Tuesday, December 27, 2005
With consumer spending up nearly 9% from holiday shopping, what exactly did the banks earn and how much did retailers have to pass along to Visa and MasterCard for credit and debit card transactions?
Because merchant interchange fees are an elusive component of bank profits, and because there are nearly one-hundred separate charges, it is anyone's guess how well the banks did from soaring holiday shopping. We know that MasterCard Advisors, a unit of MasterCard International said that holiday shopping was up 8.7% ahead of last year.
Friday, December 23, 2005
Dear Messrs. Selander and Hanft,
With just weeks away from seeking the financial confidence and $2.5 billion from public investments, the second largest bank-owned credit card association, MasterCard International, has yet to update its website.
For months, The Credit Card Interchange Report - WayTooHigh.com has been mentioning that the MasterCard.com website continues to post a timeline from only previous merchant litigations.
As the bank-owned credit card association now faces multiple antitrust actions targeting the core of its revenue stream and because this price-fixing antitrust case is among the largest in our nation's history, why is there such a void?
MasterCard continues to fail in making sure that the case is clearly referenced on its company information litigation page. There is no mention at all.
Viewing the MasterCard International website suggests that the banking industry is mystifyingly protected from complying with the Sarbanes-Oxley Act, which oversees corporate governance and reporting practices. The Sarbanes-Oxley Act Section 409 pertains to 'Real Time Issuer Disclosures,' where companies are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. Ordinarily, these disclosures are to be presented in terms that are easy to understand and supported by trend and qualitative information of graphic presentations as appropriate.
So, why is there no clearly presented disclosure information on the MasterCard International website?
Mitch Goldstone and Carl Berman
The Credit Card Interchange Report - WayTooHigh.com
Thursday, December 22, 2005
The hubris of using other people's money to fund goodwill philanthropy by the 1400 banks which own the credit card association is unconscionable. Has any other multi-national corporation ever devised this type of scheme to deflect and use investors money for this type of cause?
In addition, MasterCard is also planning to use upwards of $650 million from the IPO proceeds to battle 30 Minute Photos Etc. and the other merchants who are standing up to their price-fixing charges and anticompetitive antitrust violations.
Interchange, once a minor fee levied to cover the costs of processing a credit card transaction and the risk assumed by the issuing bank that the credit will not be repaid, has skyrocketed to a flashpoint that industry experts say is certain to change the industry, although opinions are divided on exactly what the fallout may be.
Interchange is also a significant, and growing, expense for merchants. According to the National Association of Convenience Stores (NACS), credit and debit card fees are the third largest expense convenience stores face after store rent and labor costs.
These fees are anticipated to match the cost of store rent by 2020.
NACS points out that in 2004, credit card issuers earned more profits in interchange fees from the sale of gasoline than gasoline retailers earned off those same sales. "Out-of-control interchange fees for credit card transactions are a $25 billion tax on retail transactions that goes straight into the pockets of the card issuers," said Mitch Goldstone, lead plaintiff in a merchant class action antitrust lawsuit filed in June against Visa and MasterCard.
Goldstone is also Co-editor of "The Credit Card Interchange Report" ( www.waytoohigh.com.) "We're not opposed to a cost-based interchange," he said. "The problem is the banks got greedy and raised the rates just to make more money."
Merchants point out that interchange fees have declined or are declining in most other countries but are steadily rising in the United States. "If interchange was actually cost based, it would effectively disappear," Goldstone said. "In Australia it is less than half a percent. And Canada is a great example: Business is thriving even though the interchange rate is zero."
This complexity is one factor that is fueling the debate. "I know exactly what my cost of goods sold are, what every cost involved with my business is, but I don't have a clue what my interchange fee is," Goldstone said.
(Click here to view entire article).
[source: Green Sheet]
Wednesday, December 21, 2005
As reported in the Wall Street Journal (Dec 21 - page, C3), Bank of America chairman and CEO, Kenneth D. Lewis believes that it is difficult to partner with a business they are in litigation against. However, while they settled with American Express, the bank is party to a multi-billion dollar antitrust class-action launched by merchants who accept Visa and MasterCard.
