Reading The Cards

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Though Visa U.S.A. and MasterCard have tried to depict their decisions to settle in the Wal-Mart lawsuit as having bank members' support, there are signs that many-particuarly those that issue debit cards only-are chafing about the terms as well as the deals themselves.

Debit-only issuers, including many midsize banks that sold their credit card portfolios to larger issuers in the late 1990s, are not heavily represented on the governing boards of Visa or MasterCard, which made the decisions to settle with the retailers. The associations will pay a combined $3 billion, lower-signature based debit intercharge fees by roughly a third, and modify the "honor all cards" rules to give merchants more options.

Members of the plaintiff class have until Sept. 5 to object to the terms, their chief lawyer said, but Visa and MasterCard banks have no formal recourse.

Some options they are mulling include charging customers fees for debit cards, coaxing customers to switch from debit to credit cards, and even suing the associations. Still, they are unlikely to recoup all the inter change they anticipate losing starting Aug. 1, when the lower fee schedule will take effect.

The Question Now: How To Proceed

Visa and MasterCard are also considering how to proceed. In November, Visa told members about Visa Extras, a comprehensive debit reward platform it planned to automatically extend to all issuers. It was to have been released this quarter and advertised heavily, but the introduction has been postponed at least 60 to 90 days so Visa can "reevaluate the economics and see if adjustments are necessary," a spokesperson said. "There is a lot of speculation about whether debit rewards are viable in the new environment."

But Visa is going ahead with the program on the assumption that they are. In a letter sent to its members on April 30, it defended and explained the changes wrought by the settlement, which it called "a reasonable and responsible resolution that serves the interests of member financial institutions, merchants, and consumers."

Sources said MasterCard debit issuers were particularly incensed by its settlement, which they feel forced Visa to settle. They said MasterCard, which has a 21% share of the U.S. debit market, undercut its members' interests just so it could put Visa in a very awkward position. Because of their membership in Visa and MasterCard, many executives said they would discuss the subject only if their names or some of their comments were not revealed.

Jeff Trachtman, the vice president in charge of card products at Fifth Third Bancorp of Cincinnati-one of MasterCard's largest debit issuers-said his department is trying to figure out how to make up for the lost interchange without angering customers.

"There is clearly a revenue gap here for every financial institution," he said. "We are putting together what alternatives there are and making sure that we are not being shortsighted."

By migrating debit users to credit cards, issuers would retain signature fees. "The problem is, I don't think the market is really quite sure whether this generation of debit card users is going to grow out of debit," Trachtman said.

Though the biggest banks have the most to lose-both Bank One Corp. and Bank of America Corp. said they expected to lose $60 million of debit interchange revenue this year -community banks are primarily worried about the changes to "honor all cards."

Jim Ghiglieri, the president of Alpha Community Bank in Toluca, Ill., said it will be at more of a disadvantage to big national banks.

"Our customers have access to the (card payments) system because of the Visa and MasterCard aspect" of it. "What if (merchants) don't accept the cards that our customers, as a $200 million bank in north central Illinois, present?"

The settlements could "take apart a system that has been pretty efficient," according to Ghiglieri.

Also, First Data Corp.'s planned purchase of Concord EFS Inc. might complicate a situation that bankers already view as confusing and complex, he said. "We still don't know how that will play out or how First Data will use the immense power they will have."

Surprised By Settlement

Viveca Y. Ware, the director of payment systems for the Independent Community Bankers of America, said her members were surprised by the settlement and uncertain about its ramifications, including how much banks will have to pay for the settlement.

"Each merchant will have the ability to determine whether it will accept debit cards, and consumers will very well walk into a store not knowing if their debit card will be accepted," she said. "I'm not sure how that will work out."

Alan Mandelbaum, the senior vice president of retail product management at Webster Financial Corp., said his Westbury, Conn., company was surprised by the settlements. "We had not anticipated that it would happen this year, which will affect our fee income projections for the year, like all banks." Webster is considering changes to its fee structure.

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