Taking the Card Giants Down a Notch
As the owner of a small art gallery in Louisville, it's tough for Robert Higgins to fork over $190 in processing fees on a customer's $4,850 purchase. But he has no choice. If he wants to accept Visa charge cards, that's the cut Higgins must forfeit. He also has to accept Visa and MasterCard debit cards, even though they charge fees that are five to six times higher than the rates of smaller, regional payment networks. If he said no to the duo's debit cards, he would lose the charge accounts, too. "I would not be able to refuse MasterCard," he sighs.
Until recently, retailers had little hope of fighting such heavy-handed tactics. Together, Visa U.S.A. and MasterCard International Inc. control more than 70% of all debit and credit transactions. Now, though, the combined effects of recent lawsuits and falling technology costs are dismantling this cozy duopoloy. When the dust settles, retailers and consumers will benefit from lower processing fees. For Visa, MasterCard, and the banks that issue the cards, that will mean lower profits and more competition in the $916 billion payments business. "Instead of two giants and a bunch of pygmies, you're going to see five or six viable card companies and card networks spring up," predicts Lloyd Constantine, the attorney representing Wal-Mart Stores (WMT ) Inc. and other retailers in one of the suits.
Although a giant in retailing, Wal-Mart is one of those pygmies in the payments business. It led a class action -- including 5 million other retailers -- challenging Visa and MasterCard over the fees they charge for the fast-growing debit transactions market. In a surprising concession, the two settled the suit and agreed in late April to slash such fees by as much as one-third.
Retailers estimate the settlement could save them $63 billion to $100 billion between now and 2010. It's a windfall that stores vow they'll pass on to consumers as lower prices.
Banks, on the other hand, are adding up the value of lost transaction fees caused by the decision. Bank of America (BAC ) Corp. estimates that the fee cut will shave its 2004 net income by 1.7%, or $200 million. Analysts believe profits could fall as much as 5% to 6% for the thousands of small and midsize banks that are more dependent on consumer banking for their profits.
Visa and MasterCard also gave ground on their strong-arm practices of mandating which cards retailers can handle. Stores hope this will open the door to cheaper regional payment networks such as Pulse, NYCE, and Star as well as data processors like First Data Corp. In recent years, falling costs for networking and processing technology have allowed these smaller operations to compete with the older networks run by the card giants. "We're going to see a proliferation of competitors that will be able to undercut Visa and MasterCard," predicts Dallas banking attorney Steven S. Camp.
Fees for credit cards -- an even richer revenue stream for banks -- are also under pressure. Regulators in Australia and Europe have pushed Visa and MasterCard to lower the fees their member banks charge retailers for credit-card transactions by as much as 40%. U.S. retailers now hint that they may sue to force similar rate cuts here. In 2001, a federal court ruled that Visa and MasterCard member banks should be free to issue American Express (AXP ) and Discover cards as well. The giants are appealing the decision. Legal observers expect the Justice Dept. -- which brought the suit -- to prevail. Combined with the debit settlement, these rulings should make it easier for card issuers such as Amex and regional payment networks to horn in on the transaction business.
Despite the setbacks, Visa and MasterCard execs say they remain competitive, given their universal acceptance and powerful brands. "We feel confident the momentum we have will continue to grow," says Noah J. Hanft, MasterCard's general counsel.
Still, with competition already multiplying, growth won't come easily. Analysts expect Wal-Mart to keep trying to acquire a bank and thus handle its own processing. And McDonald's (MCD ) Corp. is experimenting with cut-rate debit transactions. Suddenly, the odds in the card game may no longer favor the banks.
By Dean Foust in Atlanta, with Brian Grow in Orlando