Thursday, October 12, 2006

Visa's® Planned Restructuring Sounds Like Musical Chairs (commentary:

On the day marketing our 500th posting, big news....

As the payment industry quickly runs out of chairs to hide under, the music is getting louder. The international battle lead by all-sized retailers over antitrust violations are forcing fewer places for the banks to hide. Today's announcement by Visa, which controls about 65% of total card sales volume, will create a giant publicly-held global corporation that raises new questions.

Their goal is probably to reduce its member banks' legal risks by shoving the antitrust liability into public hands. Just review the previous bank-controlled MasterCard® IPO and it's Risk Factors to understand what is at stake.

The encouraging news from Visa's press release is that the bank-owned credit card association expects that the new structure and capital inflow will strengthen their product development and innovations. For any other industry this means lower prices and more efficiencies. But, based on their record of unbridled price increases, it will be interesting to watch what happens to merchant interchange fees. Years ago, these were the cost-based charges when retailers used credit card imprinters and thick stacks of carbon-copy receipts to manually transact business. Even as technology has moved forward at lightening-fast speed, interchange fees have also risen too.

Part of the plan is for the credit card association to install an independent board of directors. Moving forward, this helps remedy the antitrust charges that the bank-controlled board conspired to set merchant fees at artificially high levels. Currently, interchange fees are not subject to regular competitive forces; it should be set by competition, not illegal price fixing by agreement.

According to MarketWatch, UBS advised its clients that "We believe Visa is unlikely to consider aggressively cutting rates and thereby eroding revenues as a for-profit entity ... [h]ence, we believe this move is supportive of pricing...."

In our opinion, when a perpetrator of a crime prepares for court, they often clean up their appearance. Polishing up, getting a nice suit and doing the right thing is customary. But, make no mistake, in this case it is nothing more than musical chairs and window dressing. Visa’s restructuring, along with MasterCard and their thousands of member banks are still being charged with breaking the law spanning many, many years; illegal price-fixing is a crime.

The Visa announcement today only signals their intent to proceed with a public offering within the next 12-18 months. Even if they are successful, the announcement itself does not change anything.

In discussing the reasons for the IPO, both Visa and MasterCard seem to think that hiding behind public ownership will help them avoid antitrust liabilities. To us, this is just another admission that their years of collusive price-fixing have violated antitrust laws and I expect that a jury will agree with them!

While the goal of Visa’s IPO might be to insulate it and their member banks from antitrust liabilities, if Visa’s restructuring agreements are prepared like MasterCard’s, then it too will violate the antitrust laws.

[Source: Commentary,]