Will MasterCard Win, Cap One Card Unleash Debit Brand Switching?

MasterCard Worldwide received a double dose of good debit news last week. First came the news that big credit card issuer Capital One Financial Corp. is rolling out a MasterCard-branded rewards debit card that doesn't require the cardholder to have a deposit relationship with Cap One (Digital Transactions News, June 8). And at week's end, a federal judge issued an injunction striking down a Visa fee aimed at discouraging issuers of Visa-branded debit cards from switching to MasterCard. Visa implemented the so-called settlement service fee, or SSF, to protect debit revenues in the wake of its $2 billion settlement in 2003 of the retailer class-action lawsuit led by Wal-Mart Stores Inc. In that lawsuit, retailers angry about the high cost of accepting Visa and MasterCard signature-based debit cards challenged association rules forcing them to accept signature debit cards if they accepted bank credit cards. Co-defendant MasterCard simultaneously settled for $1 billion. While not banning a debit card brand switch, Visa's SSF kicked in if a top 100 Visa check card issuer's volume dropped by 10% or more from the period ending Sept. 30, 2003. MasterCard sued Visa in federal court, and on June 7, nearly four years later, Judge Barbara S. Jones of U.S. District Court in Manhattan ruled the SSF was unlawful and must be repealed. According to MasterCard, Jones also issued an order allowing all of Visa's top 100 debit issuers, with Visa debit agreements that were signed while the SSF was in place to end such agreements if they enter into a new agreement with MasterCard to issue MasterCard debit cards. In a statement, Visa said it was reviewing Jones' ruling and considering its options, including appeal. “With the settlement service fee, Visa ensured that Visa members who were recipients of the Visa check card revenue challenged in the 'Wal-Mart' lawsuit did not leave a disproportionate burden to other debit issuers by shifting their debit volume away from Visa without paying their share of the settlement,” Visa's statement says. “Since Visa enacted the settlement service fee, competition for debit card issuance has remained vibrant. Debit wins by MasterCard demonstrate that Visa's settlement service fee has not prevented members from issuing MasterCard debit cards. We are confident our issuers are committed to Visa's debit products due to the strong value they offer, not the settlement service fee. MasterCard general counsel Noah J. Hanft in a statement called Jones's ruling a “significant win,” saying she cited Visa internal documents supporting the argument that Visa imposed a “coercive fee” intended to prevent issuers from making independent brand decisions. “Banks that were prevented from fully evaluating MasterCard's debit offering because of the SSF will now be permitted to terminate their agreements with Visa in order to issue MasterCard debit cards,” he said. But how significant are MasterCard's debit wins? While he agrees that Jones's decision does “lower the hurdle somewhat” for MasterCard to win a financial institution's debit card business, “moving brand is a big decision for [a financial institution],” says Paul Tomasofsky, president of Montvale, N.J.-based Two Sparrows Consulting LLC and a former executive with the NYCE electronic-funds transfer network. “Clearly the incumbent, especially in a larger portfolio, has an advantage,” he says. Few big banks in recent years have switched debit brands; the most notable was the 10.5-milllion-card Visa file that Washington Mutual Inc. converted to MasterCard (Digital Transactions News, Jan. 7, 2005.) Tomasofsky notes that a conversion involves costly reissuance, training, marketing and systems changes. The bank card associations might offer to pay the conversion cost, perhaps $2.50 to $3.00 per card, but the issuer merely passes all or most of that on to vendors, he says. In contrast, the incumbent association might offer a fee, perhaps $1 per card, to stay. Such retention bonuses flow straight to the bottom line. “It happens all the time,” says Tomasofsky. And while Capital One's new debit card breaks the chain that ties debit cards to checking and savings accounts with the card issuer, it remains to be seen how successful the product will be. If it is, Visa could replicate it, Tomasofsky notes. If big banks subsequently start a debit card war with the new products as their weapon of choice, as a group they probably would net out about even in wins for the new cards versus the losses their traditional debit card portfolios suffered. The big losers could be smaller financial institutions without the marketing budgets to resist the overtures large banks make to their deposit customers. That might create an opportunity for smaller financial institutions upset with the bank card associations' debit card policies to convert their debit portfolios to Discover Financial Services LLC, which owns the Pulse EFT network and is trying to make debit card headway, says Tomasofsky. “I think it all hinges on if Capital One is going to be successful,” he says.