FDIC Banking Review Overview of Recent Developments in the Credit Card Industry by Douglas Akers, Jay Golter, Brian Lamm, and Martha Solt *
Since the 1980s, Visa U.S.A. (Visa)
and MasterCard International (MasterCard), the bank-controlled credit card
associations that together account for approximately 70 percent of today's
credit card market, have been able to control the use of and access to their
networks to the advantage of their bank members. Recently, however, the credit
card industry has been changing:1 some merchants are now large
enough to exert their own leverage, legal defeats have impeded the ability of
credit card associations to control the market, and some participants have
developed new arrangements and alliances that may be a prelude to further
changes in the industry. This article surveys recent developments in an
industry that is facing new competitive dynamics.
The article begins by describing the
formation of the payment card industry and then its structure. The article
continues by explaining the functioning of credit card networks: the various
kinds of network models, and the significance of interchange fees in the most
complex model. Next discussed are recent industry-altering litigation involving
Visa and MasterCard, and significant aftereffects of the litigation. The
article concludes by noting the main challenges facing the industry today.
The Formation of the Credit Card
Although merchant credit may be as old
as civilization, the present-day credit card industry in the United States
originated in the nineteenth century. In
the early 1800s, merchants and financial intermediaries provided credit for
agricultural and durable goods, and by the early 1900s, major U.S. hotels and
department stores issued paper identification cards to their most valued
customers. When a customer presented such a card to a clerk at the issuing
establishment, the customer's creditworthiness and status were instantly
established. The cards enabled merchants to cement the loyalty of their top
customers, and the cardholders benefited by being able to obtain goods and
services using preestablished lines of credit. Generally these cards were
useful only at one location or within a limited geographic area–an area where
local merchants accepted competitors' cards as proof of a customer's
In 1949, Diners Club established the
first general-purpose charge card,2 enabling its cardholders to purchase
goods and services from many different merchants in what soon became a
nationwide network. The Diners Club card was meant for high-end customers and
was designed to be used for entertainment and travel expenses. Diners Club
charged merchants who accepted the card 7 percent of each transaction. Merchants found that accepting Diners Club
cards brought more customers who spent more freely. The Diners Club program proved successful,
and in the following decade it spawned many imitators.
In the late 1950s, Bank of America,
located on the West Coast, began the first general purpose credit card (as
opposed to charge card) program. At that time, banking laws placed severe
geographic restrictions on individual banks. Virtually no banks were able to
operate across state lines, and additional restrictions existed within many
states. Yet for a credit card program to be able to compete with Diners Club, a
national presence would be important. To increase the number of consumers
carrying the card and to reach retailers outside of Bank of America's area of
operation, therefore, other banks were given the opportunity to license Bank of
America's credit card. At first Bank of America operated this network
internally. As the network grew, the complexity of interchange–the movement of
paper sales slips and settlement payments between member banks–became hard to
manage. Furthermore, the more active bank licensees wanted more control over
the network's policy making and operational implementation. To accommodate
these needs, Bank of America spun off its credit card operations into a
separate entity that evolved into the Visa network of today.
In 1966, in the wake of Bank of
America's success, a competing network of banks issuing a rival card was
established. This effort evolved over time into what is now the MasterCard
network. In addition, firms that were
not constrained by interstate banking restrictions formed card networks on the
single-issuer model (the model established by Diners Club, in which many
merchants accept payments on a card with a single issuer; see the discussion of
figure 2). For instance, the American Express Company (American Express)
introduced its charge card system in 1958, and Sears, Roebuck and Co. (Sears)
established the Discover Card credit card in 1986.3
Among the challenges each of these
networks faced was bringing together large numbers of cardholders with large
numbers of merchants who accepted the cards as payment. Achieving a
sufficiently large network was hard, partly because merchants, especially
larger retailers, were reluctant to honor credit cards that would compete with
their own store-branded credit cards. Some smaller merchants, however, viewed
general-purpose credit cards as a way they could compete with larger merchants
for customers.4 Merchants of all sizes were averse to having fees
imposed on them by the credit card network.
