Settlements announced last week in a huge antitrust case pitting major retailers against the two major bank-card systems are likely to have some negative consequences for consumers, whose real interests often get overlooked in antitrust cases. Right before the trial was scheduled to begin, the defendants — the two major bank-card systems, MasterCard and Visa — separately agreed to settle the class-action lawsuit brought in 1996 by giant retailers, led by Wal-Mart, Sears, Safeway, The Limited, Circuit City, and thousands of others.
At the heart of the retailers’ suit were the card systems’ policies requiring retailers that accepted their “branded” credit cards to also accept the Visa and MasterCard signature debit cards — their “Honor All Cards” agreements. The retailers claimed they were forced to pay more for these signature debit transactions than they would for other debit-card transactions using a PIN, and were asking for hefty multibillion dollar damages representing the difference in the transaction fees.
The settlement will now break those “Honor All Cards” agreements. In addition, MasterCard will pay $1 billion in damages, and Visa double that. The card systems also agreed to lower the processing fees retailers pay for signature debit cards, now amounting to about $1.50 per $100 transaction.
The trial lawyers representing Wal-Mart, et al claimed that consumers would be better off if they prevailed — lower costs for the transactions could be passed on to consumers in lower prices. It’s not likely that consumers will soon see “Class Action Sales” at their favorite megastores, however. Instead, as a result of the lawsuit and its settlement, they may see some restrictions on their choice of payment method, loss of security when using debit cards, and even higher fees.
The suit and its settlement may change the world of payments systems for consumers. Consumers will lose the assurance that all “branded” Visa and MasterCard cards will be universally accepted at retailers displaying those logos. Right now, consumers know that merchants who accept Visa and MasterCard will accept their credit cards and debit cards with those logos — no matter where they are geographically in relation to the bank that issued the cards. The consumer is in the driver’s seat in terms of selecting which payment method to use.
Under the settlement, that may change. While most savvy retailers won’t want to antagonize customers by refusing signature debit cards, the case does open up that possibility. So, too, at risk are other consumer guarantees that come with those branded cards, including zero liability for unauthorized use and the ability to dispute a transaction. This dilution of the “honor all cards” policy could also weaken the assurance that all issuing banks’ cards will be accepted. It’s possible, although not now probable, that in the future retailers could pick and choose which banks’ cards they will accept.
Another big uncertainty is whether consumers’ transaction or other fees will rise. Visa and MasterCard are membership organizations made up of thousands of banks that not only have to finance the settlement (even if paid out of reserves maintained) but will face much lower revenue flows from those debit card transactions, estimated by a researcher at “The Nilson Report” to amount to $1.5 – $2 billion next year. That could mean increased fees for consumers — perhaps for their PIN-based debit-card transactions or even for their credit cards.
The plaintiffs’ class-action lawyers did indeed show that the retailers were paying higher fees for the Visa and MasterCard signature debit cards cleared offline than for the online PIN debit cards, and retailers were unhappy with that. However, they were quite happy that consumers were using credit cards and debit cards in record numbers, instead of personal checks and cash, which have higher costs because of fraud, theft, verification, or handling. Most of that growth relates to the large-scale and expensive marketing, promotion, and educational campaigns over the past 30 or so years paid for by the major bank-card systems. And not only banks have reaped the benefits — retailers have benefited from lower transaction and processing costs resulting from the shift to plastic. That, of course, wasn’t mentioned in the retailers’ suit.
The innovations in the world of payments methods have provided significant benefits for consumers, in terms of consumer choice and increased convenience. The ability to use plastic — credit and debit cards — for purchases and to get cash anywhere in the world is taken for granted today. Let’s hope the class-action lawsuit and its settlement don’t disrupt that.
— Frances Smith is executive director of Consumer Alert, a national non-profit consumer group.