isa USA and MasterCard International have reached separate settlement agreements with Wal-Mart Stores, Inc., Sears Roebuck & Co. and millions of other retailers in the class-action antitrust lawsuit involving debit cards. Combined, the associations will pay the retailers nearly $3 billion, lower their debit transaction fees and change their "honor all cards" policies.

The retailers filed the lawsuit against Visa and MasterCard in 1996 and were seeking up to $39 billion in damages. They claimed that as part of an "honor all cards" policy, Visa and MasterCard violated antitrust laws by forcing merchants to accept offline debit cards, which require a signature and are most costly to process, rather than less expensive online debit cards, which require a PIN. Visa and MasterCard argued that the policy was in the best interest of consumers.

MasterCard was the first to settle with the retailers in a surprise move just as the trial was set to begin on Monday, April 28, 2003 in Brooklyn, NY. Details of MasterCard's settlement began to leak out following the announcement even though U.S. District Court Judge John Gleeson asked all parties to keep information quiet in the interest of the trial. MasterCard did not admit to improper conduct but agreed to pay the retailers about $1 billion, reduce the debit card fees it charges them and change its "honor all cards" policy, beginning in January 2004, by giving retailers the choice of accepting either online or offline debit cards.

MasterCard will establish a separate interchange rate for its debit transactions (it previously blended credit and debit into a single interchange rate). MasterCard said the new rate will be at least one-third less than the current rate.

Gleeson referred to MasterCard's move to settle as an "11th hour" decision and, for a while, it appeared that Visa would stand trial alone. Gleeson had postponed opening arguments for the trial with Visa until Wednesday, April 30; however, on Wednesday morning he announced that Visa and the retailers were involved in "earnest and good faith efforts" to reach a settlement and that court would be adjourned until later in the week.

On Wednesday night, under increasing pressure following MasterCard's surprise settlement, Visa announced it also had agreed to settle. Visa will pay the retailers $2 billion and, like MasterCard, will reduce its debit card fees. Visa also agreed to modify its "honor all cards" policy.

Both of the associations will lower their transaction fees beginning August 1, 2003. They will pay $25 million of the settlements immediately and will pay out the remaining balances over 10 years.

The months leading up to the trial were far from lackluster. In January 2003, the associations asked Gleeson to throw out the antitrust class-action lawsuit, arguing that the retailers failed to provide sufficient evidence showing the associations were involved in a conspiracy to monopolize the debit card market.

The judge declined their request in April in a 16-page document, saying he believed there was evidence, both "direct and circumstantial," from which a jury could find a conspiracy.

Gleeson's decision served as a partial summary judgment for the retailers; he agreed with the claim that they were forced to abide by the associations' "honor all cards" policy, but decreed that it was up to a jury to decide if this policy was in violation of antitrust laws.

In March, MasterCard asked for a separate trial. Gleeson denied that request as well.

Many experts believe that by settling first, MasterCard got what it wanted, which ultimately was separation from Visa, the Wall Street Journal reported. MasterCard's debit program is smaller than Visa's (Visa controls about 80% of the market), and by extricating itself from Visa MasterCard would have to pay less in damages to the retailers.

Now that Visa has settled, too, the real issue could be with revenue of the associations' member banks. Since retailers will be charged less in fees and will have the freedom to use less costly PIN-based debit card networks such as STAR, Pulse or NYCE to route transactions, they also will pay less to banks and less to MasterCard and Visa.