Visa: Pay to Abandon Ship

You will recall that Visa and MasterCard recently settled a multi-billion dollar suit brought by retailers. Although Visa has promised its members that they would not be charged for the costs of the settlement, some have decided to jump ship, presumably in order to avoid helping to pay for the settlement. However, Jathon Sapsford and Mitchell Pacell point out in their article in the New York Times that Visa's management had anticipated this possible reaction and passed an amendment to its bylaws "so that any bank that bolted from Visa would be hit with big settlement fees."

This change came to light when TCF Financial told Visa that it was considering dropping its membership with Visa and switching to MasterCard. (TCF is the 11th largest issuer of of Visa-branded debit cards in the U.S.). According the American Banker, TCF was nearing the expiration of its existing Visa debit card contract, and was prepared to negotiate with both Visa and MasterCard for a more favorable interchange rate. When informed that, under the change in the bylaws, it could cost about $20 million to do so, TCF Chairman and CEO, William Cooper, commented, "This is outrageous. If you're a member of a health club, and decide you don't like it, you should be able to leave without having to pay for the guy who slipped on the ice in front of the club." He added, "Visa implemented the penalty fees not because they can't afford to pay (the settlement) otherwise. They are doing this because they don't want me to bid my business."

Under the revised bylaws, "the amount that must be paid by banks that decide to leave the association would be determined by the bank's share of Visa's debit-card issuance and the time left in the 10-year period during which Visa agreed to complete the $2 billion settlement payments." Moreover, even if TCF did not immediately leave Visa, it would be required to pay a fee if its volume declined more than 10% below pre-settlement levels. An anonymous industry executive interviewed by the American Banker said that the penalties for switching debt brands would likely discourage issuers from switching to MasterCard, American Express or Discover Financial Services. The executive said the service fee "is definitely preemptive on a number of fronts. Is it challengeable? That I don't know." This sounds to your editors like another lawsuit waiting to happen.