MasterCard plans restructuring, IPO (MarketWatch)

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)

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[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?].

MBNA-AmEx Relationship Threatened (The News Journal / Bloomberg News)

Loss of co-branded cards could cool American Express CEO's hot streak

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.

FAST FACT: Record gas prices leads to possible profiteering and windfall for credit card companies

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.

In 2003 under half of all motorists used a credit card to pay for gas, today with record fuel costs, nearly 70% of all gasoline purchases are now paid with plastic. The paper-thin margins mean that many gasoline service stations are earning less per sale than what is being recovered by the credit card associations. Due to soaring gas prices, Visa and MasterCard reap a larger profit per gallon then the retailer selling the gasoline, according to The National Association of Convenience Stores.

"Private Lable Credit Cards Have No Interchange Fee..." (Paymentech)

The lure of private label credit cards: Private label's heritage runs deepest in the petroleum industry, tracing its roots back to the traditional gas card that consumers were expected to pay off each month. Yet while it was never intended as such, consumers began to treat private label cards as they would a traditional credit card — loaned money. Last year, consumers spent more than $20 billion on private label petroleum cards, even though transaction volume was down by 7 percent, according to the September 2004 Nilson Report.

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)

(source: Paymentech)

Banks rake in 'illegal' fees (Advertiser Newspapers, Australia)

THE Australian Consumers Association (ACA) is calling for an investigation into bank fees, some of which it says could be illegal, while banks are charging more and more on credit cards.The ACA's Gordon Renouf said it was not clear whether financial institutions were charging penalties to recoup losses for processing matters, such as late payments or bounced cheques, the ABC reported today.

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)

Retailers File Another Interchange Lawsuit (The Green Sheets)

The conflict over interchange continues. Major supermarket and drugstore chains filed a lawsuit alleging that the largest card company in the world engages in price fixing and practices that stifle competition. This is the second suit addressing these issues filed by retailers within two months.

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

Australia Benefits from Lower Interchange Fees

Higher card fees aren't a turn-off - By Matt Wade - August 19, 2005 - The Sydney Morning Herald.

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.

Profile: No wonder banks are goaded by debit cards (source: WayTooHigh.com)

(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-
transparent imprints."

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.

(Source: WayTooHigh.com)

Banks Post Huge Quarterly Income Rise From Card Fees (source: WayTooHigh.com)

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.

Use of plastic takes bite out of merchants (Akron Beacon Journal)

Fees make retailers howl - Credit-card issuers hike per-swipe rate, intensifying dispute.

(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)

Wells Fargo & Co: Improper Credit Card Processing Fees Settlement (LA Times)

Wells Fargo Suit Over Card Processing Fees (LA Times, 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.

Credit Card Competition Decimated by Recent Bank Acquisitions (commentary: WayTooHigh.com)

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"

(Commentary: WayTooHigh.com)

Group of Retailers Sues MasterCard

As reported in the Wall Street Journal, the supermarkets and drugstore chains which last month sued Visa USA Inc. have filed a similar antitrust case against MasterCard.

(source: Wall Street Journal, August 4, 2005, subscription required)

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.

(commentary: WayTooHigh.com)

Commentary: "Bringing Together Retailers and Consumers"

Lead Plaintiff Commentary: Have you ever wondered what it is like to be involved in the most economically significant antitrust case since the AT&T litigation in the early 1980's? Since the complaint was filed on June 22nd and as lead plaintiff and initiator of a multibillion dollar, antitrust class action lawsuit, we anticipated an arsenal of explanations by the defendants. But, we didn't envision an immediate cyclone of erroneous misinformation.

The polished legal and PR teams of Visa, MasterCard, and the large banks are spinning why they can charge millions of merchants with an interchange fee as high as they want. Interchange fees are the fees charged to merchants by Visa and MasterCard banks for processing credit card transactions. For comparison, think of your checking account. Banks give free checking and a host of other perks for your business. While check clearing and handling fees are substantial, the technology behind POS credit card merchant interchange transactions explains why banks reap more than $20 billion dollars each year from these fees. Why? Because they can.

Most consumers have never heard of such fees, yet these fees average almost 2 percent of every purchase made by consumers with credit cards. It represent a hidden and puzzling tax on such purchases. With nearly one hundred separate fees, we cannot even keep track of what the costs are. The WSJ's April 12th front-page "Marketplace" feature profile referenced our company and just one of these fee increases.

Currently, there is no market force to restrain the repeated increases in such fees in recent years. Now that merchants are fighting back, Visa, MasterCard and the banks are trying to explain why this hidden tax on consumers is justified. Yet, with todayÂ’s technological advances and efficiencies, and when the cost of other types of network services such as telephone, internet services and others are declining, credit card interchange network fees are soaring. Really soaring; debit card fees are up nearly 300% since 1999.

