Debit Deflation

  I was sorely disappointed when MasterCard and Visa settled just as trial was about to start in the retailers' mega-class-action lawsuit against them over debit cards. The curtain hiding the inner workings of the card associations, and to a certain degree their bank members, was about to be pulled back. Ranking executives, not used to being second-guessed, would be squirming in the witness chair. Secrets would have been exposed. Oh, the fun!
  Of course, the associations almost certainly did the right thing in getting out while the going was at least a little good. The $3 billion they'll pay over 10 years is just a fraction of what they could have been liable for in punitive damages had they lost at trial.
  And it looked like they were going to lose, because U.S. District Judge John Gleeson sided with the retailers on all the major issues that came up at summary judgment shortly before the trial. The retailers wanted to be free of the associations' "honor-all-cards" rules forcing them to accept signature-based (offline) debit cards if they accept Visa/MasterCard credit cards. In a key ruling, Judge Gleeson said credit and debit card acceptance were separate services, not a unified whole as the associations contended.
  The retailers obtained in the settlements everything they had sought since the suit was filed more than six years ago. The honor-all-cards policies are now gone. The plaintiffs will be $3 billion richer. And their most important goal, lower card-acceptance costs, was achieved, as both associations are lowering offline debit interchange by about a third for most of the rest of 2003.
  The settlements raised many questions, however. What will happen to interchange in 2004? Did Visa get off easy, relatively speaking, because it is paying "only" $2 billion compared with MasterCard's $1 billion, even though Visa has a nearly 80% share of the offline debit market? Will banks withdraw the rewards and enhancements they've attached to offline debit cards recently because the cards' chief revenue stream will be reduced? How much have Visa and MasterCard racked up in legal fees? Do the lawsuits still pending from a handful of retailers that opted out of the class action, including Home Depot and Toys "R" Us, represent a real threat to the associations, or are they mere nuisances? Are members frustrated that the associations, which they own, have lost this and other big lawsuits lately, including the U.S. Department of Justice case and an action in California challenging their currency-conversion fees?
  One thing is certain: there is now a worldwide challenge to the associations' perceived monopolistic power to set merchants' card-acceptance prices at levels disproportionately favorable to the recipients of interchange, card issuers. Australia's central bank is forcing interchange down in that country by 40%, and in Europe, Visa, under pressure from the European Commission, is reducing interchange on cross-border transactions ("The Attack on Interchange," November 2002).
  We Americans frequently use private lawsuits to accomplish what essentially amounts to public policy, but when it comes to card pricing, the effect is the same as elsewhere. No longer will the process of setting interchange be such a one-sided affair.