'm not one for paraphrasing pop music icons, but there seems no more fitting time than now to suggest that the times they are a changin', and it doesn't look good for banks or the bankcard associations.

After nearly seven years of legal maneuvering, MasterCard and Visa have agreed to out-of-court settlements with Wal-Mart and legions of other retailers who had challenged the bankcard associations' "honor all cards" rules and accused the two of trying to monopolize the POS debit market. Visa mounted a strong defense, but in the end it appeared there was more talk than compelling evidence. Once word leaked that MasterCard had capitulated and negotiated a settlement on the courthouse steps, it was only a matter of days before Visa followed.

In the end, Visa and MasterCard agreed to modify the "honor all cards" rules, which both had vigorously defended as core principles of the bankcard business model. Retailers who do not wish to accept Visa- or MasterCard-branded debit cards will be at liberty to say no to those cards beginning in 2004. (But if they accept one type of branded credit product they have to accept all types; the same goes for debit cards.) The two associations also agreed to pay $3 billion into a special settlement fund and to lower the interchange fees on offline (signature) debit cards beginning later this year.

The monetary settlement sounds big but actually is small potatoes, especially given that a trial decision in favor of the retailers could've triggered damage awards of 30 times that amount. If estimates of 4 million retailers being involved in the suit are accurate, the average retailer will pocket no more than $750 if the settlement gets doled out in any reasonable fashion. Long term, retailers no doubt expect they'll save a bundle on lower interchange fees as price competition intensifies.

Short term, Visa and MasterCard can probably manage the payout. MasterCard (the only one to speak publicly about settlement terms) says it has 10 years to pay off its portion of the settlement, which is a little more than $1 billion. Visa was able to negotiate a similar payment plan.

In fact, it looks as if Visa may have negotiated the most favorable settlement, if reports that it has agreed to pay $2 billion into the special settlement fund are true. By most accounts, Visa-branded cards are used to initiate 80% of offline debit transactions. So why is Visa paying twice as much as MasterCard when it has nearly four times the market share? This is a question a lot of people are asking.

Long term, the banks that own and govern MasterCard and Visa will be hit the hardest as the legal settlements trigger shifts in debit card usage and dramatic shifts in revenue streams. The scuttlebutt is that the bankcard associations have agreed to slash the fees assessed on their signature debit card products by at least a third, and those price cuts will flow to the bottom line. Adam Frisch, a research analyst with UBS Warburg, New York, who follows transaction processing, estimates that banks will see margins on merchant acquiring activities contract by about 1.5-2.0%.

Bankers also will need to rethink their strategies for online (PIN-based) debit card products. Today, offline cards are used to initiate about 60% of all POS debit transactions; online brands (such as STAR and NYCE) account for 40%.

It's fair to say that the pricing differential between online and offline should diminish. Today, all things being perfect, the interchange on a $100 check card transaction ranges between $1.35 and $1.50; the same transaction authorized by a PIN costs a retailer 30 to 40 cents.

The days of issuing banks (and Visa and, to a lesser degree, MasterCard) touting check cards are numbered.

Bankers also might demand changes in management at the card associations. The fact that Visa and MasterCard let this battle drag on for seven years, only to settle at the 11th hour and concede on key points (such as the "honor all cards" and debit card pricing), cannot bode well for the decision-makers at those organizations.

Complicating matters, First Data Corp. (a non-bank) now appears to have a clear shot at challenging Visa's dominant position in the retail payments space. First Data, the largest credit card acquirer, last month agreed to buy Concord EFS, Inc., owner of the largest debit card network (STAR) and a major credit card acquirer in its own right.

STAR has been coming under intense pressure in recent months as Visa competes more vigorously for bank online debit processing contracts. With First Data as its parent, STAR will be in a better position to make price concessions. First Data also moves closer to its goal of dominating the retail payments space.

UBS Warburg estimated in a recent report that First Data would wind up with a 50% share of the merchant acquiring market and 70% of the network services market (which includes transaction processing) if it were to acquire Concord. Today, First Data controls about 43% of the merchant acquiring market and 11% of the network services market, according to UBS Warburg.

To be sure, First Data execs will tout their various bank alliances (such as those that drive their credit card acquiring business) as evidence of their kinship with banks. But the facts remain: First Data is not a bank, MasterCard and Visa are bank-owned, and card volumes that shift from bank-owned networks to the networks of non-banks are transactions that have fallen outside of the banking industry's payment franchise. ISOs and Merchants Will Feel Some Heat There will be repercussions for Merchant Level Salespersons, too. For example, they can expect some diminishing of residual streams as merchants opt for less expensive debit products. They also might discover that some merchants are emboldened by the settlement terms and are looking for additional concessions in POS services contracts. On the up side, the case for installing POS PIN pads will get a boost.

