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ARLINGTON, Va. – The U.S. Department of Justice has sued to block the merger of First Data Corporation and Concord EFS ensuring, in the Department’s view, that credit unions and other financial institutions nationwide retain their current set of options in the ATM and EFT market. U.S. District Court Judge Rosemary Collyer has set December 15 to hear arguments on both the Department of Justice’s request for a preliminary injunction to block their proposed merger and to begin to hear arguments on the merits of the case. Denver- based First Data owns 64% of the NYCE network, based in the New York City area, while Memphis-based Concord EFS owns the STAR network. “While STAR has recently lost some significant bank contracts to Interlink and NYCE,” the DOJ wrote in its complaint, “under even the most conservative estimate of future market shares the combined firm would have approximately a 45% market share. Taking into account these lost contracts, the PIN debit network services market remains highly concentrated and would become substantially more concentrated as a result of the merger,” the Department wrote. On April 2, 2003, First Data and Concord announced that the two companies had entered into a definitive agreement to merge. The Department of Justice has been examining the proposed merger for its compliance with U.S. anti-trust law the entire six months since. The Department’s complaint outlined some elements of the industry that few outside the trade may appreciate and that, it said, fed into its decision to sue to block the merger. First, it noted that the market for debit transactions in which a cardholder validates their identity through a personal identification number is already significantly concentrated. As of March 2003, the Department found that only four ATM and PIN debit networks, STAR, Visa’s Interlink, NYCE and PULSE, routed 90% of all PIN debit transactions – with Concord handling 56% and First Data handling 10%. “It’s true that the market is already highly concentrated and I think it was just too hard to reconcile how losing one of the already small number of choices would help financial institutions or consumers or merchants,” said Cindy Ballard, Executive Vice President with the Houston-based PULSE EFT Association. PULSE is believed to have been one of the network firms that the DOJ antitrust officials consulted about the proposed merger, although the firm never did confirm that it had been consulted. The firm is unique in that has it is owned by its member financial institutions that include both banks and credit unions. Second, the DOJ argued that the two debit markets, one for transactions which validate with a PIN and the other in which cardholders validate their transactions with a signature, are substantially different and cannot be viewed as competitors. The DOJ cited the substantially greater expense of signature debit transactions to merchants, along with PIN debit’s relatively low fraud rate, lack of charge backs, speed of execution at the register and ability to get cash back as elements that would prevent merchants from switching easily from PIN debit to signature debit if faced with higher PIN debit costs. Third, the Department estimated that a merger between the two firms would definitely result in higher costs to merchants and consumers. “Interchange fees have risen dramatically in the past several years as the PIN debit network services market has become more highly concentrated,” the DOJ complaint alleged. “First Data’s acquisition of Concord will likely exacerbate this trend toward higher pricing by further reducing competition in the market. Merchants will be forced to pass on a significant portion of the higher fees to tens of millions of consumers, in the form of higher prices for all goods and services,” the Department added. Stan Paur, CEO of PULSE noted that the DOJ’s complaint had laid to rest what had been a “philosophical debate” in the industry over the differences between PIN debit and signature debit by laying out the tangible factors that made them different products. He also suggested that First Data’s apparent willingness to fight the DOJ might flow from its commitment as the acquiring party in the merger to making its best effort to see the deal through. Anti-trust specialists have called the suit unusual in that it is the first time that the Department has moved to block a merger in the debit card industry. Several have also noted that, in other industries where there has been anti-trust action, the DOJ has not had to actually sue, that it has been enough for it to signal its unhappiness with some aspect of a proposed merger to cause change. David John, a banking analyst for the Washington D.C.-based Heritage Foundation said that he presumed that the DOJ had tried its usual approach and that this had failed. “I am presuming that signals were sent and either not received or ignored,” John said. Possible reasons include a lack of awareness on First Data’s part of how serious the DOJ was in its objections or, possibly, a belief that it could beat the suit. The latter would appear to be the case since First Data’s CEO, Charlie Fote, has appeared in press reports challenging the suit and attacking the DOJ’s case (see sidebar). Credit Unions Keeping Status Quo If the suit succeeds in blocking the merger, both credit unions and banks will continue to face the energetic and often confusing ATM and EFT marketplace that they do now, according to Ballard and other ATM network executives. Credit unions will remain free to carve out the surcharge free networks such as the California-based CO-OP Network and the Florida-based Credit Union 24 and will face a broader range of choices when crafting their ATM and EFT strategies than they would have had otherwise, Ballard explained. Paur noted that while neither NYCE nor STAR have had pricing structures that have been very friendly to smaller and mid-sized financial institutions, like credit unions, it was unreasonable to suppose the pricing would be better with one fewer option. Both he and Ballard argued against the suggestion that the merger would further competition and lead to more products by noting that the EFT world was littered with failed product ideas and that there is very little evidence of strong consumer demand for more PIN debit transaction products. Ballard also explained that the suit recognized the reality that credit union cardholders, as long as their institutions participate in at least one of the four big networks effectively have access to their cash from virtually every ATM in the world. By participating in at least one of the big nationwide networks, which in turn tie into MasterCard’s Cirrus network or Visa’s Plus, credit union cardholders have the universal ATM access with the competition that the DOJ deemed essential to keeping prices low. Jim Park, CEO of Credit Union 24 cautioned against evaluating the case’s impact on credit unions too early and said a lot would depend on what came out in the course of the legal wrangling. He did seem to question the DOJ’s breaking the PIN debit market out of the overall debit picture and stressed that the entire payment industry needed to be evaluated. What’s Next? No one was willing to speculate on what might happen next in the ATM or EFT world, particularly if the suit succeeds in blocking the merger. Analysts appearing in press accounts have estimated that STAR would likely recover a bit after a merger failure, arguing that the firm’s negotiations with major banks have suffered from the uncertainty the merger brought with it. Staci Busby, a spokeswoman for First Data, said that the firm had built its success so far on acquisitions and planned to continue that strategy whether or not the merger with Concord is allowed to move forward. Some press reports have included speculation First Data might want to acquire Certegy, the Alpharetta, Georgia, based card processing firm with a significant number of credit union clients should the proposed deal with Concord not be allowed. [email protected]

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