When the price of a latte at Starbucks rises, consumers can choose another source to get their coffee, but merchants of every size, from Wal-Mart to 30 Minute Photos Etc. are trapped. There are simply no alternatives when it comes to interchange fees.

At 30minphotos.com, 100% of our company's online photo orders require a credit card to complete the transaction. This parallels most e-commerce businesses which simply can't operate without electronic payment.

The member banks of Visa and MasterCard credit card associations, by horizontal agreement, collectively set the interchange fees at supra-competitive rates. When you understand that credit card interchange fees are lower in almost every industrialized nation other than in the United States, it becomes transparent how the named defendants are violating the antitrust laws and overcharging by billions of dollars each year.

* Did you know that if a merchant accepts your debit or check card without recognizing that it is different from a credit card, their fees are higher? It is not that sales clerks are not alert to identify what brand card is tendered, but rather, they need to be a "Where's Waldo-type" encryption expert because the cards now conceal the word "Debit" in the hologram and elsewhere.

* Did you know that if the magnetic strip on your card is worn and cannot be read by the credit card terminal, it has to be manually keyed in, and, costs more?

* Did you know that when you use your affinity, frequent flyer card it costs the merchant more and they too are being taken on a ride?

* Did you know that people who cannot afford a credit card pay the same amount for a gallon of milk as someone using a Visa card, and thus are subsidizing every credit card transaction?

* Did you know that there are no interchange fees for check clearing?

Because of billions of dollars in annual profits from these fees - fixed by the banks elected to the Visa and MasterCard Boards of Directors, get ready for an avalanche of polished PR and marketing experts to explain why their price fixing is not illegal. In representing millions of merchants and protecting consumers, our using today's Internet technology is balancing the tone of discussion. For daily updates until we remedy these anti-competitive practices, restore a competitive balance and end Visa and MasterCard's market power visit: The Credit Card Interchange Blog - WayTooHigh.com

Mitch Goldstone and Carl Berman
co-editors - WayTooHigh.com

1/2 billion dollars in just 4 months: Just how profitable is credit card income to banks? Let them tell you in their own words...

Bank Reports 23% increase to its income as a result of bankcard interchange revenues

As the banks report their quarterly results, you can follow the profitability from their bankcard interchange income to identify how profitable this segment is. For instance, on Friday, July 22nd, First Financial Bancorp of Hamilton, Ohio reported that its "Bankcard interchange income increased $297,000 or 23.37 percent from the same quarter in 2004."

Another example is from the May 5th, JP Morgan Chase & Co quarterly results, where they reported: "Card Services revenue benefited from higher loan balances, which resulted in higher net interest income. Additionally, higher customer charge volume generated increased interchange income. Partially offsetting these revenue improvements were volume-driven increases in payments to partners and higher reward payments. The provision for credit losses benefited from lower net charge-offs reflecting lower bankruptcies and delinquencies, partially offset by additions to the allowance for loan losses related to growth in on-balance sheet loans. Expenses benefited from lower compensation and processing costs, which were partially offset by increased marketing spend (sic)."

Then, a day later, on May 6th, Bank of America reported a staggering, nearly one-half billion dollar result ... in just four months! The bank's quarterly filing reported: "Card Income increased $494 million due to increased fees and interchange income, including the $242 million impact from the addition of the FleetBoston card portfolio."

(Source: WayTooHigh.com)

Retailers Sue Visa, Seek Lower Credit Card Interchange Fees (Gartner Research)

On 15 July 2005, a group of seven large U.S. retailers sued Visa USA over a component of card acceptance fees known as interchange rates. The suit alleges that Visa engaged in price fixing and adopted rules that prevent merchants from negotiating lower rates. A similar class action lawsuit on behalf of smaller retailers was filed recently against Visa USA and MasterCard International.

(Click here to view article - source: Gartner Research)

More Retailers File Suit (convenience Store / Petroleum)

Issue Date: CSP Daily News, July 18, 2005 More Retailers File Suit. Kroger, others sue Visa over interchange fees, restricting competition

CINCINNATI -- The Kroger Co. said it has filed a federal lawsuit against Visa USA Inc. and Visa International Service Association alleging that the credit card company has engaged in price fixing and restricting competition related to credit card transaction fees.

Joining Kroger as plaintiffs in the lawsuit, filed late last week in District Court for the Southern District of New York, are Ahold USA Inc.; Albertson’s Inc.; Eckerd Corp.; Maxi Drug Inc.; Safeway Inc.; and Walgreen Co.

The lawsuit alleges that Visa has unlawfully set the interchange fees that are charged to Kroger and other merchants each time a customer makes a purchase with a Visa credit card. The suit also charges Visa with creating and imposing rules and restrictions on merchants that preclude Kroger from being able to negotiate lower fees.