While Kenneth Chenault, chairman and CEO of American Express asserted in the same WSJ article that "the economic opportunity is tremendous," his focus was distracted and myopic. Clearly, the banks and American Express are so entrenched in their orgy of boardroom domination that they truncated the focus group component; if only they involved current cardmembers and retailers. This contentious plan to flood the market with millions of new American Express branded cards, and potentially spike interchange rates will not be supported - even with hundreds-of-millions of dollars certain to be spent advertising this alliance.
For the premium "Platinum" American Express cardholders and the even more exclusive "Black" American Express cards, the appeal and benefits of distinction from these exclusive cards are about to be diminished.
This new alliance with the New York financial-services company is the latest scheme by banks which may outrage retailers and even decimate the venerable American Express brand. Even its cache as the recognized and respected customer-oriented, world leader in quality is at risk. It could be doomed as the strength of its exclusive image will be saturated with millions of new American Express logos popping up everywhere.
Several months ago, The Credit Card Interchange Report - WayTooHigh.com reported on 26 leading issues affecting credit card interchange fees. Two of the primary assertions follow which initially drew attention to what is now about to occur.
* Because banks are now permitted to issue Amex and Discover cards, MBNA and Citibank plan to issue American Express cards, which means, merchants will be flooded with the higher costing premium cards (this translates into a 50% increase in costs from about 140 bp [basis points] to 210 bp. I anticipate they will then convert their classic cards to higher priced "signature" "affinity" and "business" cards.
* The argument by American Express was that their cardholders spend more money. Perhaps this is based on buying diamonds and luxury items, but when you are at a convenience store, the amount charged from a Visa card is typically the same as for American Express. As MBNA and Citibank switch from Visa to American Express, they are appealing to the same group of cardholders with the same spending patterns.
Tuesday, December 20, 2005
Millions of merchants and consumers are not the only groups affected by the banks price-fixing, interchange fees. Illegal online casino gambling is now a multi-billion dollar off-shore industry which generates huge returns to Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and the few thousand other banks which own MasterCard and Visa.
Click here for an update from the November broadcast on CBS' 60 MINUTES which profiled why this is so damaging.
CBS: "I-Gaming: Illegal And Thriving. Billions of dollars are being spent on online gambling Web sites and the majority of that cash comes from American pockets. Despite being illegal in the U.S., Lesley Stahl reports, the industry is thriving." [What few understand is that the banks can be indirectly involved for reaping a percent of every transaction when their debit or credit cards are used. Although banks decline charges to many of these overseas businesses, there are websites to help identify ways to get your charge card approved].
Monday, December 19, 2005
The Wall Street Journal on Mon, Dec 19th explained that not all announced IPO deals which are filed actually are completed. WayTooHigh.com expects that the 1400 banks which owns MasterCard, Inc. might have a challenging time trying to unload their credit card interchange liability. The Journal profiled several companies, including Boise Cascade which pulled its IPO after putting it on hold.
WayTooHigh.com is closely monitoring the offering to look for signs that MasterCard also might place its planned stock sale on hold or even withdraw it in early 2006.
For background, click here.
Thursday, December 15, 2005
Switzerland's competition watchdog has approved a deal between the issuers of Visa and Mastercard credit cards and banks aimed at cutting costs.
The accord limits fees levied by the card companies on their partner banks and allows stores to offer different prices depending on whether a customer pays in cash or with a card.
Click here to view article.
Sunday, December 11, 2005
The National Association of Convenience Stores magazine (July 2005) reported that "interchange fees arguably are meant to cover the technology cost of account processing and the risk taken by the issuing bank that the credit will not be repaid. It is no secret that technology costs continue to fall while processing power increases dramatically."
The previous posting addresses the risk factor, this column focuses on technology.
As well-known entrepreneurs, Mitch Goldstone and Carl Berman, lead plaintiffs in the antitrust litigation against Visa, MasterCard and member banks also co-edit The Credit Card Interchange Report - WayTooHigh.com. This column provides a real-life experience to understand why Visa and MasterCard may be forced to disband its merchant interchange charges.
