The class action suit against Visa and MasterCard by a group of merchants led by Wal-Mart may still lack an opening date, but rehearsals have begun in earnest.

A dry run of sorts took place on Wednesday. While far from the courtroom, the exchange — which took place under the protective auspices of the American Bar Association’s antitrust section — offered a window into the arguments likely to emerge in the battle over the associations’ merchant interchange fees.

Participants included Stephen V. Bomse, an outside counsel for Visa U.S.A. who helped defend the association in last summer’s antitrust trial brought by the Justice Department. He also represents Visa in the as-yet-unscheduled Wal-Mart civil trial.

On the other side were Alan S. Frankel, an economist who directs the Law and Economics Consulting Group in Evanston, Ill., and David A. Balto, the Federal Trade Commission’s assistant director of the office of policy and evaluation.

The arguments Mr. Balto and Mr. Frankel made against interchange may well recur in the retailers’ lawsuit, which was first brought by Wal-Mart but has attained class action status. Visa and MasterCard have appealed that status.

Visa U.S.A. and MasterCard set the rates of interchange — a fee, based on a percentage of the transaction cost, that a merchant’s acquiring bank must pay to the customer’s card-issuing bank — and the retailers contend that the rates they set for signature-based debit cards are unfairly high.

Mr. Balto said that interchange was created to help card-issuing banks recover costs they incurred through losses, float, and fraud, but that historical justifications are irrelevant now that transactions have migrated from paper to electronics. Interchange rates are no longer “a neutral transfer” of money between issuers’ banks and merchants’ banks, he said.

“Visa had a really good story in the 1970s, when most transactions were on paper, but now the risks of loss are negligible,” Mr. Balto said.

Mr. Bomse, a partner at the San Francisco firm Heller Ehrman White & McAuliffe LLP, called interchange a necessary “mechanism” underpinning the card-based payments system. He argued that the payments system is a “two-sided market” consisting of merchants and cardholders, and said, “Interchange fees are simply a matter of an interdependent payments system.”

“Look,” Mr. Bomse said. “Visa and MasterCard are great deals. They are amazing products that confer enormous benefits to both cardholders and merchants. Maybe we ought to be awarding medals rather than threatening treble damages,” which is what the retailers’ lawsuit seeks.

Mr. Balto was the official moderator of the American Bar Association forum, which was held at the Washington law offices of Arnold & Porter and transmitted by video to law firms in other cities, and Mr. Bomse and Mr. Frankel were the official guest speakers. But arguments were made by all three, before an audience that included Melvin A Schwarz, lead prosecutor in the Justice Department’s unresolved antitrust case against Visa and MasterCard; Marcy Wilkov, in-house counsel for American Express; and Brian P. Brosnahan, another Heller Ehrman lawyer who represents Visa.

Mr. Frankel, an economics consultant who has worked extensively with the banking and credit card industries and the Justice Department, argued that interchange gives the card associations a license to collect taxes.

“The issuing banks are collecting a monopoly tax from the entire retail economy, in essence for doing nothing,” he said. “And they get revenue and kickbacks for credit card users.”

Mr. Frankel said bank card issuers earn a reputed $14 billion in profits annually from interchange fees. “It’s a brilliant scheme,” he said. “This makes the Microsoft case look small in comparison.”

Furthermore, Mr. Frankel charged, because merchants pass the cost of interchange back to their customers, people who pay by cash and check effectively subsidize credit card users. “And who’s paying cash?” he asked. “The poorest people in our economy are paying Visa’s interchange fee. You don’t hear Visa talking about this unless David [Balto] or I bring it up.”

Mr. Bomse — who has handled cases for Visa since 1980 and quipped, “Representing Visa means always having to say you’re sorry” — rebutted Mr. Frankel’s accusation that interchange was “wasteful, rent-seeking behavior.”

The real question, Mr. Bomse said, is why proprietary networks such as the one run by American Express can also set interchange rates without being sued. American Express’ rates are higher than those of Visa or MasterCard. “Is American Express subject to these kinds of damages for behaving in the same way? If not, why is Visa?” Mr. Bomse asked.

Mr. Frankel responded, “Saying, ‘We should be able to act like American Express’ isn’t much of a defense.” He said that since Visa wields more market power than American Express, the situations are different.

Moreover, American Express does not issue debit cards, which are at the heart of the retailers’ lawsuit. The merchants are challenging Visa and MasterCard rules that require them to accept those brands of debit cards as a condition of accepting those brands of credit cards. They say these rules violate an antitrust law that forbids companies to tie one product to another.

The merchants would prefer to accept PIN-based debit transactions which carry fees of around 10 to 12 cents per transaction. The fee for the signature-based Visa check card is about 1.25% of the transaction cost plus 10 cents, and MasterCard’s signature-based debit product charges about 1.36% of the transaction cost plus 10 cents. The prices vary on the basis of merchant volume and other factors.

Retailers often try to coax customers at the point of sale to use the PIN-based products. This practice is called “steering,” which Mr. Bomse said is permitted under Visa rules. But opponents of the associations have said that before the Federal Trade Commission and others began looking into the retailers’ claims, Visa’s rules prohibited steering.

Mr. Frankel said that though retailers may steer consumers toward using the less expensive products, the banks and associations are doing the opposite. He said he recently got a mail offer from Bank One Corp. that entered cardholders in a sweepstakes only when they used their signature-based debit cards.

“Consumers are rewarded for using the most expensive, and not the least expensive, system,” Mr. Frankel said.


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