MasterCard International's annual report provided a refreshed roster of litigation and other risks that the company is facing.
There were the well-known cases like the Justice Department's antitrust suit that would allow MasterCard and Visa U.S.A. member banks to issue American Express and Discover cards, and offshoots of the settled retailer class action known as the Wal-Mart suit.
But MasterCard, which is based in Purchase, N.Y., also spelled out other threats in the 10-Q report, filed last week with the Securities and Exchange Commission. These include closer regulatory scrutiny of its (and Visa's) interchange fee system, through which bank issuers and merchant acquirers generate considerable revenue; the potential fallout if, after merging, J.P. Morgan Chase Co. and Bank One Corp. dedicate their mammoth card business to Visa; and the further diminishment of MasterCard's U.S. debit network.
According to the 10-Q, regulatory scrutiny of interchange has spread. In addition to current investigations by the European Union, Australia, and the United Kingdom's Office of Fair Trading, "interchange fees are also being reviewed in a number of other jurisdictions, including Poland, Spain, New Zealand, and Switzerland," the report said.
The reduction or elimination of interchange fees could erode MasterCard's membership and transaction volume, the company acknowledged. Such an event could also "make proprietary end-to-end networks (such as those offered by American Express and [Citigroup Inc.'s] Diners Club) or other forms of payment more attractive."
In Australia, the report said, the central bank's regulations that lowered MasterCard and Visa interchange have already benefited competing proprietary networks, which have direct contracts with merchants and so do not operate interchange systems.
On the J.P. Morgan Chase merger with Bank One, MasterCard acknowledged that the New York company is "the parent of one of our largest principal members and stockholders" and that the Chicago company is "principally aligned with Visa." Lost business with Chase obviously could dampen MasterCard's revenues, it said.
Last month the head of the Chase card business, Richard J. Srednicki, was named the new chairman of MasterCard's U.S. board. Unlike Visa's, MasterCard's board members do not have excusive contracts with the brand.
MasterCard further said that "to date, a small number of merchants, including Wal-Mart, have announced that they will no longer accept MasterCard-branded debit cards." Spokeswoman Sharon Gamsin explained that apart from Wal-Mart, those merchants are "a handful of single-store merchants that just decided they won't take debit and, as we understand it, aren't taking either Visa or MasterCard."
The company also acknowledged that First Data Corp.'s acquisition of Concord EFS Inc. poses a threat to MasterCard's debit business.
The Wal-Mart lawsuit has spawned actions in 18 state courts, the company disclosed. Several lawsuits brought by merchants that opted out of the Wal-Mart class action are also pending.
As expected, MasterCard's $1 billion settlement in the Wal-Mart suit hurt its 2003 earnings. It posted a loss of $385.8 million even though revenue rose 18%, to $2.23 billion. Transaction volume rose 5.9%, to $1.27 trillion.
Visa U.S.A., which settled the Wal-Mart case for $2 billion, is not a stock-based corporation and does not file reports to the S.E.C. In its filing, MasterCard said that if Visa's "settlement service fee" is upheld in court, MasterCard's debit business would be harmed. Visa imposes the fee on any top 100 debit issuer that converts to MasterCard.
And there is also the currency conversion case in which a California state court ordered better disclosure and an unspecified restitution to California cardholders who paid the fees. In its filing, MasterCard disclosed that it "has been served with complaints in state courts in New York, Arizona, Texas, Florida, Arkansas, Kentucky, Illinois, and Tennessee seeking to, in effect, extend the judge's decision" in the California case to their states.
MasterCard also disclosed two suits related to merchant chargebacks.
Discussing the Justice Department case, MasterCard said it was not possible to predict the outcome of its planned petition to the Supreme Court. As was widely reported, in January the country's second-largest credit card issuer, MBNA Corp. of Wilmington, Del., signed an agreement with American Express Co. in anticipation of a legal defeat to MasterCard and Visa.
