Visa and MasterCard Face $38 Billion Suit

In earlier issues of Spotlight we have tracked the suit by the nation's largest retailers, including Wal-Mart Stores, Inc., Sears, Roebuck & Co., and Safeway, Inc. against the major banks that jointly own the two credit card associations. John R. Wilke has recently provided an excellent update on the case in the New York Times.

At the heart of the issue are the revenues to the banks and costs to the merchants of processing a bank's debit card vs. a MasterCard or Visa credit card transaction. To a considerable extent, the issue seems to hinge on what happens at the point of sale. If a customer submits a credit card issued by a bank, the card-issuing bank will typically approve the charge electronically. Retailers that accept those cards pay a processing fee or discount through the system to the bank that issued the card. The bank will bill consumers monthly for charges that they have made on their credit cards. If the customer fails to pay, the card-issuing bank loses.

A customer using an online debit card will enter his or her personal identification number (PIN) in a terminal at the point of sale. The amount of the purchase is deducted immediately from the customer's account to the retailer's account. Generally, the processing charge paid by retailers has been less for online debit cards than on credit cards, in large part because the credit risk has been removed through the immediate transfer of funds from the bank to the retailer.

The dispute arises when customers use their debit cards in offline mode; that is, they sign for the transaction (instead of entering a PIN) just as if it were a credit card transaction. The transaction is processed through the credit card authorization network, and the credit card merchant fees apply. Retailers estimate that processing online debit cards costs about nine cents per transaction, vs. $1.49 per $100 when processed as Visa and MasterCard transaction.

The merchants bringing the suit argue that Visa and MasterCard should not charge the same processing fees on their debit cards as on their were credit cards. The retailers point out that Visa and MasterCard charge them a higher processing fee than those charged on competitive debit cards. In response, the banks point out that, since they are processing the debit purchases through the same system used for credit purchases, the processing charges should be the same.

At the moment the case is before the federal court in Brooklyn, NY. Last year, an appeals court ruled that the case could be tried as a class-action suit. Were the retailers to win, most would be entitled to damages from Visa and MasterCard. Recently, Visa and MasterCard appealed to the U.S. Supreme Court the certification of the case as a class action suit. That appeal revealed for the first time the retailers' estimate of the potential liability for damages: a staggering $38 billion.