Visa’s Penalty Concession May Be Less Than Meets the Eye

Visa may be offering its debit card issuers a little leeway with regard to its controversial service settlement fee by allowing them to switch their card portfolios to American Express or Discover without incurring any penalties. But some industry observers don't think the offer will make any practical difference to issuers. In explaining the policy in a memo last week to Visa members, Paul Allen, Visa's executive vice president and general counsel, said Visa was revising the service-fee bylaw to exempt American Express and Discover, but explained that issuers that switched their portfolios to MasterCard would still be subject to fines. Visa says it has been in communication with the Justice Department about the bylaw and was advised that if it would amend the bylaw to exempt AmEx and Discover, it would “satisfy the Antitrust Division's current concerns.” But that offer is not appealing, according to Al Diamant, managing associate with Auriemma Consulting. “Making that offer in today's environment is not particularly generous,” Diamant says. “Neither Discover nor AmEx have a viable debit network today whereas MasterCard has an existing program that issuers could take advantage of immediately.” Last week's memo leaves unclear whether, if issuers were to begin promoting PIN debit over the Visa-branded, signature-based debit, they would be subject to the penalty. Under the original bylaw, any issuer whose Visa debit volumes declined would be subject to fines. PIN debit runs through regional ATM networks whereas signature-based transactions run through either the Visa or MasterCard networks. Most card issuers have multiple logos on their cards to allow both signature-based debit transactions and those secured by personal identification numbers. In recent years, many issuers have been prodding their cardholders to choose the signature-based option because the issuers receive more interchange revenue. And while it is possible that issuers unhappy with Visa policies could switch tactics and promote the PIN option instead, Diamant says it would be difficult to do, even if Visa exempted them from the penalties. “It would be hard to communicate the message to consumers that they should suddenly start using PINs. Also, I don't see any reason why an issuer would want to do that given the interchange differences.” Under the current lawsuit settlement Visa and MasterCard reached with retailers related to debit card acceptance, the difference in interchange revenues that issuers receive under signature vs. PIN debit transactions was narrowed, but signature-based transactions generally still pay issuers more, particularly on larger purchases.