Interchange fees—the monies paid by retail merchants to the card association (Visa and its member banks) for processing and receiving payment for a transaction associated with a general-purpose payment card—are set by Visa and its member banks and enforced by member banks through their contracts with merchants.

Rapidly rising interchange fees are a serious problem, costing retailers and consumers an estimated $20 billion or more each year. Kroger this year expects to pay credit and debit interchange fees of approximately $350 million, up more than 215% from five years ago. During that period, Visa has raised Kroger’s interchange rate 11 times. Interchange fees reportedly cost the average U.S. household more than $230 a year.

At the same time, consumers are increasingly reliant on credit and debit cards. In 2003, for the first time ever, electronic payments comprised more than 50% of Kroger’s sales. Today, more than 60% of Kroger’s overall transactions are made via credit or debit cards.

“The collective setting of interchange fees by Visa and its member banks constitutes horizontal price-fixing that leads to higher retail prices for our customers,” said Paul Heldman, Kroger senior vice president and general counsel. “This hidden cost must be borne by all Kroger customers, whether they pay for their groceries with cash, by check or by debit or credit card. 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. Instead, Visa is using its extraordinary market power to profit at our customers’ expense.”

The complaint seeks injunctive relief to stop the anticompetitive practices plus unspecified damages.

A copy of the lawsuit is available at www.kroger.com.

In late June, Plaintiff CHS Inc., Saint Paul, the parent of CHS Energy, which operates the Cenex chain of gas stations and convenience stores, filed an antitrust class action lawsuit in the U.S. District Court for the District of Connecticut against Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, JPMorgan Chase, Fleet Bank, Capital One and other major banks on behalf of merchants alleging collusive practices of their setting, by horizontal agreement, credit card interchange fees at supra-competitive levels. The Complaint seeks injunctive relief to stop the alleged anticompetitive practices plus damages.

It was joined in the suit by Photos Etc. Corp., dba 30 Minute Photos Etc., Irvine, Calif.; Traditions Classic Home Furnishings, Saint Paul; A Dash of Salt LLC, Bridgeport, Conn.; and KSARRA LLC, Newtown, Conn. At issue are the alleged practices by the defendants that cause merchants to pay supra-competitive, exorbitant and fixed interchange fees for the acceptance of these credit card payments.

“Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a ‘hidden tax’ that raise prices paid by consumers for almost every product they buy,” said K. Craig Wildfang, a partner at Robins, Kaplan, Miller & Ciresi LLP, which represents the plaintiffs. “Visa and MasterCard have previously been found to have ‘market power’ in the relevant markets, so Visa, MasterCard and the banks now have the burden of proving that they have set the interchange fees at the correct competitive level. Even Visa’s own economists admit that they cannot satisfy this burden. Due to Visa and MasterCard’s market power, the United States has the highest credit card interchange fees among industrialized countries. Regulatory authorities in many other countries, from the European Union to Australia, have recently adopted measures to reduce interchange fees, but in the United States, it will take action by the courts to accomplish this.”

“Prior litigation, which challenged narrow aspects of Visa and MasterCard’s collusive conduct, has proven ineffective at restraining the increase in credit card interchange fees, and as regulatory action is unlikely, class action litigation is the only alternative that offers merchants any prospect for relief from high, and rising, interchange fees. The card issuing banks that control Visa and MasterCard have the ability to set the interchange fees as high as they want, without any market force to restrain them,” said Wildfang.

“Interchange fees are just a way that credit card companies squeeze merchants to enhance their revenue stream. There is absolutely no need for these fees to be so high, and without anything to control them, the banks and the credit card companies continue to find ways to escalate the fees. We hope this lawsuit leads to significant changes,” said Mitch Goldstone, president and CEO of 30 Minute Photos Etc. and 30minphotos.com, a national online boutique photo service. Goldstone and co-owner Carl Berman write The Credit Card Interchange Blog, at http://www.waytoohigh.com.

“The U.S. credit card system is seriously broken and mismanaged, and millions of merchants and consumers are unnecessarily paying for it through credit card interchange fees that are increasing at an alarming rate. This lawsuit will hopefully result in a much-needed major reform of the credit card industry,” said Michael Schumann, co-owner of Traditions Classic Home Furnishings.

“Small merchants do not have any options available to them to fight this individually, but collectively, I am confident we can make a difference against big banks and credit card companies. These interchange fees definitely affect my bottom line, and I’m ready to stand up for a change,” said Jonathan Mathias, owner of A Dash of Salt.

"Scan Credit Card Firms for Antitrust": (editorial - Cincinnati Enquirer)

Scan Credit Card Firms for Antitrust - Editorial

The supermarket giants are taking on the credit-card giants in an antitrust lawsuit that could save money for every food shopper in America, whether you swipe plastic through those card-readers or use cash.

Kroger has joined Safeway and other chains in suing Visa U.S.A. Inc. for alleged price-fixing in setting the interchange fees that merchants pay card issuers for every transaction.

