By Brandes Elitch
Priceless: The Case that Brought Down the Visa/MasterCard Bank Cartel is a book about the landmark lawsuit brought against the two dominant card brands by several retailers, including Wal-Mart Stores Inc., on behalf of millions of merchants.
Often referred to as "The Wal-Mart case," the class action was settled in 2003, just as the jury was impaneled. Attorney Lloyd Constantine, the book's author, managed the lawsuit, which absorbed six-and-a-half years of his life. It resulted in the largest anti-trust verdict in history: a $3 billion settlement for the merchants.
Shortly thereafter the U.S. government sued Visa U.S.A. (now Visa Inc.) and MasterCard International (now MasterCard Worldwide), piggybacking on the discovery and theories developed by Constantine and alleging the card associations (now publicly traded card companies) used anti-competitive behavior to marginalize American Express Co. and Discover Financial Services. In this case, the associations agreed to pay an additional $7 billion to the plaintiffs.
In 1989, Constantine successfully prosecuted the associations for merging their separate debit card networks into a common network (called Entrée) with the goal of dominating the debit card industry and destroying competing networks. He was lead counsel on a team that included 14 states' attorneys general.
After a 16-month investigation, the associations agreed to drop their Entrée proposal, but the matter led to the merchants' case against them seven years later, which was about debit card pricing and marketing. So you can see this is a tangled web.
The book is really a David and Goliath story about what Constantine calls "the blood sport of complex, commercial litigation." His tiny law firm attacked the mighty empires of Visa and MasterCard – and won. To do this, Constantine had to show the court that the associations used malice and intent to engage in a consistent pattern of anti-trust violations that harmed a class of 5 million merchants and millions of consumers.
It's an exciting story (as exciting as things like discovery, depositions, appeals, briefs, expert witnesses and legal theories can be) and Constantine tells it well.
To win, (actually, the associations settled, rather than go to trial, after the judge rebuffed years of legal challenges and found for Constantine regarding a wide variety of legal and procedural issues) he also had to show a long-term pattern of illegal practices, including monopoly and conspiracy, price fixing, and restraint of trade.
To demonstrate a conspiracy, Constantine had to show common ownership, lack of competition, and concerted activity to restrain trade and raise prices.
Some important things happened as a result of this case, and some things didn't happen. In January 2010, The New York Times published an article about how Visa continues to monopolize the debit card industry. It contains a quote from William Sheedy, President of Visa for the Americas, who stated that the Wal-Mart lawsuit was "much ado about nothing."
After reading Constantine's book, this comment shocks the conscience. Indeed, the prices for debit transactions have risen; the associations achieved parity between PIN debit and signature debit by raising the price of PIN debit. As the saying goes, you just can't make this stuff up.
Even so, some people in our industry think anti-trust issues are just regulatory matters and, consequently, no big deal. But anti-trust violations are criminal. Anti-trust law prohibits anti-competitive behavior (monopoly) and unfair business practices.
Monopolies and cartels, price fixing, and elimination of competition lead not to higher profits but to market failure. When we forget this inconvenient truth, our business system, the envy of the rest of the world, starts to fall apart.
This lawsuit was a high-risk, high-stakes game for Constantine: his little firm of 17 lawyers took the case on contingency, even though they were joined by some of the largest retailers in the country.
The case involved 350 motions, 54 expert reports and 400 key depositions. The summary judgment brief was 50,000 pages. The discovery record covered 5 million pages. The deposition testimony was 150,000 pages. Constantine started on this book in 2003, and it took him six years to write it.
The book focuses on Constantine's interaction with the law firms that defended the associations, as well as the personalities of the senior executives involved. Inter-estingly, there is almost no mention of the banks, which at that time owned the associations.
This is surprising, because at that time, the associations were dominated by a small number of issuing banks, and acquirers were marginalized. I know this because I was an acquirer during this period. If some of these banks had not also been acquirers, the acquiring industry would have had little, if any, representation within the associations.
Back then, the associations would talk only to their member banks, and certainly not to the army of people who were walking the streets every day, selling MasterCard and Visa processing to millions of merchants across the United States and actually creating revenue for the associations.
This was one of the reasons the Electronic Transactions Association was founded – to get some legitimacy, credibility and power for the thousands of ISOs and merchant level salespeople who make their living selling credit and debit card processing.
But this lawsuit was not just about the associations; it was about the dozen or so major issuing banks that dictated the Visa and MasterCard agenda (via interlocking directorates, another quaint anti-trust concept).
The focus of the merchant's suit was the "honor all cards" rule, which forced merchants who took Visa credit cards to take Visa signature debit cards, too.
The book might have benefited from a more in-depth examination of the history of the debit card industry. Constantine overlooks how PIN debit got started. The key decision, taken by big money-center banks like Citibank in the 1970's, was to not charge consumers for using their ATM cards, as long as they used ATMs rather than tellers inside bank branches.
This must rank as one of the worst business decisions in the history of banking. In their misguided desire to keep transactions away from the teller window, banks accustomed consumers to always being able to use their ATM cards for free. This fostered regional ATM networks (which used a high level of encryption and security).
Ten years later, the associations realized they'd missed out on an entire payment system. However, they still had interchange in their quiver. They knew banks couldn't make money with the existing PIN debit model, but if they scrapped their ATM cards and replaced them with interchange- and signature-based debit cards, they could profit handsomely.
The associations erred in trying to disguise this; merchants could not tell in those early days if a given payment card was a Visa debit or credit card, and that was the genesis of the merchants' suit.
Constantine also erred in devoting an entire chapter to why he deserved a higher fee, as if $200 million for his small firm was not enough.
Nonetheless, this is an important book and required reading for the ISO community.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org.
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