If Wal-Mart Stores Inc. and other retailers suing MasterCard and Visa over the card associations' "honor-all-cards" rules are successful, they will have turned U.S. antitrust law on its head and handed the bill to the consumer.
In a nutshell, the retailers allege that it is unfair that they should have to accept "all" MasterCard and Visa cards: credit and debit. They particularly object to the higher costs to them if a consumer chooses a signature-based (offline) method of paying by debit card instead of the personal identification number (online) method, which costs less.
The merchants who happily accept bank credit cards want the option to deny customers the use of their debit cards-at least the offline use. But the honor-all-cards rules say if the merchants want to post the MasterCard or Visa logo in their windows, they must agree to honor all cards that carry the logo. The retailers say the rules amount to a "tie" between two products, credit cards and debit cards, which is prohibited under antitrust.
Their "tying" allegation, however, is wrong. The honor-all-cards rules actually increase consumer choice and power in the marketplace, and as such violate neither the letter nor the spirit of antitrust law.
Today's payment industry provides consumers with more choices than any other industry. No other industry offers more than 27,000 different options to best meet consumers' needs. The honor-all-cards rules are what spurred the constant innovation responsible for these choices. As a result, consumers are free to choose how-and when-they want to pay for goods and services, as well as the additional benefits derived from that choice, such as airline miles, no-fee cards, cash back, variable rates or free hotel stays.
If the plaintiffs succeed, consumers would have no guarantee that the card they want to use would be accepted, thus reducing both their choice and buying power. With merchants in the driver's seat, the impact to consumers could be more than just requiring someone to use their PIN instead of a signature. If merchants can choose which method of payment they want consumers to use, they could use that right to tell us more broadly which card they will accept. So, it's conceivable that Wal-Mart could refuse to accept, for instance, a Sears-branded MasterCard or the other way around.
The negative impact wouldn't be limited just to consumers. A ruling against MasterCard and Visa would give large retailers an unfair advantage over small-business owners, because banks would have to negotiate card acceptance and terms separately with each merchant.
The merchants' claim for billions in damages is also specious, because credit and debit card acceptance greatly increases sales and profits. If it didn't, merchants wouldn't accept them.
While merchants must agree to honor all cards, in exchange they are guaranteed payment regardless of which card is presented, and whether or not a consumer pays her bill or the card is used fraudulently.
The retailers argue that MasterCard and Visa have hindered competition and harmed consumers by attempting to monopolize the point-of-sale debit card market, thereby suppressing the growth of regional automated teller machine networks. This statement is inconsistent with the plain facts. Online debit has been the fastest growing method of payment over the past several years. The number of annual PIN debit transactions increased 32% in 2001 and 39% in 2002. Together, Star, Pulse and other PIN debit networks handle more than 40% of debit sales. Clearly, PIN debit is thriving in a competitive marketplace. That's no doubt why the ATM networks are not parties to the lawsuit.
Of course, merchants are free to steer customers to the cheaper alternative of online debit. MasterCard has, in fact, encouraged major retailers to install more PIN pads. Anyone who has ever shopped at Wal-Mart knows that cashiers always ask customers to use the PIN pad, and that many customers do enter their PINs.
But, the basic premise of antitrust laws is that choice should remain with consumers-not be given to merchants. If consumers want to enter their PIN, and a store or restaurant provides that option, then they're free to do that. If they prefer, however, to sign for a transaction or, in some cases, don't have a choice because the merchant doesn't have a PIN pad, then the consumer shouldn't be denied that choice. What we can be sure of is that the honor-all-cards rules protect consumers' choice.
The reality is that if the retailers win, consumers lose. The correct application of antitrust law is to leave the power to choose with the people who carry the cards and pay the bills. Consumers already pay enough.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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