Credit-card officials claim merchants just want to shift their costs of doing business onto the backs of consumers, but we can't help wondering why credit-card company transaction fees keep rising when the volume of those transactions has been swelling like a tsunami. If anything, as volume explodes, we would expect card companies could afford to knock down per-transaction fees. Higher fees are passed along to all shoppers - cash customers as well as card users - in the form of higher grocery prices. The courts should take a thorough look at the allegations to see if the industry practice rises to the level of antitrust violation.

This is the second round of lawsuits against the big credit-card companies. Last month, a group of small retailers, on behalf of all retailers, sued in federal court in Connecticut against Visa, MasterCard International and several large issuing banks. The lawsuit accuses them of setting "exorbitant" transaction fees. In lawsuits as well as other issues, size does matter. Wal-Mart, the world's biggest retailer, in 2003 negotiated a multibillion-dollar settlement with both Visa and MasterCard.

Kroger and the other chains say they aren't trying to kill transaction fees. They just want them to be determined by volume and other competitive market forces. They argue the ever-rising fees are harder to justify in this day when credit-card charges are processed electronically and almost instantaneously, and when annual transactions total a stupendous $1.7 trillion. Kroger says in the last five years, its credit and debit-card fees have jumped 215 percent and have been boosted 11 times. The chains insist they are not looking for a fat payoff in court. They just want to force Visa to moderate its fees. Let's hope any savings won ultimately end up in supermarket shoppers' pockets

Click here to view The Cincinnati Enquirer, July 18, 2005 editorial

Retailers Welcome Grocer/Drug Store Lawsuit on Interchange

WASHINGTON, July 15 /PRNewswire/ -- The National Retail Federation today welcomed a new lawsuit filed against Visa USA Inc. by grocers and drug stores over credit card interchange rates charged to merchants.

"This is the second lawsuit filed against credit card interchange rates in less than a month and will help focus attention on this hidden tax that is driving up costs for consumers," NRF President and CEO Tracy Mullin said. "Everybody knows that credit card companies charge monthly interest to cardholders. But what most people don't know is that they also charge a fee to merchants and effectively require that we include it in the price of merchandise regardless of whether it's paid for by cash or credit. That drives up prices for everyone and is especially unfair for customers who pay cash."

"These fees range from pennies to a few dollars on an individual transaction, but they add up to billions of dollars nationwide every year and the amount collected has nearly doubled in the last half dozen years alone," Mullin said. "The credit card companies already earn huge profits from interest. There's no justification for them to double-dip into consumers' pockets."

Interchange is a percentage of each transaction that merchants are forced to pay every time a customer uses a credit or debit card. Visa and MasterCard together collected $17.4 billion in interchange fees nationwide in 2004, up from $9.4 billion in 1998 due to a combination of rising rates and broader use of credit cards, according to a recent Morgan Stanley report. The amount is forecast to grow to $32.4 billion by 2010. The average interchange rate was 1.75 percent last year, but Visa and MasterCard both imposed a series of increases this April and some new premium cards carry rates as high as 2.9 percent.

"This is not the first lawsuit filed against Visa over interchange rates and there is no reason to believe it will be the last," Mullin said. "These suits underscore the extreme dissatisfaction and frustration merchants feel over practices Visa has engaged in over many years. Business as usual at the credit card companies cannot be allowed to continue. This suit names only Visa, but if the court holds that the practices in question are illegal, then no credit card company should be allowed to do the same."

The lawsuit was filed Thursday in the U.S. District Court for the Southern District of New York by grocers Kroger Co., Albertson's Inc., Safeway Inc., Ahold USA Inc., and drugstores Walgreen Co., Maxi Drug Inc. and Eckerd Corp. The lawsuit alleges monopolistic practices on the part of Visa, price fixing and illegally tying products and separate network services. The complaint further contends that Visa's association rules have restrained merchants' ability to negotiate lower interchange fees. The suit seeks a declaration that Visa has violated federal antitrust laws, permanent injunctive relief barring Visa from continuing practices that violate antitrust law, legal costs and unspecified damages.

Unlike another interchange lawsuit filed last month in Connecticut, the new suit does not name MasterCard, does not name Visa and MasterCard's member banks, and is not a class action.

The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.4 million U.S. retail establishments, more than 23 million employees -- about one in five American workers -- and 2004 sales of $4.1 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. http://www.nrf.com/

Visa Sued for Price-fixing - Grocers, Drug Chains Unhappy With Credit-card Fees (MSNBC)

Click here to view MSNBC coverage

View the Complaint Filing

Click here to read the actual multibillion dollar class action complaint filed on June 22nd in U.S. federal district court against Visa, MasterCard and major banks.

