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SUMMARY
The Wal-Mart settlemnet helps the large merchants save money because they can now more easily negotiate rates with acquirers and banks. Meanwhile, small and medium size merchants end up paying a predominant share of the settlement costs because they have little to negotiate with -- but of course ultimately it is the consumer that will pay the $3 billion settlement. The Battle for the US Consumer: FDC, Wal-Mart and the Future of the Payments Industry" argues that the Wal-Mart settlement is the opening salvo of a war, not the end of a skirmish. This new war is driven by banks and merchants that have a shark-like affinity for consumers, and the Wal-Mart litigation is simply the first sign that merchant consolidation/cooperation has introduced a new power that the payments industry must reckon with. In the past, merchants were almost exclusively concerned about cost control. Today merchants are focused on driving consumer loyalty so that the merchant gets an increased share of the consumer's wallet. To achieve consumer loyalty merchants need the same type of consumer knowledge that was once the exclusive domain of the banks. Tim Sloane, author of the report, states that "merchants are keenly aware of the benefits that come from owning the point-of-sale (POS) and the direct customer relationship; goals almost identical to the banks. As a result I expect these conflicts will increase and merchants will experiment with new technologies that can further solidify their loyalty programs and their control over consumer payment options." The Wal-Mart litigation has dramatically altered the long-term battle for the U.S. consumer spending by re-establishing the role of a free-market economy for PIN-based online payment. This court finding is in essence a new court defined boundary that identifies the online PIN-based products as distinct offerings from the larger general-purpose card market. By declaring Online Debit as a unique product from Offline, the court has effectively taken Online Debit out of the control of the existing bank associations. While this court decision appears to be black & white, the current market implementation of PIN-based online payment is not. Existing contractual obligations, pricing, and agency/duality issues abound; and untangling the products will present a huge new business opportunity and likely legal battlefield. TABLE OF CONTENTS
Introduction 3 Background on The Wal-Mart Litigation 3 Legal Battleground 5 Charged With Two Counts of Restraint of Trade 5 Antitrust Count 1: Governance Duality 7 Antitrust Count 2: Exclusivity Rules 8 - The Exclusionary Rule For Visa 8
- The Exclusionary Rule For MasterCard 8
- Court Decision 8
The Remedy Proceedings 9 - The Unique Aspects of Economic Networks 9
- The Settlement - Terms & Conditions - Who Gets What, When 10
- Visa Settlement Terms 10
- MasterCard Settlement Terms 11
Following The Money 12 - Figure 1: Following The Money In a Transaction 12
- Association Members/Issuers 13
- Acquirer Impact 14
- Association Impact 14
- Figure 2: Debit Card Growth for Visa/Mastercard 2003 - 2005 15
Other Lawsuites Looming 18 - FDC, Concord, and the DOJ 16
Likely Market Evolution Scenario 20 Conclusion 21 Appendix 1 - Table Of Online Fees 23 Appendix 2 - Important Court Findings 27
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