Currently the U.S. credit card
industry is a mature market. Today
credit cards are widely held by consumers: in 2001 an estimated 76 percent of
families had some type of credit card.5 Recent estimates suggest
that among all households with incomes over $30,000, 92 percent hold at least
one card,6 and the average for all households is 6.3 credit cards.7
Credit cards are also widely accepted by merchants, and with the recent
addition of fast-food and convenience stores to the credit card networks,
credit card payments are now processed at nearly all retail establishments.
The Structure of the Credit Card
As noted above, the general-purpose
card market is dominated by Visa and MasterCard, two bank-controlled card
associations. Table 1 shows the U.S. market share of the top four card
networks, with Visa and MasterCard together holding about 70 percent of the
The four major card networks have a
variety of corporate structures. Visa is a nonstock for-profit membership
corporation that as of 2004 was owned by approximately 14,000
financial-institution members from around the world.8 Until 2003
MasterCard was a nonstock not-for-profit membership association, but then it
converted to a private-share corporation known as MasterCard Inc., with the
association's principal members becoming its shareholders. MasterCard has more than 23,000 members
(including the members of MasterCard's debit network).9 The Board of Directors of Visa is elected by
the member banks with voting rights based primarily on transaction volume.10 Control of the Visa and MasterCard card
associations is roughly proportional to the transaction volume of member
issuing banks. American Express is an
independent financial services corporation, and Discover Financial Services
(Discover) is now a subsidiary of investment bank Morgan Stanley Dean Witter
& Co. (Morgan Stanley).11
The issuance of credit cards is
concentrated among five banks (table 2). Further concentration will result from
two acquisitions announced in June 2005: Bank of America is acquiring the
holding company MBNA Corporation, including its subsidiary MBNA America Bank, NA (MBNA), a monoline
credit card bank,12 and Washington Mutual, Inc. (Washington Mutual)
is acquiring Providian Financial Corporation, including its Providian National
Bank (Providian), another monoline credit card bank. The implications of these
transactions are addressed below.
In the industry today, debit cards are
a fast-growing product line. Debit
transactions reached a record $15.6 billion in 2003 (see table 3). Debit cards
are essentially ATM cards that can be used on Visa, MasterCard, or other
networks as well as at ATM machines. The amount of a payment made using a debit
card is immediately withdrawn from the cardholder's checking account, with the
result that, for the card issuer, both the opportunity to earn interest on
revolving balances and any inherent credit risk are eliminated.
The ability to use the Visa and
MasterCard networks to post debit transactions was developed in the 1970s, but
not until the 1990s was there a significant volume of transactions in these
systems. If a merchant has a personal identification number (PIN) entry keypad
at its sales location, the transaction is routed much the way an ATM
transaction is. In the absence of a keypad, the merchant can have the customer
sign a transaction authorization. These transactions then travel through the
payment systems much as a credit card transaction does (except that the
cardholder's bank will be informed of the transaction immediately and will be
able to hold the customer's funds until settlement is completed). The differing
fees charged to merchants for transacting PIN debits and signature debits
became the basis for an important lawsuit that is described more fully below.
Control of debit card transaction
processing is mostly in the hands of banks. In Germany, however, half of all
debit transactions are processed via a merchant-controlled debit card system by
piggybacking on the low-cost Automated Clearinghouse network, and the system
has no interchange fees. In the United States, Debitman Card Inc. has been
working on such an effort for PIN-based debit transactions.13
The Functioning of Credit Card Networks:
Models and Interchange Fees
The most complex form of credit card
network is the one with the greatest number of participants: the multi-issuer
card model. The cards in a multi-issuer network represent a complex form of
two-sided markets whereby merchants are more willing to accept cards that have
many cardholders, and cardholders want cards that are accepted at many
establishments. The payment network benefits the merchant and the buyer jointly
and entails joint costs, and it must price its service so that it gets–and
keeps–the two sides participating in the network.14 It does this
largely by setting interchange fees at levels that will maintain balance in the
incentive structures of issuing banks (banks that issue credit cards) and
acquiring banks (banks that service merchants and process their credit card
fees are collected by issuing banks when they send payments for purchases to
Figures 1 through 3 illustrate the
increasing complexity of a credit card network as more parties participate.