The nationally recognized business leaders operate an online boutique photo service(30minphotos.com) which recently created an entirely new business model for preserving generations of photos. Their new business, ShoeboxReprints.com is the biggest news in the photo industry since the launch of digital photography. The company previously charged $5.00 to produce one high-resolution digital scan from a single photo; the process would take several minutes. Today, their ShoeboxReprints.com service scans 150 photos of any size -- from wallets to 11x17 enlargements in just one minute. The charge is $49.95 for 1,000 photos; an entire shoe box of pictures is scanned within minutes and mailed back the same day for under 5-cents per print.
This same math applies to the credit card associations. With technology advancing at lighting-fast speed, each few months yields entirely new cost-saving techniques, yet for banking card transactions the fees keep rising?
Just one decade ago when merchants used bulky non-electronic credit card imprinters, the multi-page carbon forms cost a great deal and had to be mailed for processing. This took several days and incurred costly clearing and processing fees, which was why the interchange fees were initially established; it was cost-based.
Today, just as how the cost for digitally preserving photos was cut by Goldstone and Berman from $5 to 5-cents, so too have the costs for banks to process merchant payments. Yet, the latter service continues to face huge, unjustified fee increases.
Visa and MasterCard can learn a great deal from their customers like Goldstone and Berman. Many business services and products share similar cost-savings to lower rates while enhancing the benefits.
A lead argument by Visa and MasterCard for forcing merchant interchange fees was to cover their exposure to fraud. Although the fraud costs are a faction of the total take from the $25 billion annual interchange charge.
Interchange fees are meant to cover the cost of processing a credit-card transaction and the risk taken by the issuing bank that the credit will not be repaid. If the fraud costs were a real issue certainly, the banks would not want back its riskiest former customers.
Now, the banks are issuing a record number of credit card solicitations to the 2 million Americans who filed for bankruptcy in 2005. The New York Times (Dec 11) reports that the newest target for issuing solicitations are those with the most risk.
In May, The Merchants Payment coalition explained that: "Banks say they charge interchange to make up for bad debt or fraud. With fraud costs consistently decreasing in recent years, however, the costs interchange is intended to cover aren't nearly as much as the amount charged, and banks already make huge profits from cardholder interest and fees. Moreover, the coalition believes that much of the fraud that interchange is intended to cover is the fault of banks' poorly designed card programs, not the fault of merchants."
Only 1 in 2000 of the banks mail solicitation lead to signing up just one new cardholder. Credit card companies mail out 5.24 billion mail solicitation each year yet only 4-10ths of 1% reply. This means 5 billion pieces of mail are garbage. What other industry has such huge profits that they can afford to throw away 5 billion pieces of junk mail every year?
An earlier WayTooHigh.com posting compared the banks to drug dealers. Can you imaging the outrage if a drug supplier or legal pharmaceutical company launched a marketing campaign to former addicts?
Wednesday, December 07, 2005
Visa U.S.A. announced a major shakeup to its corporate governance structure. The result is that for the first time Visa will allow nonbankers to serve on its board of directors. Since its inception, Visa has been considered a bankcard Association, and only bankers whose institutions issue Visa-branded cards have been given seats on the board.
Pending approval by member financial institutions, Visa will add one new seat to the board and shuffle membership so that financial institutions hold only seven seats and independent directors hold eight. The restructuring is expected to take up to 12 months to complete.
In a prepared statement, Visa said "dynamic changes" taking place in the payments system precipitated the move. Some observers speculate that the intention, at least in part, is to forestall additional litigation over interchange and other contentious issues.
"Visa and our stakeholders will benefit from the wider range of talent and diverse experience that independent directors will bring to the boardroom as they help shape the Association's growth strategies," said John Philip Coghlan, Visa's President and Chief Executive Officer.
"Independent directors will generate added confidence in the organization's decision making and will ultimately strengthen Visa's position with regard to legal issues concerning the impartiality and autonomy of directors."
Visa said the new, independent directors will oversee "core economic decisions such as pricing, member transaction processing and service fees and economic relationships." Financial institution members will be responsible for control and disposition of assets, membership eligibility and corporate governance. Visa spokesman Will Valentine stated that the new board structure will "strengthen the organization competitively, organizationally and legally."
