Shuffling The Cards

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If you're like most retailers you want to satisfy your customers by accepting their preferred forms of payment. One such form is the debit card, a financial vehicle that is growing in importance while causing lots of heartburn for retailers. The big problem has been the hefty fees that card companies have charged to accept signature-based debit cards.

Well, here's some good news: If you have been honoring debit cards you stand to receive a cash payment from the card companies, thanks to the settlement of a class-action lawsuit that claimed unfair trade practices. And if you have been thinking of taking debit cards, you'll be pleased to know that doing so will be less expensive than it used to be.

The lawsuit claimed that the card companies' so-called "honor all cards" rule was unfair in that it forced merchants who accepted credit cards to also accept signature-based off-line debit cards, which are significantly more expensive to process and more prone to fraud than online cards. The lawsuit also claimed that the card companies were actually promoting the use of such off-line cards. The impetus was financial: The card companies have been collecting an average of $1.35 per $100 purchase made with these signature-based cards, compared with only 13 cents per $100 purchase when made with an on-line PIN-based debit card transaction.

The settlement calls for a huge payout to retailers: $3 billion over a 10year period.

Will you be affected directly by the settlement? Most likely. "This is a class-action suit in which virtually everyone who accepted debit cards over the last 10 years is a member," says Kent Jarrell, a spokesperson for the claimants and an account executive at Apco Worldwide, a Washingtonbased public affairs agency. "We're talking about more than five million merchants."


Your first benefit may be a receipt of your portion of the settlement funds. By the end of this summer, you will likely receive a letter in the mail detailing the award. It might seem that sending so many letters would be an impossible task, but the card companies are making their databanks available for mass mailings to the affected retailers. "There will also be public notices in national newspapers," says Jarrell. "The notices will include information on how to get in contact with us."

While the agreement calls for payments to be spread out over 10 years, Jarrell says that the attorneys are attempting to arrange for lump sum payments to be made some time in 2004. "This is a good thing for merchants because it cuts our administrative costs, which come out of the fund, so we write only five million checks instead of 60 million. It will save more than $100 million in expenses."

The average retailer will receive a few hundred dollars under the settlement, according to Lloyd Constantine, a lawyer for the retailers. The formula is to be worked out later this year and amounts will be calculated based on figures in the card companies' data banks. If you disagree with the figures you can take action. "There will be an easy way to appeal by coming up with your own records," says Jarrell.


The cash settlement is only the first benefit to be gained from the court settlement. Additionally, it will soon be much cheaper to accept debit cards. "Both MasterCard and Visa have agreed to drop the interchange fees on debit cards by at least a third," says Jarrell. And issuers will need to mark their debit cards with "Debit," "Check Card" or equivalent term. This will make it easier for retailers to identify such cards at check out.

There's more. Starting Jan. 1, 2004, MasterCard and Visa will set new rates for accepting debit cards. "At this point, you will have a choice as to what to do," says Jarrell. "If you believe the card companies are setting unacceptably high fees, then you can stop taking debit cards and only accept credit cards." Alternatively, you may decide to accept only the type of debit card that has a PIN number.


One more thing: You will likely benefit from the greater competition that results when other bank networks get into the debit card field. This is given impetus by the agreement by the card companies to cease negotiating debit card "exclusivity" agreements with banks. More companies may now make a bid for your business. Even American Express and Discover could start issuing debit cards. All this activity may cause Visa and MasterCard to adjust their charges to the realities of the competitive marketplace.

"I think you will see more bank networks issuing cards," says Biff Matthews, president of Supply Department, a Heath, Ohio-based vendor of electronic transaction equipment. "We may see wider acceptance of small and regional bank ATM debit cards that are PIN based." These companies can send their transactions directly through their bank networks, and, says Matthews, "the cost is pennies." The greater competition means retailers will be able to pick and choose what cards they will take, balancing customer choice against lower-cost alternatives.

Certainly, the costs of this settlement will have to be made up somewhere. "The banks are going to have to find another source of income," points out Matthews. "It could mean an increase in fees for card holders as the banks scramble to recover income."

Whatever the long-term benefits and drawbacks of this major court settlement, it's up to you to watch out for your own short- and long-term interests. Make sure you collect the funds you have coming to you for the debit card transactions you have honored to date. And shop around for the best debit card deal this coming January.

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