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A Thing

Merchants, Member Banks Stir Up More Displeasure

Even though 8,148,276 notices have been mailed out to merchants regarding Visa's and MasterCard's combined $3 billion class-action settlement over debit card fees, and the associations have reduced their interchange rates for offline debit card transactions by about one third (as of August 1, 2003), the dust still has not settled.

Namely, not all retailers are satisfied with the deal and neither are many of Visa nor MasterCard's member banks.

Many merchants have expressed discontent over the settlement terms. Some of them say they now are paying more for debit transactions than others. Select merchants will get as much as a 70% price break while others will receive less than 10%, the New York Times reported.

Federated Department Stores, Sears Roebuck & Co., Walgreens, Circuit City, J.C. Penney and Limited filed court documents requesting that Visa be forced to provide the same discounts to all retailers.

Presiding Judge John Gleeson of U.S. District Court in Brooklyn rejected the retailers' plea. Gleeson said the settlement terms required only that the associations "maintain a certain average discount."

Merchants also are not pleased with both Visa's and MasterCard's recent 1% increase in credit card interchange fees (also as of August 1, 2003).

The card associations say the jump is purely coincidental and that credit card rates were due to be raised because of increased competition and rising costs.

Banks Take Hit from Settlement

Several top U.S. banks that receive a percentage of the transaction fees have indicated their profit or revenue will be hurt once the settlement fully takes effect.

In a Securities and Exchange Commission filing, Wells Fargo & Co said it expects its fee income to fall about $30 million per quarter. Bank of America Corp. said the settlement will cost it $60 million in after-tax profit for the rest of 2003 and $200 million in 2004.

Bank One Corp. expects the settlement to cost it about $60 million a year in pretax revenue. Wachovia Corp. also said the settlement will affect its card businesses.

Minnesota-based TFC Financial Corp., a bank that handles more than $800 million in debit card transactions each quarter, has long been vocal about its displeasure with Visa's settlement ("Card Associations Face New Actions," The Green Sheet, May 26, 2003, issue 03:05:02).

TFC even recently explored terminating its membership status with Visa and switching to another credit card brand. However, Visa sent a letter to TFC explaining a change in its bylaws as of June 2003. Now, any member bank wanting to leave the association would have to pay large fees, the Wall Street Journal reported.

The fees would depend on the bank's share of Visa's debit card issuance and how much time is left for Visa to complete its $2 billion settlement payment. TFC said it would have to pay up to $20 million to abandon its membership with Visa.

Although Visa continually has said that funds for the settlement will come from its operating revenue and not additional fees to member banks, if some of these banks leave Visa, then the remaining ones might have to bear the settlement burden.

The new debit card rate reductions will be in effect until the end of the year. The final part of the settlement kicks in on January 1, 2004 - the revised "honor all cards" policy -where merchants that accept Visa and or MasterCard credit card transactions also will have the option to not accept offline or signature-based debit transactions. Visa and MasterCard have not yet determined what these new rates will be, and the industry is anxiously awaiting the news.

The dust may never settle.

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