[Disclosure: the editors of the Credit Card Interchange Blog: WayTooHigh.com are co-owners of 30 Minute Photos Etc., and lead plaintiffs in what is economically the most significant litigation since AT&T in the early 1980s].

Editors Comment: Kroger Co. and Other National Retailers Similar Litigation

As lead plaintiffs of the original June 22nd litigation against Visa, MasterCard and several US banks, we are delighted to learn that Kroger Co. and several leading national merchants are pursuing similar objectives. This underscores that the entire nation is seeking to protect consumers from unbridled interchange fee increases controlled by the credit card industry. We welcome the support of other merchants in this fight to escalate awareness for this unfair tax on businesses and hidden charge to consumers.

30minphotos.com, our online boutique photo service, like most e-commerce businesses, must accept credit card transactions, yet we too are faced with nearly one-hundred separate charge catagories, based on the type of cards used.

If you are an accredited journalist and would like to schedule an interview, please send your request to: corpcommunications@30minphotos.com

Carl Berman and Mitch Goldstone
co-editors, WayTooHigh.com

7 Big Retail Chains Sue Visa, Saying Its Fees Are a Form of Price Fixing (NYT's July 16)

The New York Times - The most recent case is unusual because it involves some of the largest players in the supermarket and convenience store industry. It also comes just days after John Philip Coghlan, Visa's new chief executive, publicly reached out to merchants on his first day on the job.

"It was widely known that Visa has gone around to individual merchants to keep them on board and keep them quiet on these issues," said Avivah Litan, a payments industry analyst at Gartner. "MasterCard has not done the same thing. They have been more lax."

Click here to read article (NYT, Eric Dash, July 16, 2005- Subscription required)

Grocery Chain Operator Kroger Co. And Several Other Large Retailers are Charging Visa USA Inc. With Price-fixing on Credit-card Transaction Fees (AP)

By DAN SEWELL AP Business Writer - Kroger, others sue Visa over price-fixing

Last month, a group of small retailers filed a lawsuit in Connecticut federal court against Visa, MasterCard Inc. and several big banks, including Bank of America Corp. and Citigroup Inc., alleging they set "exorbitant" interchange fees. One of those plaintiffs, Mitch Goldstone, runs 30 Minute Photos Etc. of Irvine, Calif., and also an online photo service. He said the transaction fees are increasingly significant as more business is done online. "I'm very encouraged by it," Goldstone said Friday of the Kroger-announced lawsuit. "I'm delighted there is additional attention to the unlawful price-fixing."

Click here to read article
MSNBC

Kroger Co. And Other National Retailers File Similar Federal Antitrust Interchange Lawsuit Against Visa U.S.A. Inc.

The complaint filed by seven national retailers including Kroger Co. against Visa U.S.A., Inc. seeks similar injunctive relief to stop their anticompetitive interchange fee practices.

Click here for a copy of the complaint lawsuit

Group of Supermarkets and Drugstore Chains Sues Visa U.S.A. (PMA Newsline)

Retailers sue Visa, claiming price fixing

A group of supermarkets and drugstore chains has sued Visa USA, San Francisco, Calif., USA, and its Visa USA unit, accusing the credit card association of price fixing, restricting competition, and keeping companies from negotiating lower rates, Reuters reports. In the lawsuit, which was filed yesterday in U.S. District Court for the Southern District of New York, the retailers contended that Visa's restrictions allowed it to extract "supracompetitive, artificially inflated" fees, and maintain "monopoly power" in some markets. Visa did not immediately return calls to Reuters seeking comment.

Companies filing the lawsuit included grocers Albertsons Inc., Kroger Co., Safeway Inc., and Ahold USA Inc., as well as drugstores Walgreen Co., Jean Coutu Group's Eckerd Corp., and Maxi Drug Inc. The plaintiffs are seeking an injunction and treble damages from Jan. 1, 2004 to the present, the article says. The lawsuit accuses Visa of unlawfully setting interchange fees charged to merchants each time customers use Visa credit card to make purchases, and imposing rules that preclude merchants from negotiating lower fees.

This lawsuit follows on the heels of an earlier one filed by a handful of merchants, including PMA member Mitch Goldstone, president and CEO of 30 Minute Photos Etc., Irvine, Calif., USA, and www.30minphotos.com, an online photo service. Goldstone and co-owner Carl Berman also write The Credit Card Interchange Blog, at www.waytoohigh.com.

Visa's new CEO, John Philip Coghlan, said earlier this week his past experience will help him reach out to merchants.

Click here to read article

"The View From Visa's New Boss" (BusinessWeek)

Encouraging words from new Visa U.S.A. CEO, John Coghlan

From BusinessWeek Online: -Schwab exec John Coghlan is also a former merchant, and he says that experience will color his tenure at the payment-card giant.

