Friday, September 14, 2007

"Visa's IPO Use of Proceeds Plan and Interchange Overview (commentary,

Many of the same banks that owned MasterCard®, own Visa®. And, as with the earlier MasterCard IPO, according to a Reuters news report, Visa plans to set aside a portion of its IPO windfall to open "an escrow account to help cover potentially hefty legal bills."

As mentioned in the prior posting, Visa explains in its SEC filing that among the risk factors for an investment in the company is that they may become "insolvent" due to the merchant's interchange litigation victory. Is this a possible reason for the IPO - to transfer liability onto shareholders and restructure the banks ownership to limit their liability? After all, according to the filing, "Interchange fees are often the largest component of the costs that acquirers charge merchants in connection with the acceptance of payment cards."

For those unfamiliar with our battle against Visa, MasterCard and many of its member banks, here are some points of interest:

  • The payment card interchange fee and merchant antitrust litigation alleges anticomptitive, antitrust violations by Visa and MasterCard, which is made up of thousands of banks
  • Many banks sat on both the Visa and MasterCard boards and stand accused of illegally fixing the interchange fees by agreement and in coordination with each other.
  • Many electronic payment transactions were handled by the same banks, as the issuer and acquirer, meaning they get fees twice.
  • There is no real competition; Visa and MasterCard maintain an 80% market power over electronic payment processing.
  • Interchange fees have more than doubled in the last 10-years.
  • Few customers know about interchange fees because it is virtually impossible for merchants to tell customers what the exact fee is.
  • Every consumer pays for these hidden credit card fees, even cash customers because the cost is built into every product - a gallon of milk bought with cash by a mom is also paying to award premium signature card holders' bonus mileage to Europe.
  • Interchange fees are one of the worst and most unfair fees paid by American consumers - it's more than six times what people paid in ATM fees.
  • Huge profits: Even though the actual cost to process a $1 transaction is virtually the same as that of a $10,000 transaction (buy a soda or a Cartier watch), the interchange fee is based on a percentage of the total. Even Realtors lowered their commissions when housing prices soared.
  • The interchange fees are far higher than the actual cost o the transaction they are meant to pay for.
  • The technology used to process credit card transactions are today more efficient and less expensive.
  • Why are interchange rates higher in the U.S. in most other industrialized nations?
  • U.S. interchange fees are close to 2%, while other countries, like the UK are typically 0.7% and Australia averages 0.55%.
  • Did you know that merchants are forbidden from disclosing to consumers the fees that are charged?
  • Behind closed doors, Visa and MasterCard meet to increase these anti-competitive hidden fees. It seems they are regularly being raised, not lowered as technology creates more efficiencies for speedier electronic payment processing.
  • We understand that these price-fixing practices are in violate antitrust laws.
  • Few things are more anti-competitive than the credit card market - virtually every other marketplace lowers prices because of competition.
  • Study the market dynamics of other counties with significantly lower interchange rates to understand that the banks and card association are still doing well and they have not experienced disruptions in transaction handling processes, despite lower rates.
  • We assert that the banks which make up Visa and MasterCard have colluded to set these fees which in any other industry would be in violation of federal antitrust laws.

Repost from Prior Summary - Briefing on Interchange Issues (