Litigation Fallout

Stored-value cards branded by Visa or MasterCard appear to have lost some of their luster in the wake of a proposed out-of-court settlement between the credit card associations and a group of retailers. Even so, the business case for the cards remains intact, according to industry experts.

Visa and MasterCard agreed to reduce debit card interchange rates by more than one-third under the terms of the settlement reached in late April between the associations and a group of major retailers led by Wal-Mart Stores Inc. and Sears, Roebuck and Co. Since issuers receive about the same interchange fee on stored-value transactions as on signature-based debit transactions, it appears the lower rates will apply to stored-value card purchases as well.

Visa's standard, non-supermarket interchange rate had been 1.25% plus 10 cents per transaction. This will fall to 0.77% plus 10 cents under the proposed settlement, which will reduce interchange revenue from about 73 cents to 49 cents on a $50 purchase. Similarly, MasterCard has announced a one-third cut in its signature debit interchange rate.

Universal acceptance of debit and stored-value cards may also come into question, since merchants that accept credit cards won't automatically have to accept other kinds of cards, as they had before.

These issues will need to be sorted out before the true effect on financial institutions is known. And the litigation may not yet be over. Some bank issuers are reportedly upset with terms of the agreement and Minneapolis-based TCF Financial Corp. has filed an objection with the U.S. District Court in Brooklyn, claiming its interests weren't represented.

Even so, consultant John Gould remains optimistic the stored-value card is a winner for financial institutions. "Even if the interchange rate for issuers is lowered, this is still a nice, profitable product, since there is little or no risk associated with it," says Gould, director of consumer credit for Needham, Mass.-based TowerGroup Inc.

The settlement could even spur banks to accelerate their quest for additional revenue-generating products, such as stored-value cards, since cash flow from signature-based debit cards is expected to decrease. Many large merchants have been installing personal identification number pads in their store lanes and switching signature-based debit transactions to PIN-based ones, where the interchange rate is lower. "Even before the settlement, card issuers were looking for ways to supplement their revenues," says Janet Jones, consulting manager for Unisys Corp.'s North American payment practices in Charlotte.

Gould also thinks the acceptance issue is overblown. "Any merchant that discriminates by accepting credit cards but not the debit and stored-value cards would be extremely foolish, especially since they won't have to pay as much in fees. Merchants need to accept all the cards or risk alienating customers."

Indeed, a MasterCard statement about the changes in acceptance rules noted: "...we believe the vast majority of merchants will recognize the value of continuing to offer their customers the broadest choice of payment options, and will continue to accept all MasterCard programs."

— Lauri Giesen