MasterCard and Visa Settle Antitrust Lawsuit and Will Lower Transaction Fees

Last week, Visa USA Inc. and MasterCard International Inc. agreed to settle a federal antitrust lawsuit brought by U.S. merchants that argued that the banks were unfairly charging high transaction fees for their Visa Check and Master Money debit cards when consumers signed for transactions. The settlements will ultimately mean lower transaction fees for retailers, according to J. Craig Shearman, senior director of media relations for the National Federation of Retailers (NRF), one of the plaintiffs in the federal antitrust lawsuit.

The retailers who brought the lawsuit argued that Visa and MasterCard's "honor all cards" practice -- requiring retailers to accept both credit cards and the Visa/MasterCard debit cards -- was a violation of federal antitrust law. Plaintiffs in the case included about 20 of the nation's largest retailers, including Wal-Mart and Sears, Roebuck & Co. In addition to the named plaintiffs, the lawsuit was a class action representing any merchant that had accepted Visa or MasterCard debit cards since October 1992, or approximately five million large and small retailers.

The plaintiffs' contention with the Visa and MasterCard debit cards was that when the consumer signed for a debit card purchase, the banks charged the same transaction fee as they did for a credit card transaction, an average of 1.5 percent to 2 percent of the sale. Conversely, when a consumer used an electronic pad to enter a personal identification number (PIN) on a debit card purchase, there was a flat transaction fee of between 10 to 15 cents.

"The Visa/MasterCard debit cards are not credit cards at all…. They're strictly debit cards," Shearman said. "Yet, if you signed for [the debit card transaction], [retailers paid] the same transaction fee as a credit card. We argued that this was an excessive charge. When someone makes a charge with a credit card, it's unpaid, there's a bill that will go out, and there's a chance the consumer may not pay it, or they may return the item. There's much more risk, so it's legitimate that [Visa and MasterCard] would have a higher percentage rate [per transaction]." However, when a consumer uses the debit card, the money is removed directly from that person's bank account within 24 hours, meaning the transaction is almost free of risk, he added.

Under the two separate settlements reached with Visa and MasterCard last week, the companies will change their fee structure, reducing by at least one-third the fee for signature transactions between now and January 1, 2004. The MasterCard settlement included damages of approximately $1 billion, and Visa will pay damages of about $2 billion, according to NRF. The damages will be divided among the retailers represented in the suit, based on a percentage of the debit card transactions they have conducted.

Additionally, as of January 1, the "honor all cards rule will cease to exist," said Shearman. "Retailers will be free to not accept [Visa/MasterCard debit cards]." To ensure that retailers can discern the difference between the debit and credit cards, starting in January 2004, Visa and MasterCard will encode the magnetic strips on their debit cards to indicate to the retailer at the point of sale that the card is a debit card.

However, Shearman does not believe retailers will stop accepting the Visa/MasterCard debit cards once they have the choice. He said that the pressure is squarely on the banks to compete. Once retailers have the option not to accept the cards, "Our expectation is that there is going to be more pressure on MasterCard and Visa to lower their transaction fees [even more]," he said. --David Grogan