Some Merchants Pass on Visa's Latest Price Hike

B y Patricia A. Murphy, The Takoma Group

The decision by Visa a few months back to hike the interchange rates on Interlink debit cards is prompting some retailers to give Interlink the old heave-ho. While the defectors include some big names in retailing, the shakeout isn't likely to result in many cards being turned away by merchants.

Wal-Mart, for example, figures that fewer than 10 percent of its debit payments are routed through Interlink, the online (PIN-based) debit network Visa operates. Nevertheless, the retailers' actions should be cause for concern, especially when viewed against the backdrop of antitrust litigation involving both Visa and its bankcard competitor, MasterCard.

The U.S. Department of Justice (DOJ) is suing the two associations, challenging the so-called "duality rule," which permits financial institutions to issue and acquire both MasterCard- and Visa-branded credit cards. DOJ also has taken issue with association rules prohibiting member banks from issuing competing card brands, such as Discover and American Express. In addition to this litigation, DOJ has also opened an investigation into Visa and MasterCard debit card policies.

Meanwhile, retail giant Wal-Mart leads a group representing up to 4 million Visa- and MasterCard-accepting merchants in a legal challenge to the Visa and MasterCard rules that require retailers accepting one type of Visa- or MasterCard-branded card to accept all cards that are so branded. In other words, any retailer accepting credit cards with the Visa logo is obliged to also accept all Visa debit cards.

The retailers' lawsuit also takes issue with the interchange fees for Visa- and MasterCard-branded offline debit cards. Offline debit cards, also known as "check cards," resemble credit cards in all but one important way: Check card transactions effect debits against demand deposit accounts (DDAs). In other words, the transactions seemingly function as electronic checks.

Wal-Mart and the other retailers giving Interlink the boot don't run afoul of the "honor-all-cards" rule because Interlink operates independently of Visa credit card programs. Debit cards with both the Visa and Interlink logos will be treated as offline, signature-based debit cards with no option for cash back. Debit cards with logos representing regional EFT networks (such as NYCE, Pulse and Star) will continue to be accepted.

In addition to Wal-Mart, at least two other retail chains have said they will stop accepting Interlink cards beginning in October: RaceTrac Petroleum Inc., which operates more than 500 gas stations around the country, and Publix Super Markets Inc., which operates more than 670 supermarkets throughout the Southeast.

Publix was one of the first grocery chains in the U.S. to accept debit cards, back in the 1980s. But like Wal-Mart, Publix says the new interchange rates make Interlink too expensive.

Credit card transactions trigger extensions of credit, which makes them riskier, experts agree, than debits against funds on deposit. Wal-Mart and other retailers want the bankcard associations to take this fact into consideration and cut interchange rates for check cards relative to the rates for credit cards. And they've hired Lloyd Constantine to present their case.

Constantine heads up Constantine & Partners, a small New York firm specializing in antitrust law. Before starting the firm, Constantine was chief of the antitrust division at the New York State Attorney General's office, where he also did battle against Visa and MasterCard - and won.

In the late 1980s, a task force of state attorneys general led by Constantine sued Visa and MasterCard, alleging a jointly planned online national POS debit card system (dubbed Entrée) would stifle competition, in violation of antitrust laws. The associations ultimately settled that lawsuit by pulling the plug on Entrée.

This time, the stakes are higher. What has come to be known as the "Wal- Mart suit" seeks damages that could total as much as $50 billion, according to some sources, and the right of retailers to refuse Visa- and MasterCard- branded debit cards.

The suit is in limbo, awaiting a decision by the U.S. Court of Appeals for the Second Circuit in New York, which is considering a Visa-MasterCard appeal of the class-action status granted the case.

If the class-action status is upheld, Constantine and his staff will need to contact every merchant that accepts MasterCard and Visa cards (about 4 million) and offer each the opportunity to sign on or opt out of the lawsuit. They should have plenty of time, though; indications are that the Wal-Mart case might not go to trial until a decision has been handed down in the DOJ suit.

DOJ's case was presented in the summer of 2000 in U.S. District Court for the Southern District of New York (New York City), as was the Visa/MasterCard defense. In October 2000, the presiding judge abruptly canceled plans to hear closing arguments from the two camps and has remained mum on the case since.

In the meantime, online debit costs continue to inch up. Within a month of Visa's announcement that it was raising interchange fees on Interlink transactions, Concord EFS raised its interchange rates. Concord operates three large ATM/POS networks under the Star brand name.

The new Concord interchange fees, which take effect Jan. 1, 2002, top out at 34 cents per transaction for most merchants; grocers will pay a flat fee of 19 cents a transaction. The new interchange fees for Interlink max out at 45 cents per transaction for most merchants; grocers pay 22 cents for each Interlink transaction processed.

The greatest beneficiaries of the increases in interchange fees will be the banks that issue debit cards to customers. Bank of America, which boasts more consumer DDAs than any other bank in the country, has made it clear it likes the Interlink approach to pricing. In August, BofA switched its debit card processing workload from Star to Visa.

(It's worth noting that Interlink originally was created by BofA, which sold the network to Visa in the early 1990s, and that Visa's genesis is also with BofA, as BankAmericard.)

And what about the merchants? While merchants have been held captive to interchange and the Visa/MasterCard honor-all-cards dictum for decades, the news from Wal-Mart and other merchants that they no longer will accept Interlink cards could create a wave of defections.

At this point, it's not entirely clear what the outcome will be, except, perhaps, to further weaken the utility of Interlink as a payment card. And, of course, it's a safe bet that the lawyers at Constantine & Partners and the Justice Department will be monitoring price changes and the marketplace ramifications.