Wednesday, August 31, 2005
MasterCard plans to go public under new ownership structure By Steve Gelsi. NEW YORK (MarketWatch)
MasterCard on Wednesday unveiled a new ownership structure and said it plans to become a publicly traded company. Under the new corporate governance and ownership structure, MasterCard's current shareholders, approximately 1,400 financial institutions worldwide, are expected to retain a 41% equity interest in MasterCard Inc. Through their ownership of non-voting Class B common stock. MasterCard also intends to issue shares of voting Class A common stock to public investors through an initial public offering. Public investors will hold shares representing an expected 49% of the company's equity and 83% of its voting rights. (Source: MarketWatch)
[WayTooHigh.com commentary: The news of banks unloading shares in MasterCard reminds me of a case-study example from the old adage of how to invest. As the story goes, there are three types of investments for betting on new oil wells. "Type A" - a sure thing - is where you know that oil is in the ground, it is seeping out of the surface -- you are swimming in the stuff and that is where you personally invest along with your closest friends and family members. "Type B" - we'll, we're in Texas and there's just got to be oil here - is where there might be oil, but you have to drill and explore; this is where you get the neighbors and distant friends to go along. And, "Type C" - throwing darts at a map - is where you haven't a clue; that is where "investors" risk the capital. With a multi-billion dollar antitrust price-fixing class action threatening the core of MasterCard's Interchange revenue stream, what better way to hedge your investment than to charm the IPO public markets with an opportunity to own what might be a threatened business. MasterCard was always a "Type A" investment for the banks, that was until its customers caught on to the nearly one-hundred separate Interchange fees in the U.S., which are among the highest in the world. I use this oil analogy because as the nation faces record high gas prices, the credit card association members are reaping windfall profits; they typically earn a percent of the sale from every gallon pumped. Since gas prices have doubled, MasterCard and Visa also benefiting from profiteering from motorists, consumers and businesses throughout our country. As the government prepares to open the valves to our nation's strategic oil reserves to soften the effects of soaring gas price, what is MasterCard and Visa doing to help?].
Tuesday, August 30, 2005
BY MONEE FIELDS-WHITE / Bloomberg News, 08/30/2005
Kenneth Chenault, CEO of American Express Co., has been a winner for much of his life. He was junior class president and a star athlete at the Waldorf School, a private school in Garden City, N.Y. He went on to graduate magna cum laude from Bowdoin College in Maine and earned a degree at Harvard Law School.
Since taking over AmEx in 2001, Chenault, 54, has led the New York-based company to 14 straight quarterly earnings increases of more than 10 percent. Warren Buffett, whose Berkshire Hathaway Inc. is American Express' biggest shareholder, with a 12.2 percent stake, praises Chenault's stewardship.
"I need all the help I can get -- and Ken has certainly provided it," Buffett said. Chenault will be hard-pressed to keep his winning streak alive. On June 30, Charlotte, N.C.-based Bank of America Corp. agreed to pay $35 billion for Wilmington-based MBNA Corp., the largest independent credit card issuer and Delaware's largest private employer.
The acquisition threatens a relationship in which American Express and MBNA issue co-branded credit cards that helped boost AmEx's second-quarter profit by 16 percent to a record $1.01 billion.
The U.S. Supreme Court opened the door for such partnerships in October 2004 when it refused to let Visa International Inc. and MasterCard International Inc. block banks from issuing their competitors' cards. Chenault also has completed deals with Citigroup Inc., UBS AG and USAA Federal Savings Bank.
"I've been in the company since 1981 and involved in the card business since 1984, and I believe we are in the strongest position we've been in," Chenault said. "I remain confident in our overall network strategy and our relationship with MBNA going forward."
MBNA and Bank of America officials have yet to say whether the American Express partnership will continue after Bank of America completes its buyout in late 2005 or early 2006.
Chenault has to contend with attempts by Visa and MasterCard to go after his high-spending customers as well. AmEx cardholders on average spent about $9,460 per card last year -- four times more than Visa and MasterCard's customers, American Express said.
AmEx customers pay an annual fee -- ranging from $65 to $395 a year -- for the popular, reward-based charge cards, which offer everything from access to private airport clubs to invitation-only events. While many Visa and MasterCard credit cards offer similar services, some of theirs have no annual fees and give cash advances.
