RIVERWOODS, Ill. -- Discover Financial Services stands to receive a significant payout from the resolution of some long-standing litigation with Visa and MasterCard.
Credit unions and banks that issue Visa should pay attention to the case, according to lawyers familiar with it, because if the cost of settling exceeds reserves set aside for the case, Visa has said it would raise more cash through further stock sales. Such a sale would dilute the value of the Visa stock that credit union issuers were previously given, the lawyers explained.
This particular legal tussle stems from a former Visa and MasterCard practice that prevented banks that issued either of their brands from issuing cards under another brand, the so-called exclusionary rule. A previous legal fight between the card brands and the U.S. Justice Department began with a suit from the government in 1998 over the anticompetitive nature of the policies.
Both Visa and MasterCard withdrew the policies in 2004. None of the parties are commenting on the Discover case or on settlement talks that were slated to conclude by June 30.
Card industry analysts speaking on background said they expected Visa and MasterCard to settle before the trial gets underway on Oct. 14, primarily because, while any settlement might be very large, an antitrust ruling could carry triple damages.
The core of Discover's argument is that Visa and MasterCard's exclusionary rule prevented it from effectively competing. Visa and MasterCard
countered that by its own admissions, Discover would not have been able to compete effectively due to its own weaknesses in the number of locations accepting the card or in the lower fee income the brand offers issuers.
Visa and MasterCard have noted that Discover has signed up relatively few financial institutions since 2004. In press reports Discover stated that it has more than doubled its network transactions since 2004.
Published reports estimate a possible $4 billion payout to Discover if the case is settled and a far larger amount if they lost in court. In financial filings attached to its stock offering in March of this year, Visa said it was sequestering $3 billion to settle legal claims, including $650 million for the Discover case; Visa has reported roughly $2 billion left.
Even if the payout comes in at only half the estimated amount, there are indications it will provide Discover a wellspring of important capital. The card brand's third quarter profits were down 11% from last year, according to financial filings.