Debit on Trial: Debit Cards Are Finally Taking off in a Big Way, but the Wal-Mart Mega Lawsuit Is Threatening to Bankrupt the System. (Cover Story)

Article excerpt

Visa recently announced that its debit card transactions now exceed Visa credit card transactions in the U.S. There were 3.04 billion Visa check card transactions in the first two quarters of 2002, compared with 2.96 billion credit card transactions, despite the fact that the number of credit cards exceeds the number of debit cards in circulation. Meanwhile, MasterCard's signature-based debit volume rose 22% during the first half of the year.

Compared with other countries, Americans had been slow in migrating to debit cards. "Now more and more consumers, particularly the younger ones, are beginning to realize the convenience of debit," says Stan Paur, CEO of the Pulse EFT Association. "They trust it, it works and with it they can avoid writing a check."

"Of those who don't have debit cards, 25% say they would take one if offered," says Ruth Ann Marshall, president of MasterCard North America.

This would be all well and good except for a few storm clouds on the horizon that threaten to dampen these cheerful prognostications. There's the matter of a lawsuit that could burden the banking industry with billions of dollars in damages. Then there's the evolution of a dispute over the fees charged to consumers who make PIN-based purchases. And this is all coming to a head at a time when a soggy economy and greater credit card scrutiny by federal regulators threaten to dampen consumer spending.

The lawsuit is no small potatoes.

Wal-Mart and other large retailers have filed a class action suit, claiming that Visa and MasterCard rules, which require all merchants who accept their credit cards to also accept their signature debit cards, constitutes an illegal tie-in in violation of antitrust law. The card networks argue that the claim fails to meet the definition of tying since their honor-all-cards agreement with merchants doesn't prevent them from steering their customers toward PIN-based debit transactions with their concomitant lower merchant fees.

In addition to Wal-Mart, defendants in the lawsuit include The Limited, Circuit City, Safeway, and Sears, and large trade organizations such as the Food Marketing Institute and the International Mass Retail Association. Most observers believe the future viability of debit cards depends on the outcome of the case, which is set to go to trial on April 28 in U.S. District Court for the Eastern District of New York in Brooklyn.

Point, counterpoint

The lawsuit pits one major industry, banking, against another, retailing. The banking industry is lending its support to Visa and MasterCard, while the list of merchant plaintiffs continues to grow with each passing day. Class action notices have been mailed to nearly 7.7 million existing or former merchants who have accepted Visa or MasterCard.

"Visa and MasterCard are trying to monopolize the debit transaction business and destroy other card networks," says Lloyd Constantine of Constantine & Partners, New York, the lead counsel for the plaintiffs in the merchants' case. He also argues that the two biggest networks have destroyed equitable debit card pricing by moving to pricing that emulates credit card pricing.

Others believe the merchants are misusing antitrust law. Presumably the antitrust laws were enacted to give the courts power to break up monopolies so that citizens would have access to the largest number of goods and services possible at the cheapest, most competitive prices. A win for the merchant plaintiffs in the Wal-Mart suit might make it easier for other networks to compete, but a single debit card may no longer be accepted at the unlimited number of purchase points where credit cards are honored today.

For his part, Constantine believes debit card transactions would increase if he wins the case. "When debit is offered to merchants on a competitive basis, the cards would get cheaper," he says. …