Taking the heat Chenault also must placate merchants who are grumbling about credit card companies' fees. American Express charges businesses an average of 2.54 percent of the price of a purchase to carry out a transaction compared with an average of 2 percent for Visa and MasterCard.
Those businesses accepting credit cards regularly complain about the fees. Walgreen Co., the largest U.S. drugstore chain, threatened in December to end its agreement with AmEx. Some merchants have fought back by filing an antitrust lawsuit against Visa and MasterCard.
"When you are looking at 2 percent- 2.5 percent of sales, that's a substantial amount of money," said Mitchell Goldstone, CEO of 30 Minute Photos Etc., which is listed as a plaintiff in the suit.
Finally, Chenault has taken some heat about doing business in countries that allegedly sponsor international terrorism. In December, the California Public Employees' Retirement System (CalPERS), the largest U.S. public pension fund, sent letters to almost 2,000 companies in which it owns shares, including American Express.
CalPERS requested information on AmEx's business in Sudan, a country the United States says sponsors terrorism. AmEx said it responded in late May, stating it had canceled its operations in the Sudan when U.N. sanctions were imposed in 1995.
Revenue hit record as earnings grew John Augustine, 43, chief investment strategist at Fifth Third Asset Management, which owns 292,646 AmEx shares, said investors are anxious about Chenault's ability to sustain earnings growth.
"Our concern is that if the momentum stops, how that could affect American Express's top-line growth, because it is really a top-line story for investors," he said.
The company's momentum has been building since the end of 2001, the year Chenault became the first black CEO of one of the 30 companies that make up the Dow Jones Industrial Average.
Last year's revenue hit a record $29.1 billion, up 13 percent from a year earlier and up 29 percent from 2001. Profit almost tripled, to $3.45 billion, during the same three-year period, rising 15 percent last year alone.
Total return to shareholders jumped 18 percent in 2004 compared with a 5 percent gain for the Dow Jones index and an 11 percent rise for the S&P 500 Index, according to its 2004 annual report.
American Express generates more than three-quarters of its revenue from its credit card business and travel services. Chenault said his first order of business is boosting the number of cardholders in an industry that has grown three-fold in 10 years. Global spending on credit and debit cards totaled $5.6 trillion in 2004, up 13.8 percent from the previous year, according to the Nilson Report, a newsletter that monitors the industry.
Visa, whose cardholders account for 43 percent of U.S. purchase volume, and MasterCard, with 30 percent, still dominate the market. American Express is jockeying for position, at 21 percent.
The News Journal.
Saturday, August 27, 2005
DID YOU KNOW?
If you thought the gas companies were reaping huge profits at the expense of our dependency on petroleum, know this: Soaring gas prices means that more consumers are using credit cards to pay for filling up at the pumps. The credit card interchange fee costs motorists as much as $1.50 per fill-up!
The Colorado/Wyoming Petroleum Marketers Association reports that "for every gallon of gasoline or diesel fuel sold today, as much as seven cents or more per gallon is spent in processing the credit card transaction. Credit card fees are a significant factor contributing to the price of fuel."
Credit card transaction fees paid by retailers have been increasing creating a windfall for the credit card processing company on the high cost of fuel. Because the Interchange fees are a percentage of each transaction and is accompanied by other fees that banks collect from retailers every time a credit card or debit card is used to pay for a purchase, the credit card associations' members seem to be profiteering from our nation's record high gas prices. As the price of fuel increases, so to do the profits to the credit card companies, yet there cost of processing the transaction is the same.
Tuesday, August 23, 2005
As interchange costs continue to increase, private label cards are resurfacing as a choice payment option for retailers. Here's why ... Private label cards have no interchange (in the traditional sense as defined by the card associations)
Monday, August 22, 2005
Mr Renouf said government and regulators had not forced financial institutions to reveal what proportion of the banks' penalty revenue was cost recovery and what was profit, the ABC reported.
He said it was illegal for banks to charge more than it costs to recover losses.
"The fees are imposed because consumers don't comply with their contracts, for example, by having not funds available for a direct debit or overspending on their credit card, or not paying on time," he said.
"You're entitled to charge the cost that has been incurred and not some greater amount to make a profit."
