership fees could increase. Both Visa and MasterCard have their own reserves and credit lines.
   The settlement modifies the "Honor All Cards" policies to allow merchants that accept Visa or MasterCard credit cards to decide whether they want to accept signature debit products, beginning January 2004. Merchants opting to accept signature debit cards will continue to accept all such cards, regardless of the issuer.
   Beginning August 1, Visa and MasterCard will lower signature debit interchange rates. According to MasterCard, "the new interchange rate will be at least one-third lower than the existing interchange rate, and will be set at a level that should incent both issuance and acceptance of MasterCard debit cards." We will need to watch closely if smaller merchants, who lack the clout of the biggest retailers, will ultimately be adversely affected.
   MasterCard will also develop rules requiring issuers to clearly and consistently identify MasterCard debit cards on their face and to make these debit cards identifiable through electronic terminals.
   "The settlements, after millions of dollars of legal fees, will only serve to devalue and potentially balkanize the United States' efficient payment processing systems," said ICBA President and CEO Ken Guenther.
   "What is being postured as a reduction in merchant cost could result in reduced consumer choice of how consumers can pay, and possibly new direct fees to consumers," Guenther said. "Whenever choice is narrowed, the result usually becomes more expensive."
   Wal-Mart's ceaseless expansionist appetite however goes far beyond just card litigation, as the retail behemoth continues to try to acquire its own banking charter. House-passed legislation strongly opposed by Fed Chairman Greenspan that would, in effect, give industrial loan companies (ILCs) full commercial banking powers is pending before the Senate Banking Committee.
   It is all of our jobs, bankers and those involved in the transaction world, to insure that the Congress does not acquiesce. If the Congress does, it will open the door to a new full service nationwide banking and retail empire.
   Hopefully, this card litigation settlement supporting Wal-Mart's efforts to tear down the payments system that has built consumer credit in America will sound an alarm. The very fabric of our diversified financial system is being threatened as the world's largest retailers threaten to undermine the nation's banking system and our incredibly pro-consumer payments system.