Payments And the Law: Looking for Closure in All the Wrong Places By Patti Murphy
o it's final. The federal judge overseeing the federal government's
antitrust case against MasterCard and Visa has issued her final judgment:
The bankcard associations must rescind policies that bar banks from issuing
cards on behalf of American Express and Discover.
But nothing is ever what it seems, especially when it comes to payments and
the law.
Visa, upon reading the judge's final decision, promptly stated its
intention to appeal. Visa also said it will seek to have the judgment put
on hold (a "stay" of the judge's order, in legal parlance) pending the
outcome of its appeal.
Visa's fears run deeper than the prospect of losing market share to Amex or
Discover (as remote as that may seem to some). There has to be some
consternation at Visa's headquarters in Foster City, Calif. (as well as in
Purchase, N.Y., home of MasterCard's headquarters) over the likelihood that
the judge's ruling will open the door to a flood of new lawsuits.
The bankcard associations have been embroiled in litigation these last few
years. Most recently, two companies that accept credit card payments have
filed a lawsuit charging that the Visa-MasterCard policies against banks
issuing Amex and Discover cards, ruled anti-competitive by Judge Barbara S.
Jones of U.S. District Court in New York, have been bad for business.
The two companies - a food distributor based in Pennsylvania and a
publishing company in New Mexico - are seeking class-action status for the
lawsuit. The companies claim the disputed rules (known as the association's
"exclusionary" rules) have resulted in their paying higher fees for card
network services than they would have paid in a more competitive issuers
market. Also named in the lawsuit are several of the largest credit card
issuers, including J.P. Morgan Chase, Bank of America and MBNA, according
to published reports.
Visa and MasterCard have been in court for several years defending merchant
challenges to their "honor-all-cards" rules. Many of the merchants involved
in that lawsuit presumably also would qualify for inclusion in the latest
suit if class-action status is certified for that case.
The honor-all-cards rules require that merchants accepting MasterCard and
Visa brand credit cards accept all payment cards issued under those brand
names, including offline debit cards (or "check cards"). Merchants, led by
giant Wal-Mart, oppose paying the same interchange fees for check card
transactions that they pay for credit cards. Their argument is simple:
Credit card transactions are initiated against lines of credit and
therefore carry more risk to card issuers than do offline debit card
transactions, which are posted against funds on deposit in a checking (or
checking-like) account.
It's important to remember that interchange is just part of the fee
structure in retail card payments, albeit a large part. More than 90% of
the discount fees paid by merchants to network processors pass through to
issuers in the form of interchange fees.
Ostensibly, interchange compensates issuers for the risks of extending
credit on card purchases. But over the years, card issuers have gotten
pretty hooked on the revenue flows, and they're not too keen about losing
any.
Merchants, understandably, want to control card-acceptance costs. That's
why many are training checkout clerks to encourage customers to pay for
purchases using the offline (direct debit) option on their check cards.
(Remember, check cards often double as bank ATM cards.) It's also why
companies like National Processing Co. (NPC) have made it part of their
jobs to help merchants manage interchange costs.
Visa and MasterCard, obviously, have vested interests in maintaining the
status quo. The banks that issue and acquire credit and debit card
transactions are owners of the two associations.
But the sheer size of the complainant class (as many as 4 million merchants
qualify as plaintiffs in the case) could undermine any resolve to keep
honor-all-cards rules on the books. Experts figure the case, if settled in
favor of the retailers, could cost Visa and MasterCard as much as $100
billion in damage awards alone. Pushed to the wall, Visa might have to
consider an out-of-court settlement, but not without first putting up a
fight.
Visa and MasterCard officials have said they will appeal the class
certification of the case. No surprises there. Considering all the money at
stake, Visa and MasterCard can be expected to appeal this case all the way
to the U.S. Supreme Court.
That's a lot of time in court, with potentially whopping legal fees. But
the longer these cases are tied up in court, the less likely it seems that
there will be closure. It's almost a guarantee when you're dealing with
payments and the law.
During the nearly 25 years that I have been involved in the payments space,
I've watched as charges of unfair competition have been lobbed between
banks and non-banks. Few of the legal challenges have had much of a lasting
impact, though. That's because with appeals and counter-appeals the cases
just drag on. By the time decisions are rendered, the market has moved on.
Payments is a changing market. Sometimes people have difficulty adapting to
change; but markets don't.
Consider, for example, that back in the early 1980s, when retail electronic
payments were just beginning to catch on, a group of data-processing
companies were tied up in court with banks and federal regulators for years
over regulatory decisions allowing banks to offer data-processing services.
Today, data processing is a core competency for banks active in the
payments space.
In the early days of ATM cards, some banks sued to block retailers from
installing ATMs. Today, it's rare not to have ATMs at certain types of
retail establishments (like grocery and convenience stores).
So what's to become of Visa and MasterCard and the merchants and the
government's antitrust case? Nothing anytime soon, I suspect. Posturing and
logistics will keep all the parties tied up in the courts for years.
In the meantime, banks will continue issuing check cards, consumers will
increase the frequency with which they use the cards, and merchants will
keep accepting the cards. And in all likelihood, they'll keep paying more
in interchange than they think they should. Don't look for closure anytime
soon on the core issues.
Patti Murphy is Contributing Editor of The Green Sheet and President of
Takoma Group. She can be reached at pmurphy@takomagroup.com.
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