Visa, MasterCard International and member financial institutions of both organizations are under fire for alleged anticompetitive interchange pricing; they face a host of merchant lawsuits. MasterCard announced its own corporate restructuring in August and is in the process of going public (see "MasterCard Plans IPO," The Green Sheet, Sept. 26, 2005, issue 05:09:02).
K. Craig Wildfang, lead plaintiff attorney in two legal proceedings that merchants have brought against Visa, said the change in Visa's board makeup will not have much of an affect on pending lawsuits. "It will definitely not affect their liability going backward," he said. "They are trying to escape their liability going forward."
To be considered as an independent director, one must have "no material relation to Visa or its members for the past five years," Valentine said. "We have very high standards. They must be a
senior level executive with a relevant business, academic or regulatory body."
While Valentine wouldn't discuss specifics, he left open the possibility that Visa might ask a retailing executive to join the board. Visa's member banks are expected to decide on the new board's makeup sometime in spring 2006. Currently, Visa's board is comprised of 16 people, including 14 from member financial institutions and two nonvoting Visa executives (Coghlan and Visa International CEO Christopher Rodrigues).
Separately, Visa International announced new criteria for its own board and the six regional boards that comprise the organization. The new boards will be required to have at least two independent directors, subject to member approval.
Friday, December 02, 2005
Move seen as method for organization, banks to limit liability
JOE BEL BRUNO - Associated Press
NEW YORK - An initial public offering of a big credit-card outfit might not command the hype afforded a white-hot tech company, but the move could prove priceless for MasterCard Inc. and the big banks that own it.
This week the 1,400 banks that issue its cards -- and together control the brand -- approved a series of proposals that clear the way for an IPO on the New York Stock Exchange early next year. Although the vote is considered a common step for companies going public, analysts and former executives of the nation's No. 2 credit-card brand say this won't be your average IPO.
For starters, the amount of money raised -- estimated conservatively at about $2.5 billion -- will easily trump the $1.67 billion raised by Internet darling Google Inc. And, unlike most IPOs, MasterCard is tapping the capital markets begrudgingly -- and mostly as a defensive measure to combat antitrust lawsuits.
"The paramount reason for them going public is to reduce their legal liability exposure in the U.S. market, period," said Eric Grover, an analyst with corporate consultancy firm Intrepid Ventures.
Both MasterCard and larger rival Visa USA have been accused of anticompetitive practices in dozens of class-action lawsuits that could cost billions of dollars to settle. The architects of MasterCard's plan to go public are betting the IPO will take the wind out of those lawsuits.
After converting to a public company, member banks will give up voting rights -- effectively shielding them from being named in future lawsuits. The move also ends any criticism of the banks having too much influence in MasterCard's operations.
Besides getting a new structure, MasterCard plans to bank $650 million from its IPO proceeds into a war chest to fight pending litigation. The biggest legal challenge are 38 federal lawsuits that claim MasterCard and the banks conspired to artificially inflate interchange fees charged by card companies to merchants.
Already, MasterCard and Visa have paid some $3 billion in damages from a class-action lawsuit led by retail giant Wal-Mart Stores Inc. They've also lost a legal challenge mounted by the Justice Department, which paved the way for rivals American Express Co. and Morgan Stanley's Discover unit to sue for damages.
These legal hurdles have made member banks increasingly nervous through the years, said former MasterCard general counsel Brian Smith.
"When I was there, we had a number of cases and investigations that were brought against individual banks, which have a chilling effect on their executives," said Smith, who served as the company's top attorney from 1974 to 1982 and is now a Washington, D.C.-based senior partner with Latham & Watkins.He said the next step for MasterCard might be allowing member banks an opportunity to cash out completely -- and instead enter into licensing agreements to continue using the brand. JPMorgan Chase & Co. has an 11.7 percent stake in MasterCard, Citigroup Inc. owns 6.2 percent, and Bank of America Corp. has 6 percent, filings show.
[Source: AP, Charlotte Observer ]