Figure 1 illustrates the simplest bilateral model, where information and funds
flow between a merchant and a cardholding customer when the merchant extends
credit. On a monthly basis, the merchant
will present a bill to the cardholder listing all transactions for the
month. The cardholder then remits
Figure 2 illustrates the single-issuer
model, which has a more complex closed-loop card-association system in which
many merchants accept payments on a card with a single issuer. In this system,
the merchant sends information about each purchase, including the customer
account number, the transaction amount, and verification to the card issuer. With modern telecommunications and data
processing technology, these steps are usually completed at the point of
sale. The card issuer pays the merchant
and sends a monthly statement to the cardholder listing all transactions which
occurred during the statement period.
The customer then pays the balance due, in whole or in part, based on
the credit terms that were extended to the cardholder by the issuer. This description applies to the original
Diners Club model and, until very recently, to the Discover Card and American
Express models (which have now converted to the multiple-card-issuer model, see
Finally, figure 3 provides a basic
illustration of the most complex model, the model with one card association,
many cardholders, many merchants, and multiple banks. In this model, the card
association (or network) plays an important role by imposing rules for issuing
cards, clearing and settling transactions, advertising and promoting the brand,
authorizing transactions, assessing fees, and allocating revenues among
transaction participants. Further, each
participant in the credit card transaction has an incentive for participating
in the network.16Figure 3
shows the typical flow of information and funds for a sample $100 credit card
purchase. The process begins when the
cardholder presents the credit card to the merchant to purchase a good or
service. The merchant transmits to the
acquiring bank the cardholder's account number and the amount of the
transaction. The acquiring bank forwards
this information to the card association network requesting authorization for
the transaction. The card association
forwards the authorization request to the issuing bank. The issuing bank responds with its
authorization or denial through the network to the acquiring bank and then to
the merchant. If approved, the issuing
bank also sends to the acquiring bank, via the network, the transaction amount
less an interchange fee.17
The interchange fee is established by the card association. The example illustrated in figure 3 shows
$98.00 ($100.00 purchase price minus 200 basis point interchange fee) flowing
from the issuing bank, though the network, to the acquiring bank. The acquiring bank, after subtracting its own
service fee, passes the payment on to the merchant.18 In figure 3, the merchant receives $97.50
($98.00 minus a 50 basis point fee).19
Acquiring banks can outsource these
functions. One such company that
provides outsourcing services is First Data Corporation which handles over 50
percent of all MasterCard and Visa transactions processed at the point of sale.20
The profit margins for servicing merchant processing of credit card payments
are thin,21 and the competition is based on discount fees, support
services, and the handling of chargebacks (which are the reversals of charges).
The issuing bank bills the cardholder for the full amount of the purchase and
receives payment from the cardholder. The card association receives a small
fee, usually around $0.05, for each transaction.
Figure 4 lists the costs and benefits to
each type of participant in the credit card industry. In order to benefit from
economies of scale, the card associations must construct rules that balance
each party's needs so that large numbers of participants of each type choose to
join (and stay in) the network. Over time, the dynamics among the various
parties may change, with the result that network policies may need to be
Interchange fees are set by the card
associations and in 2004 were a source of some $25 billion in revenue to card
issuers.22 At the same time, interchange fees are a source of
irritation to merchants and can be among the largest and largest-growing costs
of doing business for many retailers.23 A standard interchange fee
is around 200 basis points, plus $0.10 per transaction, but many transactions
have lower fees and some have higher fees. Large merchants can negotiate
directly with the card association for very low interchange fees, but these
fees are not publicly circulated.
The pricing structure of interchange fees is
complex. The specific interchange fee depends on the card association, the type
and size of merchant, the type of card, and the type of transaction. Merchants
that sell low-margin items–for example, convenience stores, supermarkets, and
warehouse clubs–have lower rates. Hotels and car rental establishments have
higher rates. Newer premium credit cards that offer more rewards have high
rates. Credit card transactions have higher rates than signature debit card
transactions, whose rates are higher than PIN debit card transactions. Sales
transacted over the telephone or Internet have higher interchange rates,
ostensibly to compensate for the greater risk of fraud associated with
transactions that are not conducted in person.
