NEW YORK – Card industry analysts have split on what MasterCard's recent settlement in a landmark card policy case means for the case going forward. MasterCard settled its part of the lawsuit before the trial actually began on April 28 for an estimated $1 billion, according to published media reports. The judge in the case has enjoined either MasterCard or the retailers from talking about the terms of the settlement. Retailers led by Wal-Mart had sued VISA and MasterCard over their honor all cards rule, charging that forcing them to accept the signature debit products because they accepted the credit card products amounted to monopolistic control of the market for electronic payment services. Retailers wanted more leeway to accept only ATM/EFT transactions that use personal identification numbers for validation. PIN based transactions carry a sharply lower rate of interchange than do transactions in which the cardholder signs the receipt. VISA and, until April 28 MasterCard, had countered by arguing the honor all cards rules effectively protected consumer choice of which electronic payment product they will choose. They have also argued that the growth and consolidation among PIN-based EFT networks belied the allegation that they have been able to monopolize the market and have recently pointed to the announced intention of Concord EFS and First Data to merge as further proof (see sidebar). The issue has gathered energy from the steady growth in the number of electronic payment transactions and from the money already invested in the products. VISA, for example, will roll out a somewhat controversial rewards program for its debit card product in May. That program, similar to credit card reward programs, will award points for debit purchases in which cardholders sign their names for validation and represents a deeper level of investment in debit transactions for the California-based card association. MasterCard has, by way of contrast, invested less in its debit product, and that fact may have been one of the factors that led the New York-based card association to settle, according to one analyst. "I think there were a lot of factors that led MasterCard to look at settling as a real option," the analyst said. He declined to speak on the record since he lacked the details of the legal arrangement, but he pointed out that the firm had sought to split itself off from VISA in the suit arguing, in part, that its smaller size prevented it from being the monopolistic force that the claimants claimed it was. "I think the Court helped push them to settlement when it kept them in the same boat with VISA," the analyst added. "They could reasonably say `this isn't our fight.'" Several analysts said they were very interested in the details of the MasterCard settlement since that settlement could contain the blueprint for how signature debit interchange rates might go in the future. Many analysts have speculated publicly that, no matter who won the legal battle, the suit's overall effect would be to bring the rate of interchange that the card associations are able to charge for their debit transactions down. The details of the MasterCard settlement might give a hint as to how much and, more importantly, how the negotiations on future interchange will be handled, the analysts said. Currently the interchange on a debit transaction through an EFT network, one where the cardholder enters a PIN, is about a dime. By contrast the interchange on a debit transaction through the card association's network can run as high as $1.50 or more, depending on the circumstances. What Happens Next In The Case? Industry watchers are split over whether MasterCard's settlement would make VISA more or less likely to settle too. "I expect that MasterCard's pullout really puts the heat on VISA to settle as well," said one analyst who also refrained from commenting on the record "With fewer defendants, VISA becomes a bigger target." But an industry analyst for another firm estimated that VISA would stay the course in the case. "They have a strong position and more invested in debit products," than MasterCard does, the analyst pointed out. The analysts who expected VISA might also settle the case argued that the card association could do so if the other side made an offer to compromise some of its demands as well, particularly if the retailers were willing to give ground on their objections to the honor all cards rule. The analysts pointed out that the honor all cards rule is really the big prize, from Visa's point of view, in the suit since the firm is involved in a significant market fight with an increasingly consolidated EFT network industry. "It's all about market share," said one analyst, and VISA's honor all cards rule helps keep their debit card in the door of merchants across the country. These analysts also pointed out that the retailers would have to ask themselves how many of them would really not accept VISA debit cards if the associations dropped the honor all cards rule. VISA has such a market presence in the overall card market that whether or not the honor all cards rule was in force, many retailers would still wind up accepting the cards, the analysts argued. A lawyer familiar with the case also estimated that the Court, itself, is looking for the parties to settle and not go to trial. She pointed out that the judge in the case had been strict about deadlines for filings and had, in general, made it clear to both parties that a trial was going to be both expensive and difficult. Details of the MasterCard settlement will probably be released after the trial is either completed or settled. -

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