Raking it in. Banks charged households $3.44 billion in fees in 2004, a healthy 12 per cent jump from $3.44 billion in 2003.
A huge proportion of that, or $787 million, was charged on credit cards, up from $607 million in 2003. That was closely followed by $746 million charged on home loans in 2004, up from $679 million in 2003.
The ANZ Bank (anz.ASX:Quote,News) today posted a record $2.81 billion net profit for the year to September 30, 2004, up 20 per cent on the previous year, helped by strong growth in personal lending and bank fees.
ANZ reported mortgage growth of 15 per cent for the 12 months to July 2005. Credit cards continue to perform well with outstandings up 18 per cent.
"Declining credit spreads continue to impact margins, offset by improved non-interest income in the second half," the bank said.
Over the past decade, all big banks have earned a rising proportion of their total income from fees, particularly on credit products.
The major reason for this has been the slower growth in interest income due to declining margins, according to the Reserve Bank of Australia.
However, the increases in bank fees and other non-interest income earned by banks has not been sufficient to offset the decline in interest margins from housesholds, the central bank said earlier this month.
Fortunatley for consumers, recent credit card reform has also resulted in interchange fees charged by Bankcard, MasterCard and Visa card schemes being reduced to around a little over half of their previous level, the central bank said earlier this month.
The Reserve Bank said competition by credit card providers will likely ensure that the new, lower fees will flow through to merchants and ultimately reflect in the prices that consumers pay.
(source: The Advertiser, Adelaide, Australia)
Thursday, August 18, 2005
The first suit was filed in June 2005, when several smaller merchants banded together to sue both card Associations and their member banks over similar complaints (see "Merchants Bring Interchange Lawsuit," The Green Sheet, July 11, 2005, 05:07:01 ).
On July 14, 2005, a group of retailers led by The Kroger Co., the corporate parent of Ralph's, filed suit against Visa International and Visa U.S.A. in U.S. District Court for the Southern District of New York. Kroger objects to Visa's engagement in "price fixing and restricting competition related to credit card transaction fees."
Other plaintiffs include Ahold U.S.A. Inc.; Albertson's Inc.; Eckerd Corp.; Maxi Drug Inc.; Safeway Inc.; and Walgreen Co.
The most recent suit does not list MasterCard International or its member banks as defendants. However, Visa's member banks are listed as alleged "co-conspirators" because of their direct involvement with Visa.
The major retailer chains contend, according to the text of the lawsuit, that Visa and its member banks conspire to "eliminate plaintiffs' and other merchants' ability to negotiate lower interchange fees through a set of restraints in Association rules," including the No Surcharge and Honor All Cards rules.
They claim that ever-increasing interchange costs retailers and consumers an estimated $20 billion each year.
For 2005, they expect to pay a total of $350 million in interchange fees, up more than 215% over the past five years. During that five-year period, Kroger said Visa has raised its rate 11 times.
"At a time when technology has made card authorization and processing faster, cheaper, safer and more efficient than ever, we believe that our customers should be receiving the benefit of declining interchange fees," said Paul Heldman, Kroger Senior Vice President and General Counsel. "Instead, Visa is using its extraordinary market power to profit at our customers' expense."
Visa cannot yet comment on the specifics of the suit, Paul Cohen, Visa U.S.A. Vice President said in a statement. He did say that merchants are trying to shift the burden to consumers while receiving "all the value of electronic payments," and "the marketplace, not a courthouse, is the best determinant of price."
What Are the Implications?
"These suits underscore the extreme dissatisfaction and frustration merchants feel over practices Visa has engaged in over many years," said Tracy Mullins, National Retail Federation President and Chief Executive Officer.
The question is will these lawsuits succeed in bringing about lower interchange rates? Equity research firm Thomas Weisel Partners said under certain circumstances, it is possible that lower rates could result. The firm's July 15, 2005 Financial Products Update addresses the recent lawsuits and speculates about the consequences.
"If the suits gain class action status, the card organizations may be forced to adjust their existing interchange practices and create a uniform rate system for all retailers," firm analysts Mark Sproule and Kyle Doherty wrote. They also cite precedents set by such large retailers as Wal-Mart Stores Inc., which negotiated its own individual interchange contract.