There is considerable friction among network
participants over the issue of interchange fees, and card associations are
being challenged on the structure and application of those fees. Merchants
increasingly view interchange fees as an unnecessary and growing cost over
which they have no control. Furthermore, banks are now issuing credit cards
with even higher interchange fees.
Merchants are unable to refuse transactions made with these cards. Therefore, merchants perceive issuing banks
as earning revenue at their expense, with no added value to merchants.
Merchants pass on the costs of interchange fees to their customers, who are
largely unaware of this cost.
Among other factors, the interchange fee
structure that favors large merchants over smaller ones is inspiring merchants
to challenge the interchange system more actively. Early in 2005, merchants
formed a trade association for the purpose of changing interchange fees.24
In addition, Visa and MasterCard will be defending the interchange arrangement
anew from litigation filed in June 2005 by a group of smaller merchants.25
Despite merchant discontent, card issuers
have incentives to maintain or increase interchange fees. Issuers are marketing
credit cards with reward or loyalty programs that encourage greater card use
and reinforce customer loyalty to the brand. An estimated 12 to 24 percent of
cards held by consumers have rewards associated with them,26 and in
2003 an estimated 60 percent of credit card spending was attributed to cards
with rewards.27 Card issuers are funding these increasingly popular
reward programs through interchange fees.
Figure 4 - Benefits and Costs for Participants in the Credit Card Industry
Outside the United States, Visa and
MasterCard have come under additional pressures to reduce interchange
fees. Regulators in Australia, the
European Union, Israel, and the United Kingdom, among others, have reviewed the
effects of interchange fees on competition.
Overseas, Visa and MasterCard have been pressured to reduce these fees.28
Significant Litigation against Visa and
MasterCard and Its Aftereffects
As indicated above, when Visa and MasterCard
were building their dominant credit card networks, they imposed exclusionary
rules and restrictions on other parties to credit card transactions. In two
cases, whose outcomes are described in this section, merchants and the U.S.
Department of Justice (DOJ) successfully challenged some of these practices.
The decisions in the two cases29 weakened some barriers to
competition and reduced the control exercised by the card associations, thus
influencing the future of the credit card industry. In fact, the aftereffects
of the decisions have already begun appearing.
Successful Legal Challenges
One case dealt with restrictions on
banks' ability to issue cards that competed with Visa and MasterCard. The other
related to a requirement forcing merchants to accept all types of MasterCard
and Visa payment cards regardless of the fees associated with those
The decision in the first case
prohibited Visa and MasterCard from banning member banks from issuing cards on
rival networks. This litigation ended in October 2004, when the U.S. Supreme
Court refused to hear an appeal of the case. The case began in October 1998
when the DOJ claimed that Visa and MasterCard, by not allowing their member
banks to issue credit cards on other networks (including American Express and
Discover Card), were limiting competition in the credit card market and
therefore violating the Sherman Antitrust Act.30
The second case illustrated merchants'
unwillingness to accept conditions and costs unilaterally imposed on them by
the card associations. Some of the largest U.S. merchants–including Wal-Mart
Stores Inc. (Wal-Mart), Sears,, and Safeway Inc.–joined forces to battle rules
imposed on them by MasterCard and Visa. These rules required the merchants to
accept for payment any card that had the Visa or MasterCard logo. Merchants
challenged the "Honor All Cards" rule because certain types of cards–namely,
signature debit cards–had significantly higher processing fees than PIN debit
cards, and merchants had no role in establishing these fees. Merchants argued that fees should be
established in some proportion to the risks that the transaction poses to the
network. As part of a 2003 settlement,
Visa and MasterCard agreed to: pay retailers collectively $3 billion over ten
years, temporarily reduce debit card fees, permanently change the "Honor All
Cards" policy as it relates to debit cards, and establish lower transaction
fees.31 The settlement did
not address requirements for merchants to accept premium credit cards.32
The primary significance of these
cases is that merchants have become a much stronger bargaining partner in
negotiations over the responsibilities and fees associated with credit card
transactions. Merchants are no longer likely to tolerate quietly what they view
as uncompetitive practices or unreasonable fees imposed on them by the card
associations. One can assume, therefore, that the long and costly battle with
Visa and MasterCard has not ended. Because sizeable segments of the merchants'
customer base will want to use credit cards for payment, retailers will
continue to have difficulty refusing to accept them, but by pursuing alliances
with Visa and MasterCard's competitors and by encouraging their customers to
use cards with lower merchant fees, merchants may find it easier to win cost
The Aftereffects: Recent Business Alliances
Already, merchants' freedom to refuse
certain higher-fee cards and banks' freedom to issue any type of credit card
have generated new alliances in the reinvigorated credit card industry. Some
important deals have since taken place in the wake of the resolution of these
cases. It remains to be seen how successful these new partnerships will be.