Truth be known, though, I'm not convinced that millions of merchants are going to decide to stop accepting Visa Check and MasterDebit cards at their check-outs. Signature debit, especially the Visa Check card, has seen substantial growth over the last several years.

According to a year-end 2002 report, check card purchases make up one-third of the dollar value of transactions initiated using Visa-branded cards. In 2002, Visa estimates that Visa Check card purchases totaled $380 billion. That's no small piece of change.

The typical consumer uses a signature debit card about 11 times a month, according to Frisch of UBS Warburg. Frisch figures there are about 124 million offline debit cards in circulation here in the U.S. No retailer worth their salt is going to want to turn their back on those sales.

My mom has a check card and never ceases to remind me how much she likes using it. Mom grew up during the Great Depression; she's debt averse and is not too keen on new-fangled technologies (in fact, she still refuses to accept her monthly Social Security payments in anything but paper check form and has no desire to use her check card as an ATM card).

Mom likes her check card, she says, because it looks and acts like a credit card but doesn't result in debt. I suspect she's not alone. And I suspect many merchants will be hard pressed to turn away millions of offline debit cards from their check-outs.

It's not just the public relations implications that I'm referring to here; there are practical, technical changes that will need to take place, such as the installation of PIN pads, which can be found at only about 25% of merchant locations. Any merchant decision to shun check cards in favor of online POS debit will require that they install PIN pads and that they coax folks like Mom to use a PIN. Good luck!

Wal-Mart is Big Winner

Wal-Mart looks to come out a big winner once the settlements are approved and final. The mega-retailer convinced millions of small mom-and-pop shops - many of them, no doubt, run by folks on the front lines of the "keep Wal-Mart out of my town" movement - to follow it like lemmings into a sea of regret.

While these merchants now have to consider the pros and cons of accepting Visa and MasterCard signature debit products versus PIN-based debit or both, Wal-Mart surely will pursue its desire to own a bank and turn payment processing (and possibly card issuance, too) into in-house specialties.

Two states already have denied Wal-Mart requests to buy industrial banks. (An industrial bank is a limited-purpose financial institution that can be owned by a non-financial company.) Last month, TD Bank USA, a unit of Canada's Toronto Dominion Bank, backed away from a plan to partner with Wal-Mart in offering store-branded checking and savings accounts.

Wal-Mart isn't known for backing off once it sets its sights on a market opportunity, and there are at least a half-dozen states that charter industrial banks. I don't think we've seen the last of Wal-Mart shopping around for a bank.

Additional Legal Hurdles

As if this weren't bad enough, Visa, MasterCard and perhaps even the banks face substantial other challenges, especially in the courts. There's the federal government's antitrust case, which MasterCard and Visa are now appealing. The judge in the original case, brought by the Department of Justice, ruled that the so-called "exclusionary rules" that preclude banks from issuing non-bank cards (such as American Express or Discover) violate federal antitrust statutes.

There's also the recent ruling by a California judge that Visa and MasterCard refund millions of dollars in currency-conversion fees. If upheld, it could lead to an avalanche of lawsuits in other jurisdictions.

The judge found fault with the way MasterCard and Visa banks disclose the fees that are assessed on card purchases priced in foreign currencies. Typically, MasterCard and Visa charge an exchange rate plus 1% of the transaction; the banks pass along that charge to cardholders along with additional fees of their own, which together equal 2% to 4% of the ticket total.

Cardholders don't usually receive breakdowns of those fees on their monthly card statements, and banks generally disclose fees during the application and card-issuance process only.

The judge ordered MasterCard and Visa to require member banks to fully disclose currency-conversion fees and to devise a plan for paying as much as $800 million in restitution for overcharges (read: undisclosed fees) between 1996 and 2002. The restitution plan was due to the court on April 28, 2003; both MasterCard and Visa have said they intend to appeal the court's ruling.

Losing that appeal almost certainly would result in similar cases in other states, notably New York. Because Visa is headquartered in California and is fully under the court's jurisdiction, it must refund money to all Visa cardholders nationwide; MasterCard, headquartered in New York, is only liable for reimbursing cardholders residing in California.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at patti@greensheet.com