An Interchange Suit Dismissed
Less than 10 days after Kroger filed its case, the federal court in the Northern District of California dismissed a similar case involving retailer complaints over interchange fees.
In the case of Kendall v. Visa U.S.A. Inc. et al, filed last year, several merchants charged that Visa, MasterCard and a number of their member banks were in violation of Section 1 of the Sherman Antitrust Act by setting merchant discount and interchange fees.
In response to the court's dismissal of the case, MasterCard's General Counsel Noah J. Hanft said MasterCard is pleased that the court applied "existing antitrust precedent."
In his ruling, Judge Jeffrey S. White stated that an antitrust claim cannot be brought by an indirect purchaser. Since the card Associations set interchange fees to acquirers, which pass along the fees to merchants who are charged a discount fee, merchants are not direct recipients of interchange.
The National Retail Federation's (NRF) General Counsel Mallory Duncan said of the case that "no precedents were established" and "MasterCard is bragging that they squashed a fly." NRF spokesperson Craig Shearman called it a "totally insignificant case."
The Green Sheets
American Express and Diners Club have snatched a bigger share of the credit card market despite hidden fees and charges more than double those of competitors Visa, Mastercard and Bankcard, Reserve Bank figures reveal.
The Reserve Bank said changes it introduced in 2003 to cut the hidden credit card charges - called interchange fees - had reduced prices that all consumers pay for goods and services.
"As a result of the bank's reforms, merchants' cost of accepting credit and charge card payments were around $580 million lower over the past year than they would otherwise have been," a Reserve Bank report said.
"Given the competitive nature of Australian business, these cost savings are finding their way into lower prices for goods and services, or smaller price increases than would otherwise have taken place."
The changes have created greater competition in the credit card industry, with several new entrants challenging the banks' stranglehold on the market.
Figures released by the bank yesterday show American Express charged an average merchant
service fee of 2.36 per cent on each card purchase and Diners Club 2.31 per cent. The average merchant service fee charged by Visa, Mastercard and Bankcard has fallen to 0.92 per cent of each purchase, down from 1.4 per cent before the Reserve Bank's fee changes. Consumers pay for these fees indirectly as merchants pass them on in higher prices for goods and services.
The Reserve Bank said the average merchant service fee charged by American Express and Diners Club had fallen modestly since the overhaul of the credit card system and it expects these charges to fall further.
"The publication of average merchant service fees … should help to encourage competition in the card-acquiring market, as merchants will be better able to compare average merchant service fees both across schemes and with their own negotiated rate," the Reserve Bank said.
Despite charging much higher merchant service fees than their competitors, American Express and Diners have lifted their combined market share from 14.6 per cent of the value of all card transactions to 16.5 per cent over the past two years.
"This increase was largely concentrated in the second quarter of 2004 and was coincident with the issuance of American Express credit cards by two of the major Australian banks. Since that time their market share has shown relatively little change," the Reserve Bank said.
About 88 per cent of credit card purchases are made with Visa, Mastercard and Bankcard, accounting for 83 per cent of the value of all card spending.
Separate figures show total outstanding credit card debt reached an all-time high of $31.4 billion.
(Irvine, CA) - August 19, 2005 - Study suggests that 31% percent of consumers prefer debit cards to cash or credit.
It doesn't take an investigation to understand why banks are goaded by the profitability of consumer debit cards. Beyond their traditional card fee revenue centers, the hidden source of probability for banks are when merchants accept a debit card as a credit card. Why? Because, while there is typically a flat fee of about 50 - 75 cents per transaction, if a clerk doesn't indicate that the card is a debit card, the processing terminal transacts the card as a credit card, which costs the retailer - and thus the consumer through this hidden tax - a percent of the sale.
Mitch Goldstone, lead plaintiff in the credit card antitrust litigation noted that "merchants with higher per sale transactions could be paying a steep premium when the debit card feature is overlooked. And, it is very easy to not discern the difference, especially as the word ‘Debit,’ ‘ATM’ and ‘Check’ and are being cunningly masked within the hologram and via other non-
As a retailer and co-owner of a national ecommerce business, Goldstone was not surprised that a recent American Bankers Association survey identified that more than 30% of U.S. consumers prefer using debit cards. "This popular payment tool is a boon to banks," explained Goldstone, "because a merchant who mistakenly charges the transaction as a credit card could be paying upwards of $25.00 on a one-thousand dollar order, rather than just about 75 cents if it was entered as a debit card. This helps explain why the interchange business reaps more than $20 billion each year for banks.