American Express cards, marketed
mostly to wealthy customers on the basis of the cards' superior rewards
program, are now offered by banks that were previously prohibited from offering
those cards. In January 2004, MBNA became the first major issuer of Visa and
MasterCard in the United States to offer American Express as an option to its
customers;33 Citigroup Inc. followed suit in December 2004,34
and USAA Federal Savings Bank in May 2005.35 In addition, a
dual-branded American Express and Visa card (a charge card for American
Express, a credit card for Visa) that provides a consolidated rewards program
is anticipated to be offered by UBS in late 2005.36
Another dual-branded card was
announced by MasterCard and the much smaller Diners Club. Diners Club will
reissue its cards to include the MasterCard number and to carry both the Diners
Club and MasterCard brand marks, with the cards processed as MasterCard
transactions in North America but continuing to receive the much superior
Diners Club rewards. This deal creates more transactions on the MasterCard
system enabling greater economies of scale.
It also may bring additional cardholders and merchants into the
MasterCard system.37 Diners
Club and its cardholders benefit because the card now will be accepted at
almost three times as many merchants.38
Discover also announced some
potentially important deals. In January 2005, Discover announced plans with
Wal-Mart and GE Consumer Finance (a unit of General Electric Company) to launch
a new credit card on the Discover network.39 Wal-Mart will benefit
from this arrangement because the arrangement is structured in a way that
enables the merchant to avoid paying interchange fees on any transactions made
on that card on the merchant's own premises. GE Consumer Finance, the issuer
for many large retailers' private credit cards, will issue the card–the first
time that an entity other than Discover has issued one of Discover's cards.
Should the Wal-Mart–Discover Card product prove successful, Discover may be
able to persuade other stores to create similar products, thereby extending the
size of its cardholder base. However, this arrangement will not provide
Discover with much revenue on card transactions.
Earlier, in November 2004, Discover
acquired the Pulse EFT Association for $311 million. Pulse is the third-largest
PIN debit network in the country and had been owned by the more than 4,000
financial institutions that were its members, with 90 million debit
cardholders.40 Discover's acquisition of Pulse provided Discover not
only with a debit product but also possibly with a greater opportunity to
market its credit card product to Pulse's member financial institutions or
directly to their customers.
Consolidation among credit card
issuers has increased. During a
four-month period in 2005, the three largest monoline credit card banks–MBNA,41
Capital One Financial Corporation (Capital One),42 and Providian43
(the third, fifth, and seventh largest credit card issuers, respectively)–all
announced transactions that signaled significant changes in the structure of
credit card issuers. MBNA is being
acquired by Bank of America, and Providian is being acquired by Washington
Mutual. In a mirror image of these
transactions, Capital One is purchasing Hibernia Corporation, the holding
company for a regional bank.
These transactions will affect the
structure of the credit card issuer market.
Bank of America now will become the largest issuer. Upon completion of each of these deals, the largest
ten issuers will control 90 percent of the market. Greater concentration among card issuers also
means that a smaller number of banks will control the card associations.
