Master Card and Visa Settle Suits with Retailers

MasterCard International has agreed to settle the suit brought by the nation's major retailers by paying them about $1 billion. (The retailers had asked for $5 billion to $25 billion.) Just a few days later Visa settled a similar dispute for $2 billion. Both card issuers will pay $25 million by the end of this year and the balance of their obligations over the next ten years. In their article in the Wall Street Journal, Jathon Sapsford and Kara Scannell provided an excellent explanation of the issue. While the following discussion of the issues relates to MasterCard, the discussion applies to Visa USA as well.

Credit cards vs. debit cards. As we all probably know, debit card transactions are automatically deducted from cardholders' bank accounts rather than billed to purchasers' credit-card account. At the heart of the dispute was the card associations' "honor all cards" policy. Under that edict, a merchant that accepted a MasterCard or Visa credit card had to accept that issuer's debit card as well. The card associations argued that this was necessary to preserve brand integrity and prevent the customer confusion that would result if a merchant who advertises acceptance of a Visa or MasterCard product took one kind of card but not the other. Since most retailers would find it hard to survive if they did not accept credit cards, they were effectively required to accept those debit cards as well. Merchants argued that the "honor-all" policy was a "tying" arrangement and was illegal. The policy also encouraged the accusation of attempting to monopolize the immense debit-card market. In his article in Fortune, Roger Parloff reports that consumers used their debit cards to make purchases amounting to about $14 billion in 2002, up 30 percent from 2001.

But there was more to the issue than just enlarging the market for Visa and MasterCard debit cards. An important issue was that it was much more costly for merchants to clear their Visa and MasterCard debit transactions through the association's routing systems than was the case for other systems utilizing PIN number technology. According to Sapsford and Scannell, "on a typical $100 transaction, it costs a merchant $1.49 to route a debit-card transaction through the Visa or MasterCard credit card network, compared with nine cents to route the same transaction through a rival system operated by First Data or others." (We assumed that most of our astute readers bought First Data when it was selling around $24 and relish the current price of about $42.)

There is another issue from the standpoint of consumers. Most debit cards do not require consumers to sign the sales slip, since their personal identification number is on the card. However, the debit cards issued by Visa and MasterCard require a consumer's signature at the point of sale. Consequently, it is somewhat less convenient for consumers to use those debit cards.

But, in the end the most important factor leading to the joint $3 billion settlement was summarized by Prof. George L. Priest, a teacher of anti-trust law at Yale School of Law. His major point is worth quoting in its entirety.

Though there had been no trial on the merits—indeed, not a single witness had testified—and though the antitrust claims against them were highly questionable, MasterCard and Visa had no choice but to settle. Judge John Gleeson had certified a class of four million merchants—led by Wal-Mart and Sears—seeking damages that were estimated to be between $40 and $100 billion in a case to be tried to a Brooklyn jury. With potential damages at $100 billion, trebled under the Sherman Act, the Wal-Mart class needed only a 1% chance of victory for a $3 billion settlement to make sense.