Tuesday, August 16, 2005
Higher interchange rates on card transactions helped lead to nearly $1.5 billion in income just from card fees for Bank of America Corporation in just three months.
[During the past six months, the bank reported $2.7 billion in income from these fees, vs $1.9 billion in 2004].
The June 30th BofA quarterly report filed with the Securities and Exchange Commission in Washington, D.C. revealed that card income increased $278 million in part due to an increase from its interchange income and merchant discount fees driven by growth in debit and credit card purchase volumes. The bank also reported an 8% increase in consumer credit card purchase volumes which resulted in higher merchant discount and interchange fees.
J P Morgan Chase & Co also reported that for the latest quarter its "Revenue increased due to higher loan balances and increased interchange income from higher charge volume." For the three months ended June 30th, credit card income rose 179% to $1.7 billion, vs. $631 million the prior year. Even better were their six month results with a 183% increase from $1.2 billion to $3.4 billion, respectively.
Saturday, August 13, 2005
(Akron Beacon Journal - subscription required)
This article details just how much the credit card associations have recently raised their interchange fees and how it effects merchants (editor: WayTooHigh.com)
Friday, August 12, 2005
[Although specifically unrelated to the antitrust credit card interchange litigation, this news item speaks volumes about unbridled fees imposed by banks on merchants; editor - WayTooHigh.com. See related story - Click here for Market Watch story]
From the LA Times: Wells Fargo Settles Suit Over Card Processing Fees By E. Scott Reckard Times Staff WriterAugust 12, 2005:
Wells Fargo & Co. agreed Thursday to pay as much as $34 million to settle allegations that it imposed improper credit card processing charges on about 96,000 California businesses over a four-year period.
The settlement by the San Francisco bank amounts to a partial return of what the plaintiffs contended were "junk fees" that were never properly disclosed beforehand and never explained when the merchants called to ask about them. The disputed charges included extra fees charged by the bank when merchants had to punch in a credit card number by hand, said Howard M. Jaffe, a Los Angeles lawyer representing the businesses. "If a merchant failed to swipe the card, couldn't get the machine to read it and just manually input the numbers, they'd get dinged usually by a modest amount, but it added up to millions and millions of dollars," he said.
Jaffe said other fees were charged for such things as submitting paperwork late and failing to provide an address for the customer when asked to do so as a confirmation of identity. Some agreements between Wells Fargo and the merchants mentioned only the basic charge for processing transactions, Jaffe said. Others "made vague references saying that's the rate that would apply if you jumped through all the hoops, without saying what the hoops were," he said.
In a statement, Wells Fargo said it "has always made full disclosures to merchants" about its billing practices. Spokeswoman Mary Trigg said the bank wouldn't discuss how those disclosures were made. "The settlement allows us to focus on providing great service to our customers while meeting all of their credit card and debit card processing needs," the bank statement concluded. In the settlement approved Thursday by Los Angeles County Superior Court Judge Anthony Mohr, Wells Fargo agreed to pay at least $19 million and as much as $34 million to settle the claims, covering charges made from March 1999 through March 2003.
The bank will repay 29% of the charges made early in that period, 19% of those in the middle, and 10% of the charges at the end, when disclosures had improved, Jaffe said. If eligible businesses fail to file for their share of the settlement, the money will go to businesses that do file claims. That is likely to raise the average distribution from the $300 range to perhaps double that, because it's typical for only half of those eligible to file claims in class actions when individual payments are relatively small, said attorney Niall McCarthy of Burlingame, Calif., another lawyer for the plaintiffs.
The lawsuit named four small businesses as plaintiffs, but the settlement was certified as a class action that applied to about 96,000 California business customers of Wells Fargo. Some large retailers such as the Ralphs and Safeway supermarket chains dropped out of the case because they were pursuing damages in a separate lawsuit in Connecticut that alleged broader antitrust violations by credit card companies, McCarthy said.
