An offer retailers couldn't refuse - Guest Column - Visa, Mastercard agree to settlement in debit card suit filed by retailers - Column

DSN Retailing Today, June 23, 2003 by Don Rankin

Back in the early 1990s, when so-called "debit cards" were just starting to emerge as an alternative to credit cards, the nation's two major card associations--Visa and MasterCard--made retailers an offer they couldn't refuse. In truth, they couldn't afford to refuse it.

Effectively, these outfits gave retailers the following choice: Either accept the new debit cards and get slapped with an exorbitant transaction fee for each sale, or be locked out of the Visa or MasterCard system altogether.

Retailing's decision was a no-brainer. Even the industry's largest and most powerful players-chains like Wal-Mart, Sears and Circuit City-would find themselves at a crippling competitive disadvantage if they were no longer able to honor bank cards from their customers. And small, mom and pop merchants could be forced out of business altogether by the loss of access to Visa or MasterCard.

With their backs against the wall, retailers took the deal they were offered.

But that didn't make the arrangement fair. And it didn't make the all-or-nothing, "honor all cards" policy of the charge card associations legal.

The retail industry fought back, challenging the scheme in court as an illegal "tying" arrangement-a restraint of trade prohibited by the nation's antitrust laws.

After seven years of legal maneuvering, a federal judge finally ordered the case to trial earlier this spring.

At the heart of the dispute: a two-track fee system imposed on debit card transactions that retailers claim provided Visa and MasterCard with an unwarranted multibillion windfall at the expense of retailers and their customers.

Under that system, when a consumer uses a debit card for a store purchase using an online PIN at the cash register, the retailer is assessed a flat fee of between 10 cents and 15 cents for the transaction--a reasonable charge, according to retail industry officials.

But if that same consumer simply signs the sales slip instead of entering a PIN, the retailer will be charged a stiff transaction fee equal to between 1.5% and 2% of the sale.

"When a consumer uses a Visa or MasterCard 'check card' to make a $100 purchase and innocently signs the sales slip, the retailer gets slammed with a hefty 'transaction fee' of $1.50 or more that unfairly drives up the cost of merchandise," explains Tracy Mullin, president of the National Retail Federation (NRF)--one of several industry groups that supports the legal challenge of the transaction fee.

Those extra pennies per transaction add up fast. According to NRF, these higher offline debit card fees have generated "more than $6 billion per year in excess profits for Visa, MasterCard and their member banks."

Officials at the International Mass Retail Association (IMRA)--another industry group supporting the lawsuit on behalf of five million U.S. retail stores--maintain that this windfall for the card associations is coming directly from the pocketbooks of American consumers.

The good news is that retailers won't have to go to court to get relief. To their credit, MasterCard and Visa agreed to a last-minute settlement providing for damages of $3 billion--that's right, three billion with a "B"--to the retailers injured by these unfair transaction fees.

More importantly, however, the two card associations also agreed to lower their debit card transaction fees significantly, and to drop their rules requiring merchants to honor overpriced off-line in order to accept credit cards. Also gone under the settlement: restrictions on the right of retailers to "steer" customers to less costly payment options by offering discounts to those who don't use debit cards.

According to court documents, eliminating these unfair tying arrangements will save American retailers between $63 billion and $100 billion--money that will ultimately be passed on to consumers in the form of lower prices.

Thank you, IMRA, NRF, Wal-Mart, Safeway, Circuit City, Sears and all the others in retailing who helped Visa and MasterCard do the right thing.