Visa: You Can't Leave Us, Even If You Don't Love Us

  Visa USA for years forced merchants to accept its Visa check card, only to back down from its "honor-all-cards" policy when it settled in May the merchant class-action lawsuit led by Wal-Mart Stores Inc. Now the organization is trying to force financial institutions to keep issuing its signature-based, or offline, debit card called the Visa check card. But this time Visa faces an antitrust challenge from offline debit card issuers and possibly from government enforcers.
  Visa's board of directors in June voted to change association bylaws by financially penalizing any top-100 check card issuer that defects to another brand to avoid the fallout of Visa's $2 billion settlement in the merchant case that resulted in Visa dropping its honor-all-cards policy starting Jan. 1 ("The Retailers' Home Run," July). The action came to light Aug. 1, when Visa notified Wayzata, Minn.-based TCF Financial Corp. of the change and TCF decided to go public with it.
  William Cooper, TCF chairman and chief executive, says Visa notified his bank of the bylaw change after TCF, whose Visa contract is up for renewal, sent requests for proposals regarding its debit program to Visa, MasterCard International and American Express Co. TCF had 1.36 million Visa check cards and another 53,000 automated teller machine cards outstanding in 2002, making the firm the 27th-largest debit card issuer, according to Thomson Media's Card Industry Directory.
  "Instead of bidding, Visa sent us something that says we can't leave," Cooper says. "Visa never told anyone about the bylaw change, which is despicable in itself."
  Cooper contends the major credit card issuers on Visa's board, which include such TCF competitors as Wells Fargo & Co., Bank One Corp. and U.S. Bancorp, are controlling association policy. He cites as evidence Visa's decision to lower by one-third the interchange merchant acquirers pay to Visa check card issuers from Aug. 1 through the end of the year while at the same time increasing credit card interchange. He contends the honor-all-cards rule was for the benefit of credit card issuers, so they should have to pay their fair share of the settlement.
  'Dangerous Things'
  "There's a lot of dangerous things happening in the banking business as we're moving toward electronic banking and who controls it and in what fashion," Cooper says, noting that TCF, which does not issue credit cards, would have to pay $20 million to leave Visa. "I had nothing to do with the honor-all-cards rule. I worked under Visa's assurances that they did nothing wrong, and now they want me to pay for it."
  In a statement, Visa notes that check card issuers over the years have realized the benefits from the marketing, brand distinction and revenue from check card transactions, and the new rule ensures that those same financial institutions will assist Visa in fulfilling the settlement.
  "This decision was the best way to ensure an equitable and fair distribution of our settlement obligations," the statement reads.
  Cooper says he is unsure if TCF will take Visa to court. "We're getting a little tired of being the lone horse out here," he says. "Others say roll over and let Visa do what it wants to do."
  An executive from another top-50 Visa check card issuer, who asked not to be identified, says he understands TCF's position. But he says Visa is trying to keep all of its members happy.
  "If we stay and TCF decides to go, I'm not paying TCF's share of the settlement," he says. "Part of me feels for where TCF is coming from, but another says they need to look at the realities. If they stay with Visa, they won't be paying a penny of that ($20 million) fee."
  The executive, though, agrees with Cooper that issuers need to worry about market forces outside their control that may cause their offline debit card volumes to drop low enough to cause Visa to impose fines. Factors that could influence Visa check card usage include increased use of debit cards' personal identification numbers instead of signatures, electronic check conversions and automated clearinghouse transactions.
  "This is disturbing, and it's something we've addressed with Visa," the executive says. "It's a legitimate concern we all should have."
  David Balto, a former Federal Trade Commission antitrust policy director, says Visa's bylaw change raises antitrust and contract-legality questions.
  "Typically you can't change contract rules retroactively," he says. "And authorities have challenged exit fees."
  Balto adds that the new bylaw raises similar issues that the U.S. Department of Justice raised in its antitrust complaint challenging Visa and MasterCard policies that enable members to issue both Visa and MasterCard cards, but not American Express or Discover Financial Services cards.
  "What the Visa rule says in the Justice Department case is you have to leave Visa if you want to issue American Express," he says. "But now when you leave you'll pay a huge exit fee."
  In the DoJ case, a U.S. District Court judge in Manhattan ruled in 2001 that Visa and MasterCard must allow their members to issue AmEx and Discover cards. The exclusionary rules remain in effect pending a federal appellate court's ruling on the card associations' appeal of the lower court's decision.
  American Express says it is eager to work with U.S. banks. Few if any such exclusionary rules exist in other parts of the world. "But we'll have to wait and see what the final outcome of the appeal is," a spokesperson says.
  Exit fees raise antitrust concerns, according to Balto. "It is something that will get serious antitrust scrutiny from the federal government," he says. A DoJ spokesperson did not return a CCM call for comment.
  Balto cites as an example the Canadian Competition Bureau's successful challenge several years ago to a policy at Interac that forced financial institutions that wanted to leave the debit network to receive just $1 per share in the organization, even though Interac shares were worth more. "The rule prevented anyone from leaving Interac," he says.
  More Challenges
  Other observers believe disputes similar to TCF's will become more common as the details of the settlements in the merchant class-action case and how they affect issuers become clearer.
  "Even though the associations have explicit rules on how these are handled, the amounts are significant enough and absolutely issuers will push back and will challenge the way the settlements are being allocated and administered," says Les Riedl, executive vice president at the Atlanta-based Speer & Associates consultancy. "Not just on the Visa side but on the MasterCard side as well."
  Executives at MasterCard, which agreed to pay $1 billion to settle the lawsuit, say they have no exit-fee bylaw. And they used Visa's bylaw change to take a stab at their chief competitor.
  "Restrictions of this nature take away members' freedom to choose, and are inappropriate and antithetical to free markets," says Alan Heuer, MasterCard senior executive vice president, in a statement. "This heavy-handed attempt by Visa to restrict competition seems to indicate that Visa is afraid that absent the threat of harsh punishment, they would not be able to hold on to their debit business."