When former Visa USA CEO Carl Pascarella announced plans to retire last year, he left some big shoes to fill -- and some thorny legal problems to solve. In 2002, Visa and MasterCard paid $2 billion to settle a lawsuit filed by Wal-Mart (WMT ) and other merchants over debit-card fees. Last month, another group of merchants sued the card companies over credit-card fees.

But rather than hire a lawyer as its next CEO, Visa took the peacemaker approach and named a former merchant. On July 11, the card association announced that its new CEO is John Coghlan, who, prior to spending 17 years as an executive at Charles Schwab (SCH ), ran a small business called San Francisco Grocery Express Ltd. The 54-year-old San Francisco native vows to pay special attention to merchants' needs during his tenure.

Click here to read the article (BusinessWeek Online, July 12, 2005)

"Peeved Over Plastic, Some Stores Are Yelling 'Charge.'" (Investor's Business Daily)

Investor's Business Daily - Retailers Gripe About Card Fees, Which Are Confusing And Rising. Tuesday July 12, 7:00 pm ET Donna Howell. Peeved over plastic, some stores are yelling "charge."

Click here to view article

New Visa U.S.A. CEO Challenged to Defuse Merchant Rebellion (AP)

NEW VISA U.S.A. CEO ASKED ABOUT INTERCHANGE SUIT

The Associated Press reported on July 12th that VISA U.S.A., the country's largest payment system named John Philip Coghlan as its new chief executive officer. During the Monday conference call, while not discussing the antitrust litigation, of which 30 Minute Photos Etc. is a lead plaintiff, AP did report that Mr. Coghlan said he could "empathize with merchants, having been one himself."

The article explains that the merchant interchange fee average about 1.7 percent of each transaction and yields more than $20 billion annually in revenues. While Wal-Mart has already been successful in negotiating fees, the new litigation seeks to become a nationwide class action.

David Robertson, publisher of The Nilson Report said "This represents some thinking outside the box. "Visa's challenge is no longer getting its cards into the hands into consumers or convincing merchants that they need to accept the cards. The challenge now is build better relationships with merchants."

The article explained that Visa's new CEO is faced with helping the credit card association defuse this merchant rebellion against rising interchange fees.

Click here to view the Associated Press article

"Visa and MasterCard International no Strangers to Antitrust Violations - (GreenSheet.com)

The Green Sheet current July edition has a lengthy article regarding the background and updates on this antitrust violation litigation.

Click here to read the article (subscription required)

26 Leading Issues: Credit Card Interchange Fees (WayTooHigh.com)

[Repost from Nov 2, 2005]

26 leading issues affecting credit card interchange fees, by Mitch Goldstone and Carl Berman, editors, WayTooHigh.com

1) Merchants' interchange fees have risen even though network fees are decreasing.

2) The credit card companies have an unbridled ability to raise fees at will. Member banks of the credit card associations are in our opinion, co-conspirators.

3) Since 1999, the PIN debit fees rose 267 percent.

4) In the early 1990s there were about a dozen separate interchange fees, today there are nearly one hundred. These interchange fees seemingly always increase and have not decreased.

5) Visa and MasterCard fix uniform credit card interchange fees, which are agreed to and used by all Visa and MasterCard banks.

6) This collective horizontal price fixing violates Section 1 of the Sherman Act.

7) Even the cost for paying out reward benefits to affinity card holders has declined and is getting more stingy. Ex: American Airlines now charges a fee of $250 each- way to cash in frequent flyer mileage to upgrade from coach to business-class on international flights. This is an audacious game few understand.

8) The credit card associations are extending loyalty and kick-back programs to consumers which few can actually figure out the value of. If merchants could even figure their actual cost - from nearly one-hundred separate rates - and listed the actual Interchange fee as a separate item on the customers' receipt, people would be less likely to want frequent flyer mileage rewards once they understood how much more they are actually paying for those perks.

9) This is a hidden tax on consumers and merchants.

10) With today's technologies, the interchange structure is now inefficient. In our opinion, consumers don't benefit and merchants don't benefit.

11) Part of this inefficiency relates to credit card companies where only 1 in 2000 of their mail solicitations lead to signing up just one new cardholder. Credit card companies mail out 5.24 billion mail solicitations 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?

12) Why does it cost so much to use a credit and debit card, rather than with writing a check? There is a zero interchange fee for checks, the money goes directly from the consumer to the retailer. Example: The checking system works without any of these fees. The difference between credit card and check fees are also a study in competition; banks impose various fees on account holders and on merchants for writing and processing checks, from zero to a variety of rates in order to stay competitive.

13) Today, the card associations have lower costs and even no float expense when debit cards are used. With technology, there is less fraud and no need for paper receipts. Processing and telecommunication fees are lower and now automated. With interest rates so low for so long, even the cost of the the regular float has declined.

14) Merchants shouldn't have to cover the cost for card holder credit risks. Defaults by card holders should not be paid by merchants, but rather, issuers should be more careful who they extend credit to.

