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Five years ago, an attorney representing merchants in a lawsuit addressed the board of our organization, the PULSE EFT Association. The lawyer dispassionately outlined the arguments in a case against the financial industry’s credit card associations, VISA and MasterCard. The retailers were arguing that they had been compelled to accept certain VISA and MasterCard debit cards issued by financial institutions. They contended the charges for accepting these cards were unreasonable and the requirement to accept these cards under an “honor all cards” rule was a violation of antitrust laws. In his presentation, the attorney was circumspect when talking about what damages his clients might seek. When finally pressed by a Board member about how much money we were talking about, the lawyer said the damages would be in the “three to four billion range.” Moreover, since this was an antitrust case, these figures would be trebled. The room, which included representatives from five credit unions, fell very quiet. Finally, some asked if the institutions themselves would be targeted. The attorney said that the retailers did not contemplate going directly after the issuers. As a result of this presentation, the Board members asked our attorney for a summary of the case and the potential consequences of this lawsuit. This report was intended to create awareness of the risks to the financial industry of an unfavorable decision in this case. This document was distributed but failed to gain traction because attorneys for Visa and MasterCard routinely and vigorously dismissed a chance of the merchants prevailing. In late April, a settlement was announced in the VISA/MasterCard merchant dispute. The credit card associations agreed to pay $3.050 billion in damages. Additionally, these organizations agreed to reductions in interchange on their VISA Check and debit MasterCard programs. The lowering of the fees paid by merchants will result in a corresponding loss of income to financial institutions of several billion dollars a year. Since 62% of credit unions issue these cards, this is a development of profound significance to the industry. By any measure, this was a huge financial victory for the retailers. However, the implications of this merchant win go far beyond the dollars and cents agreed upon by the parties. This settlement is likely to redefine how charges for electronic payments are determined in the future. This process of using litigation, rather than negotiation, may be the basis on how reimbursement for current and evolving forms of payment are established. To a certain extent, the credit card associations and issuers were fortunate. The potential damages could have been much more significant (potentially $39 billion). The core of this dispute was whether the associations could legally impose an “honor all cards” rule. However, beyond this specific legal point, a much more fundamental issue was at stake. Today, all financial institutions, including credit unions, possess a variety of assets. These assets include, among other things, their facilities, people, reputation and, in today’s information age, a valuable database of consumers. This latter information has been compiled over years, even decades. With increasing frequency merchants, processors, third party ATM operators and Internet service providers are looking to electronically access a financial institution’s database. Typically, this access seeks to obtain an authorization. In some instances such as online, PIN debit POS transactions, these authorizations represent a guaranteed transaction. What should a credit union be paid for providing this guaranteed authorization? What is the value to the merchant of this type of authorization? Finally, who should set the cost of this transaction to the party receiving the authorization? Prior to the recent historic settlement, the credit card associations dictated these fees. The consequences of this agreement between the merchants and VISA and MasterCard is that the financial industry associations and networks will likely be restrained in setting various authorization fees for credit, debit, Internet and ACH transactions. One can hardly blame the merchant community for seeking redress on this issue. With more than 14 billion (PIN and signature) debit transactions annually, the reduction of even a few cents represents hundreds of millions of dollars in savings. A logical question is what does this mean to the individual credit union? Besides the hard dollar losses in revenue that many issuers of signature debit cards will experience, this agreement might result in organizations reassessing their approach to electronic payments. In reality, this re-evaluation should be a part of an ongoing process relative to electronic payments. Credit unions would be well advised to implement the following: * Develop a written strategy for providing electronic banking services. This strategy should offer the rationale for providing a range of card and other EFT services in light of member needs and competition. * Designate a senior executive to understand current and evolving electronic products. This person should also be charged with reporting how developments related to industry policies, lawsuits and rules might affect the credit union’s operation and profitability. This individual should routinely and regularly report to senior management. * Clearly understand and appreciate the costs and profitability of electronic payment offerings. Such an analysis is particularly timely in light of the recently announced settlement involving signature debit cards. Some credit unions may use this exercise as a basis for revisiting its pricing policy to its members. * Ask who are our partners in delivering electronic payments to our members? Are these parties sympathetic to the needs of issuers or is their focus on simply acquiring transactions? Why are we doing business with certain companies? Are there more cost effective alternatives? For some credit unions, the retailer/credit card association settlement and the resulting diminished revenue will come as a surprise. Besides individual credit unions becoming more attentive to their proprietary practices, they should, as a group, become more proactive in the shaping of EFT policies. Credit unions should insist on meaningful representation on all bodies that set fees and policies that could affect the profitability and competitiveness of individual institutions. While in most shared EFT networks, credit unions represent a minority of volume in terms of numbers, they constitute a sizable portion of the membership base. But few EFT networks, whether operating as associations or publicly traded companies, have granted credit unions a credible role in terms of governance and policymaking. In contrast, in PULSE credit unions represent more than 30% of the membership and are represented on the Board by six directors. It may be timely for credit unions to leverage their considerable numbers. In the end, this settlement should be a call to action for both the individual credit unions and the movement.

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