Jaffe filed the class-action case in March 2003 after winning an undisclosed settlement from the bank on behalf of a small chain of Los Angeles auto repair shops. That suit contended not only that the auto shops were charged fees that were not properly disclosed but also that Wells Fargo intentionally issued confusing statements, repeatedly changing the names of the fees, and that the bank refused to provide explanations for them despite repeated requests. Vincent Archer, who manages the shops, said he had a sound deal with another processor that didn't apply extra fees. Wells Fargo promised to match that deal if the company switched to its processing services, "but later that year I started noticing the extra fees," he said.
After a few months, Archer said, he contacted Wells Fargo and asked for a written explanation of "a whole array of these charges. And they would not give me an answer."The extra fees, which ran as high as $75 per transaction, roughly doubled the auto shops' cost of accepting credit cards, Archer said. He said that after years of go-rounds he wrote a formal letter of protest to Wells Fargo's legal department, after which the fees were reduced but no explanation was offered. The shops now use another credit card processor that charges about the same basic rate and far fewer extra fees, he said.
Friday, August 05, 2005
Big getting bigger: One of the last independent credit card issuers sold
(Irvine, CA) August 8, 2005 -- As HSBC Holdings PLC, the large British-based bank is preparing to acquire Metris Companies Inc., an independent credit card issuer, consumers and merchants are poised to feel the affects from this further consolidation within the industry.
With Bank of America's planned acquisition of MBNA and Washington Mutual buying Providian Financial Corp, this new deal substantially lessens competition. The HSBC Finance acquisition will further shrink what is a rapidly consolidating market.
"The impact of these transactions can further ravage retailers and consumers," warned Mitch Goldstone, co-editor of the Credit Card Interchange Blog: WayTooHigh.com and lead plaintiff in the interchange price-fixing litigation against Visa, MasterCard and member banks. "As the remaining credit card issuers are sold off, this added competitive threat can result in further horizontal fixing of credit card interchange fees with unbridled market power. This acquisition also reinforces the validity for our interchange antitrust litigation"
Thursday, August 04, 2005
(source: Wall Street Journal, August 4, 2005, subscription required)
Tuesday, August 02, 2005
If Writing Checks is Free and Processing Checks is Free, Shouldn't There Also be No Interchange Fee Too? (commentary: WayTooHigh.com)
Have you ever seen those advertisements for banks' free checking offers?
Several offer check writing with no monthly maintenance fees or charges to bank at ATM's, online and by phone. With no minimum requirement, Bank of America, for example, offers free online banking with free bill paying and a free Bank of America Visa® Check Card with Total Security Protection® and Photo Security® . The website explains that it is all free.
When you write a check, there is zero interchange fee, there is no charge to the consumer or retailer who accepts the check, yet we all know how costly and the amount of labor required to process and clear checks.
Citibank even offers free checking with direct deposit and your first order of checks are free too.There is even no charge for Citibank ATM transactions and no charge on non-Citibank ATM transactions. The bank provides programs for unlimited free check writing.
How about all these free perks from Wachovia Bank, N.A. and its no-strings attached free checking. It looks like everything is free. The bank has "re-invented its personal free checking account to better meet consumer needs. Extra Free Checking requires no minimum balance, has no monthly service fee, and unlike many banks' free checking accounts, does not require direct deposit. It also comes with the Visa Extras debit rewards program and Free Online BillPay." Some of the features of the Wachovia "extra free checking account" include: no minimum balance, no monthly service fee, unlimited check writing, no direct deposit required..., free online banking and online BillPay, free check card with Visa Extras rewards program, unlimited visits to Wachovia financial centers, Wachovia's automated phone service, Wachovia ATMs, plus access to SouthTrust ATMs to get cash or check balances with no fees.
Bank One Net Checking® provides no fees for transactions, withdrawals, bill payments or balance inquiries, unlimited check-writing, convenient use of ATM, Direct Deposit or Bank-by-mail, make withdrawals at Bank One® Money Access Center® ATMs for no fee, unlimited transactions with no fee for withdrawals and balance inquiries at Bank One® Money Access Center® ATMs, by phone or when you make purchases with The One® Business Card SM and you can use its direct deposit and bank-by-mail services with no transaction fees.
The point is that there are no "points," no fees, no charges, no costs, nothing. Yet, credit card transactions face supracompetitive interchange fees which are a hidden tax on consumers.