May 1, 2003
Visa and MasterCard have agreed to pay $3 billion to settle a suit over debit-card fees filed by Wal-Mart, Sears and other large merchants. The companies will also stop requiring retailers to accept both their credit and debit cards and will lower their transaction fees by about $1 billion per year.
It's a clear win for big retailers, who will save from $1.5 billion to $2 billion annually in fees. It's a strategic win for the card companies, who saved themselves a lot of bad publicity if the case had gone to trial.
But is it a win for consumers? Both sides -- the stores and the card companies -- claimed to be fighting for the rights of consumers, but just how the settlement will help shoppers is open to debate.
"Consumers are the losers in all of this," said David Robertson of a credit card industry publication, the Nilson Report.
"It's a victory for both retailers and consumers because high fees have driven up the price of every product sold," said Mallory Duncan of the National Retail Federation.
Most analysts thought it unlikely that retail prices would drop as a result of the settlement, though it's possible that Wal-Mart and other discounters might shave a few cents off the average purchase.
Sears and Wal-Mart were barred from discussing the suit under a gag order issued by the court.
One thing everyone agrees on: the banks who make big money from debit fees -- J.P. Morgan Chase and Citigroup, among others -- will take a huge hit under terms of the settlement. That means they'll be looking for other ways to increase revenue, possibly through increased fees and interest rates.
In the class action suit on behalf of thousands of retailers, the stores argued that Visa and MasterCard unfairly required merchants to accept their debit cards, which require a customer's signature to verify a transaction. Retailers would rather use less expensive independent networks that clear debit-card purchases using a personal identification number (PIN).
Visa and MasterCard say the policy -- known to retailers as honor-all-cards -- increases consumer choice and offers better protection against fraud. The retailers say the higher fees wind up being passed on to consumers. The card companies charge transaction fees of about 1.7 percent for large retailers and about 2.5 percent for smaller ones.
The costs add up quickly for merchants. On a $100 purchase, a large retailer would pay 25 cents to 50 cents to clear a debit card purchase on a regional network, while it wuold pay about $1.75 to process it through Visa or MasterCard.
