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Article published in Issue Number: 070202

Lawsuit challenges interchange practices

By Lynn Walford, Contributor LogoThis story was originally published on, Jan. 29, 2007; reprinted with permission. © 2007 NetWorld Alliance LLC. All rights reserved.

The subject of ATM interchange fees is a touchy one. Cardholders want the convenience of getting cash anywhere, anytime, but hate the costs associated with it.

Deployers - especially ISOs - depend on the fee for income, but hate the behind-the-scenes manipulation of its implementation.

Making times especially difficult are the lingering impacts of Visa U.S.A.'s move to tiered interchange fees in October 2005, and a California class action lawsuit plodding through the courts since 2004. The double-whammy has some ISOs writhing in discomfort.

"We're getting squeezed ... with the tier 1, tier 2 restructure of Visa Plus interchange rates, an added Cirrus MasterCard fee, the NYCE increase, new agreements, and background checks," said De Lone Wilson, President of Jackson, Miss.-based NetBank Payment Systems Inc., ranked the nation's third-largest ISO.

"We don't have a voice or choice in the situation," he said.

Visa's interchange-fee restructuring stung ISOs, Wilson said, because they perceived it favored mid-sized to large financial institutions (FIs).

To qualify for tier 1 status, and pull the highest interchange rate of $0.50 per cash withdrawal, Visa came up with a list of requirements that include the use of a level 1 safe, nondial telecommunications and armored-car vault-cash replenishment - expensive tools more characteristic of FI programs, not independently operated ones.

ISOs argue they are being unjustly penalized: Because they have a sponsoring FI, they already comply with the same federal mandates and regulations as FIs and therefore warrant equal treatment.

ATM operators that fall under tier 2, pull $0.10 less - $0.40 - per cash withdrawal.

MasterCard also adjusted its interchange fee in April 2005, but ISOs didn't balk at that announcement because the fee-change affected all ATM operators the same.

MasterCard now necessitates that acquirers pay $0.05 for each domestic ATM withdrawal and $0.25 per ATM withdrawal made by international cardholders in the United States.

Visa defends the tiered approach as a way to better balance the issuer-acquirer relationship, since there are "significant differences in ATM portfolios in terms of cost, security and cardholder value."

A court challenge

Meanwhile, in a federal courtroom in California, a lawsuit is challenging not only the means by which some interchange fees are set, but the fee itself.

In July 2004, attorneys initiated a class action suit on behalf of ATM cardholders in U.S. District Court, Northern District of California, against several deployers, including First Data Corp.'s STAR Network and Bank of America Corp.

The suit claims the organizations conspired to "fix" interchange fees - that is, agree to a single fee, precluding any one of them from charging less than the others - and thereby broke antitrust laws.

Consumers are hurt twice, plaintiffs contend: By the fee itself, and by paying an amount fixed not by competitive market influences, but by mutual agreement of the various companies charging it.

"As a result, the depositor pays for the same transaction twice - surcharge set at competitive rates to the ATM owner and a foreign ATM fee to its bank, which is artificially inflated by the fixed - and unnecessary - interchange fee," the suit alleges.

In late November, a U.S. District judge sent the opposing parties back to the discovery drawing board, citing in his memo that neither side had adequately addressed whether the STAR Network's interchange fees are restraining trade or are unreasonable.

In that memo, Judge Charles R. Breyer said that if the defendants "can set forth evidence to support plausible, pro-competitive justifications for their agreement to fix the interchange fee, then the Court would have to examine their agreement under the rule of reason."

One of the plaintiffs' attorneys, Joseph Saveri, a Partner at San Francisco-based Lief, Cabraser, Heimann & Bernstein LLP, said the networks and banks don't have a right to set interchange fees.

"There should be competition and a free market," he said. Saveri also suggests competition may lead to negotiated interchange fees.

Eva Weber, an industry analyst with Boston-based Aite Group LLC, said she doesn't believe the interchange debate will end anytime soon.

"Interchange rates are certainly a bone of contention," she said. "And until all market players are satisfied with how interchange rates are set, we will continue to see lawsuits trying to establish the business model that is most favorable to them."

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Article published in issue number 070202

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