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<p>ARLINGTON, Va. -There’s been some activity recently in the class action anti-trust lawsuit Wal-Mart and other retailers have filed against Visa and MasterCard. What are the case’s potential effects on CUs? The Supreme Court recently let stand a lower court certification of the retailers as a class for the suit and estimates of possible damages have ranged as high as $39 billion. Two credit card executives have sought to reassure credit unions that, while it is theoretically “possible” for some of the damages from the lawsuit between the card companies and retailers to reach them, it is “highly unlikely” that they would do so. The suit stems from a dispute over the rates of interchange the retailers are forced to pay whenever a customer uses one of the so-called “signature debit cards” which draw the funds for a given transaction not from a line of credit but from the card user’s checking or share draft account. Like so-called point of sale cards, where the user enters a personal identification number (PIN) to access their funds directly, signature debit cards also access the user’s own funds. But unlike point of sale cards, signature debits process in much the same way as do credit cards. Verification of the card and the customer’s signature approve the transaction. This, Visa and MasterCard maintain, makes the signature debit cards significantly more expensive to manage and more subject to loss and fraud than the point of sale cards. That extra risk and loss justifies the higher interchange rate, they say. Usually, signature debit cards carry an interchange rate only a fraction of the rate carried by credit cards and as much as 90 basis points above the rate for transactions using the point of sale cards. Retailers maintain that since, in the cases of both signature debit and point of sale cards the funds do not come from a credit line but from the user’s own account, they both should carry a significantly cheaper interchange rate. Wal-Mart and other retailers that objected to the high signature debit card interchange nonetheless faced having to accept them because of the card associations’ so called Honor All Cards rules. The Honor All Cards rules state that if a retailer accepts one of the card associations’ cards they have to accept them all. Wal-Mart refused to accept the signature debit cards and sued Visa and MasterCard, alleging that the Honor all Cards rule violates U.S. anti-trust law. The card associations have defended their rules by arguing that Honor All Cards seeks to protect competition and preserve consumer choice by placing the choice of which card to use more firmly in consumers’ hands. The lawsuit, which was originally filed in 1996, will be heard in the U.S. District Court for the Eastern District of New York in Brooklyn. Currently, a trial date has not been scheduled. Financial institutions, including credit unions, which are card members, have a technical exposure to the damages from the lawsuit since neither Visa nor MasterCard are companies on their own. As member associations they could technically levy assessments to pay off a large settlement from their members, but both association and bank executives doubted whether they would do so. Noah Hanft, General Counsel for MasterCard International, challenged fears that the card associations would lose the case and called it “extremely unlikely” that the retailers would prevail in court. He further charged that the damage estimates of between $8 billion and $39 billion were based on “simplistic” calculations that, he believed, could not be supported. Instead Hanft cast doubt on whether there would be damages at all if the card associations lost the suit. He pointed out that the signature debit card interchange generally brought in less revenue than the cost of running a card program and added that without any profit there could be no damages. He added that any damage calculation would also have to include the cost and losses from alternatives consumers would have used to make the make the transactions, as well as possibility they might not have made the transaction at all if were not for the availability of the signature debit card, all of which would act to lower the possible figure. “If,” he added, “it was to even get that far which we don’t believe it would. We are going to win the suit. The fact is that the signature debit card vastly expanded the universe of card holding customers available to retailers,” Hanft said. “With the signature debit cards retailers get an even larger pool of customers who have an easy, safe, pre-approved way of buying their products. It’s definitely a good deal for the retailers and they know it,” he added. Jerry Craft’s comments back up Hanft’s. Craft is president of InfiCorp holdings, a major card portfolio purchaser and card issuer, with over 33 years experience in the credit card management as well as involvement as a witness in previous anti-trust lawsuits over credit card interchange rates. Craft also agreed there was a possibility that major damages could make their way down to Visa and MasterCard association members, but likened the risk to being struck by a meteor, “possible but not likely to happen any time soon.” Craft speculated that the “worst case scenario” of a $39 billion damage award would effectively bankrupt the associations since neither Visa nor MasterCard could pay it on their own. Members, he predicted, would resign from the association before paying anything approaching that amount of money and such a situation would do neither the associations nor the retailers any good. Further, Craft estimated that since the court in Brooklyn has a crowded docket, and adding in time for appeals up to the Supreme Court level, which he considered nearly certain, the case could take another five or six years to resolve. In that time, Craft argued, continued changes in the retail and card marketplace will act to make the suit less and less relevant. Like Hanft, Craft pointed out that retailers have a “pretty good deal” with consumers having access to many different card options. Market changes and innovations over the course of the suit’s five or six years will help lead both sides to a compromise, Craft predicted. Privately, legal sources generally familiar with the case agreed with Craft, though none wanted to speculate for the record. They joined in a consensus that a compromise would likely preserve the Honor All Cards rule but that the compromise would include some means for compensating retailers who felt they were being disadvantaged by the rule. They also predicted the final compromise would see the interchange rate for signature debit cards lowered and advised credit unions to consider that eventual reduction in their financial planning. [email protected]</p>

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