15) There is no ability to bypass the credit card network. For instance, 30minphotos.com operates a national online boutique photo service where all online orders require transactions to be completed with credit cards, this parallels the entire online retail segment.

16) Part of the proof that the card association and their interchange fees are a monopoly is that even though rates continue to rise, merchants are forced to use their products.

17) Trickery and confusion. Even though there are lower interchange rates for debit cards, it is increasingly more difficult to distinguish debit cards. It's difficult to see the "debit" or "check card" reference and retail clerks can easily ring up the sale as a charge card, thus paying higher rates.

18) When consumers present merchants with faulty magnetic strips on their cards it cannot be swiped by the card reader. This causes merchants to then manually enter the number, which costs more even though there is an identical risk to the card association. But, the charge for manually entering a card is excessively higher, and even higher if the address and zip code are not entered.

19) In 1994, the Visa and MasterCard interchange fees on a $100 transaction for the largest non-supermarkets was about 1% and 1.33%, today it is 1.53% and 1.58%, respectively. For the smallest non-supermarket merchants, the charge was about 1% and 1.31% in 1994; today it is about 1.61% and 1.72%, respectively.

20) There is no added direct value or benefit to the merchant by accepting an affinity card or any other card, such as the Visa Signature card.

21) Australia, the European Union and the United Kingdom are samples where interchange regulations work. The U.S. is the only market where interchange fees are increasing. Canada, for example, has a zero interchange fee for debit cards and their PIN Network is the most popular way to transaction business. U.S. Interchange fees are 3-times higher than in Australia and two-times higher than in the UK. Australia is a great example - since the nation regulated these rates, merchants paid $500 million less. This translates into lower costs to consumers. The Australian CPI actually declined and there was an increase in card usage.

22) The only leverage merchants have is in choosing their payment processor. Those fees are highly competitive, yet the Interchange fees cannot be negotiated.

23) Because banks are now permitted to issue Amex and Discover cards, MBNA and Citibank plan to issue Amex 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.

24) The argument by Amex was that their card holders 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 Amex. As MBNA and Citibank switch from Visa to Amex, they are appealing to the same group of cardholders with the same spending patterns.

25) How can groups like "Americans for Consumer Education and Competition" be expected to be objective? [(ACEC is financially supported by VISA USA]. They suggest merchants want to pass along the interchange fees to consumers. The fact is that this litigation has nothing to do with "shifting' costs from merchants to consumers, but rather it is about reforming the system so that competition works and will drive total costs down so that both merchants and cardholders have lower costs.

26) The Bank of America announced acquisition of MBNA will only worsen the competitive problems faced by merchants, and will further reduce competition in the credit card business.

[Source: WayTooHigh.com]

"Naples Merchant Takes On Credit Card Firms Over Fees" (Naples Daily News)

The Naples Daily News (subscription required) has a July 1st feature profile on Mike Schumann, one of the five lead plaintiffs in this litigation against Visa, Mastercard and several US banks. This coverage is extensive and clearly identifies the issues by personalizing Mr. Schumann's concerns.

..."Last week Schumann was one of five merchants who filed a class-action lawsuit against Visa and Mastercard and the nation's biggest banks, alleging they have conspired to fix prices on a type of fee charged to merchants, called an interchange fee. The interchange fees, which have increased dramatically in recent years, cost merchants $20 billion a year, said K. Craig Wildfang, Schumann's attorney with the Minnesota-based law firm Robins, Kaplan, Miller and Ciresi. The law firm gained notoriety for representing the state of Minnesota in the historic $6.6 billion tobacco settlement in 1998".

Click here to view article (subscription required)

Merchants sue MasterCard, Visa over ‘exorbitant’ interchange rates

Internet Retailer - Strategies for Multi-Channel Retailing

30minphotos.com leads five merchants in filing a class action suit charging MasterCard International, Visa International and their merchant banks with illegally fixing interchange rates—the fees merchants must pay to accept credit cards.

Five merchants have filed a class action suit charging MasterCard International, Visa International and their merchant banks with illegally fixing interchange rates—the fees merchants must pay to accept credit cards.

------------------

Lead plaintiff in the lawsuit—filed last week in U.S. District Court in Connecticut—is 30minphotos.com, a national online boutique photo service. The lawsuit asks for an injunction to prevent the two card associations and their members from collectively setting interchange fees and asks for yet-to-be determined damages.

The suit contends that the two card associations conspire to set interchange rates, causing merchants to pay supra-competitive and exorbitant fees for card acceptance. Merchant acquirers typically pass increases in interchange on to the merchant in the form of higher discount rates. As a result, the interchange fee acts as a minimum merchant discount fee, according to the lawsuit.
In the suit, the merchants also argue that because Visa and MasterCard have combined market share of 73% of the general-purpose card market, they can raise interchange fees without losing merchants.