Conclusion: Challenges Facing the U.S. Credit Card Industry Today
The challenges facing the U.S. credit
card industry are substantial. The
largest U.S. merchants are now better able to negotiate lower interchange rates
from all networks and may pressure other participants in the credit card
transaction to lower costs. They could
also develop innovative arrangements to retain a greater portion of the revenue
stream. Additionally, other merchants
are attempting to replicate these efforts.
If successful, these developments could lead to a decline in pricing
flexibility for the interchange rate structure on which the multiple card
issuer networks are based.
At the same time, Visa and
MasterCard's smaller competitors–Discover (the smallest of the major card
networks) and American Express–are facing challenges of their own. As noted above, Discover has made moves that
may give it access to the debit card market and opportunities to increase its
cardholder base; alliances with other large retailers eager to reduce
interchange fees may follow. Hindering
Discover's efforts are lack of an international presence, limitations
associated with its less affluent customer base, and its small number of
cardholders and merchants. The future of
Discover is largely dependent upon the objectives of its parent company. Management of Discover's parent company,
Morgan Stanley, and decisions about Discover's continuing corporate
relationship with Morgan Stanley have been uncertain since early 2005, impeding
Discover's ability to develop and execute a clear business strategy for its own
American Express has made progress in
increasing its cardholder base.44
However, it is facing new competition for its higher net worth customers
from MasterCard's World and Visa's Signature programs, both of which offer
higher rewards than their traditional programs.
The World and Signature programs charge interchange rates that are lower
than those of American Express but higher than the two card associations' other
programs.45 American Express may therefore find it hard to maintain
high fees, at least with some larger merchants. Finally, greater numbers of
consumers are expecting rewards with their card use.
The industry is also facing serious
challenges from credit card fraud, identity theft, and the need to secure
confidential information. These challenges
have always been an operational risk, but the problem has intensified now that
large quantities of confidential information are maintained in
Internet-accessible systems and criminals are becoming more sophisticated in
obtaining and using sensitive data.
Besides being a costly drain on banks, these problems have the potential
to erode consumer confidence in the credit card industry. Consumers' concerns about the security of
credit cards and confidential information need to be addressed. Otherwise, consumers may become reluctant to
continue using credit cards as freely as they do now.46
Consumers' growing sophistication in
the use of their credit cards goes beyond their greater awareness of fraud
issues. An important element of the
business model of credit card issuers is interest income. However, increasing numbers of cardholders–an
estimated 55 percent of them–are "convenience users," paying their balances in
full each month to avoid interest charges.47 On the other hand, others are having difficulty
managing the use of their cards, incurring debt potentially beyond their means
to repay and representing credit risk to card issuers.
In short, the highly competitive
credit card industry is in flux. Credit
card associations, controlled by a diminishing number of large card issuers,
are caught between cardholders seeking greater rewards and merchants trying to
lower the cost of accepting payments. At
the same time, the card associations are not only incurring increasing expenses
because of fraud and fraud prevention but they are also bearing the costs of
recent and pending litigation. For
decades it was not hard to envision what the credit card industry would look
like five years into the future. This is
no longer true.
*All the authors are in the
Division of Insurance and Research at the Federal Deposit Insurance
Corporation. Douglas Akers is a research assistant, Jay Golter a financial
analyst, Brian Lamm a senior financial analyst, and Martha Solt a senior economist.
1The term "credit card industry" as used in this article refers to
the four major payment card networks: Visa, MasterCard, American Express, and
Discover. In addition, Diners Club is a
very small participant.
2The holder of a charge card, unlike the holder of a credit card,
must pay the monthly statement balance in full.
3Whereas American Express processes all of its credit- and
charge-card activity through the American Express Bank, a wholly owned
subsidiary it has held for nearly 100 years, Discover processes all of its
card-related transactions through Greenwood Trust, a wholly owned subsidiary of
Discover's parent company, Morgan Stanley Dean Witter & Co. (In order to
process the Discover Card transactions, Sears, Roebuck and Co. purchased Greenwood
Trust through its Allstate Enterprises subsidiary in 1985 and converted it to a
nonbank bank. Morgan Stanley purchased the bank, along with Dean Witter and
Discover, in 1997.)
