Visa and Mastercard used their market position to force retailers to accept signature-based debit cards. If the court finds that this was an illegal use of monopoly power, the schemes will have to change their practices or even head to bankruptcy court. However, if the schemes win, they will become even more aggressive in forcing new products onto retailers.
US retailers are suing Visa and MasterCard for abuse of market power.
In recent years, Visa and MasterCard have been hit by lawsuits. The credit card providers lost an October 2001 antitrust suit to the government, and have also lost in pretrial hearings in the latest case.
Four million US retailers, including Wal-Mart, Sears and Safeway, have filed a lawsuit alleging that the associations are violating antitrust law by forcing merchants who accept their credit cards to accept their signature-based debit cards as well. The costs of processing these cards is four to five times as high as for the more common PIN-based debit cards issued by banks.
Visa and MasterCard introduced the signature-based debit cards in the early 1990s, designing them to look and work just like credit cards. Like PIN-based cards, they deduct the charge directly from the customer’s checking account, instead of billing them later. Visa and MasterCard have told retailers to accept these cards or forego accepting Visa and MasterCard credit cards, which account for over 70% of the US market.
The case, which will be tried in Brooklyn’s US district court, could result in Visa and MasterCard facing total judgments in excess of $39 billion. The Supreme Court has rejected petitions by the schemes to overthrow the class-action certification.
If the retailers win the lawsuit, nearly every store in the country will be entitled to damages. If this bankrupted them, it would send the entire credit card market into turmoil – although a court-brokered settlement changing the schemes/retailer relationship would be more likely. If the credit card providers win, they will become increasingly bold in leveraging their market dominance and use this power to force new ePayment systems onto retailers. Either way, the outcome will affect the payments market for years to come.
Related research: Datamonitor, US Retail Banking – Quarterly Update – Q2 2002 (BFTC0751)
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