The merchants also contend that increases in interchange are not based on increased costs. “Interchange fees are just a way that credit card companies squeeze merchants to enhance their revenue stream,” says Mitch Goldstone, president and CEO of 30 Minute Photos Etc. “There’s absolutely no need for these fees to be so high.”

Online retailers especially have little recourse but to accept the fees because 100% of their businesses require credit card acceptance, Goldstone says.

In a statement, Noah J. Hanft, MasterCard general counsel, said that the lawsuit is “misguided, and MasterCard looks forward to defending interchange, which is necessary for the operation of a four-party system and has been found lawful, efficient and pro-competitive.”

Visa would not discuss specifics of the suit. But in a statement, Paul Cohen, vice president of Visa USA, said that the association plans to “vigorously defend interchange—a business practice that has been both successful in the marketplace and found to be legal in federal court.”

Credit Card Fees Draw Lawsuit By Merchants

Credit Card Fees Draw Lawsuit By Merchants

The National Retail Federation explains why the interchange fee case is so important to all merchants and consumers.

Click here to view article

(Gazette-Times; Knight Ridder Newspapers)

TV-News 14, Charlotte NC - Watch the video link

To watch video coverage of the credit card lawsuit from TV-News 14 in Charlotte, NC

Cliick here to watch video

Class-Action Suit Alleges Visa, MasterCard Fix Fees (DM News)

An antitrust class-action lawsuit has been filed against Visa, MasterCard and several major U.S. banks on behalf of a group of merchants, alleging the fixing of credit card fees, law firm Robins, Kaplan, Miller & Ciresi LLP said yesterday.

Robins, Kaplan, Miller & Ciresi, Minneapolis, is representing merchants in the suit, such as 30 Minute Photos Etc., Irvine, CA; Traditions Classic Home Furnishings, St. Paul, MN; CHS Inc., also of St. Paul; A Dash of Salt, Bridgeport, CT; and KSARRA, Newtown, CT.

The suit, filed June 22 in U.S. District Court for the District of Connecticut, alleges practices by the defendants that cause merchants to pay "supra-competitive, exorbitant and fixed interchange fees for the acceptance of credit card payments," according to the law firm.

"Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a 'hidden tax' that raise prices paid by consumers for almost every product they buy," Robins partner K. Craig Wildfang said in a statement.

Also named in the suit are Bank of America, Citibank, Bank One, Chase Manhattan Bank, JPMorgan Chase, Fleet Bank, Capital One and other banks.

This move was undertaken because prior litigation proved ineffective and regulatory action is unlikely, Wildfang said in the statement.

DMNEWS - June 24, 2005 By: Chantal Todé Senior Editor

Merchants Sue Banks Over Credit Card Fees - (WJLA - ABC News)

Merchants Sue Banks Over Credit Card Fees

(Click here to view story)

Suit Challenges Credit Card Fees - (ConsumerAffairs.com)

Suit Challenges Credit Card Fees

June 24, 2005 A class action lawsuit filed by several small businesses accuses Citigroup, Bank of America and other large banks of illegally fixing the price of credit card transaction fees.

Click here to view entire article

(ConsumerAffairs.com)

Companies Assert "Interchange Fee" On Every Charge Is Exorbitant And Unfair (Inc. Magazine)

Antitrust Suit Filed Against Visa, MasterCard

Companies assert "interchange fee" on every charge is exorbitant and unfair. By: Max Chafkin - Inc Magazine

June 24, 2005--Five small businesses filed a class action lawsuit in Connecticut Thursday charging that Visa and MasterCard have been illegally fixing the fees charged to merchants who accept their cards.

The suit alleges that by dictating so-called "interchange fees" -- a percentage of the total sale that is charged to the merchant -- Visa and MasterCard have created a non-competitive environment in which businesses cannot negotiate for lower rates. The lawsuit also seeks an injunction that would allow businesses to negotiate rates with member banks in addition to unspecified damages.
Fees vary depending on the type of card but are usually around 2%.

While Visa said that it is still reviewing the complaint, Paul Cohen, a Visa spokesperson, defended the fee structure in a statement as "a business practice that has been both successful in the marketplace and found to be legal in federal court."

Interchange fees came under fire in 2003 when Wal-Mart settled with the card companies for $3 billion dollars. As part of the settlement, the retailer won the right not to accept certain high fee debit cards, which are generally favored by banks because they bring in high revenues. Card companies argue that the high-fee premium cards are good for merchants since they attract bigger spenders.

Mitch Goldstone, whose Internet photo service 30 Minute Photos Etc. is one of the companies bringing the suit, complained that the fees have forced him to raise prices. "It is a huge hidden tax on consumers," he said.

Said Visa's Cohen, "We believe the merchants in this suit are seeking to shift their normal costs of doing business onto someone else -- the consumer."