4For more information on the history of credit cards, see Evans and
Schmalensee (2005) and Mandell (1990).
5Aizcorbe, Kennickell, and Moore (2003). This is the most recent data on this topic
from the Federal Reserve Board.
17Funds flow between the card association and participating banks,
not on a transaction-by-transaction basis but on a batch basis, several times
per day, with the card association effecting settlement among the participating
banks by determining each of their net positions in order to balance the
18The Acquiring Bank sets its own fee which is deducted from the
merchant payment. That fee must be high
enough to cover the cost of the interchange fee and the Acquiring Bank's own
expenses for the transaction. Interchange fees amount to a large portion of the
fees charged to merchants by Acquiring Banks, and changes in interchange fees
in the past have led to roughly equal changes in fees charged to merchants. See
19Chakravorti (2003) presents a fuller description of the
participants in the credit card industry and of the costs and benefits to each.
28These efforts are criticized by Swartz et al. (2004) for not
considering the benefits to all parties of payment card usage, and by
Schmalensee (2001) for not considering the proper role of interchange fees.
29They are: United States v. VISA U.S.A., Inc., 163 F.Supp.2d
322 (S.D.N.Y., 2001) (original decision), with final decision in United
States v. VISA U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003) and In re VISA
Check/Mastermoney Antitrust Litigation, 287 F.Supp.2d 503 (E.D.N.Y. 2003)
(original decision), with final decision in Wal-Mart Stores, Inc. v. VISA
U.S.A., Inc., 396 F.3d 96 (2d Cir. 2005).
The second case is commonly known as the 'Honor-All-Cards' case.
30After the final disposition of this case, both American Express
and Discover filed lawsuits against Visa and MasterCard for unspecified
31On April 30, 2003, MasterCard settled the dispute. Terms of the settlement included agreements
to (1) pay retailers about $1 billion over ten years, (2) reduce the debit card
fees it charges retailers, (3) change its "Honor All Cards" policy beginning in
January 2004 by giving retailers the choice of accepting either online or
offline debit cards, and (4) establish a separate interchange rate for its
debit transactions (previously it had blended credit and debit transactions
into a single interchange rate), reducing the interchange rate for its debit
transactions by at least one-third. Visa's settlement agreement contained
similar terms, some of which were that Visa would (1) pay retailers $2 billion
over ten years starting in 2004; (2) modify its "Honor All Cards" rule so that beginning
in 2004 merchants may accept Visa check card only, Visa credit card only, or
both; and (3) lower its fees for certain types of merchants.
32Premium cards are a type of credit card typically targeted to more
affluent customers that have more rewards and higher interchange fees.
46Both Visa and MasterCard have recently instituted zero-liability
policies in an effort to combat these concerns. Visa states: "Use your Visa
card to shop online, in a store, or anywhere, and you're protected from
unauthorized use of your card or account information. With Visa's Zero
Liability policy, your liability for unauthorized transactions is $0–you pay
nothing." MasterCard states: "As a MasterCard cardholder you are not liable in
the event of an unauthorized use of your U.S.-issued MasterCard card. This
coverage extends to purchases made in a store, over the telephone, or online."
Aite Group. 2005.
Summary: Five Misconceptions
about Interchange in America. http://www.aitegroup.com/reports/200504042.php. [August 8, 2005].
Aizcorbe, Ana M., Arthur B.
Kennickell, and Kevin B. Moore.
2003. Recent Changes in U.S.
Family Finances: Evidence from the 1998 and 2001 Survey of Consumer
Finances. Federal Reserve Bulletin
2005. In Brief: Restaurant Group
Joins Protest. May 20. www.americanbanker.com. [August 8, 2005].
American Express. 2004a.
American Express and MBNA Announce Card-Issuing Alliance. Press Release January 29. www.americanexpress.com. [July 22, 2005].
2004b. American Express Announces
Card Issuing Alliance with Citibank.
Press Release December 13. www.americanexpress.com. [August 8, 2005].
2005a. UBS Selects American
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