How Visa, Using Card Fees, Dominates a Market

Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.

A Seven-Year Battle

Wal-Mart, Circuit City, Sears and a number of major merchants eventually sued. After seven years of litigation, Visa and MasterCard agreed to end the “honor all cards” rule between credit and debit and to pay the retailers a settlement of around $3 billion, one of the largest in American corporate history. Visa paid $2 billion, and MasterCard the remainder.

Since then, only a handful of retailers have stopped accepting Visa debit cards, an indication that the crux of the lawsuit was “much ado about nothing,” Mr. Sheedy says.

And while some merchants said they thought the lawsuit would pave the way to a new era of competition, a curious thing happened instead: while Visa temporarily lowered its fees for signature debit, it raised the price on PIN debit transactions and passed the funds on to card-issuing banks, and its competitors soon followed.

The current class-action lawsuit joined by Mr. Goldstone contends that Visa’s PIN debit network, called Interlink, is offering banks higher fees as an incentive to issue debit cards that are exclusively routed over this network. Interlink, which has raised its PIN debit fees for small merchants to 90 cents for each $100 transaction, from 20 cents in 2002, is often the most expensive, especially for small merchants, Fed data shows.

One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.

Visa officials say its PIN debit network is taking off despite rising costs because it offers merchants, banks and consumers a level of efficiency and security that regional networks cannot match. “We are motivated as a company to try to drive value to each one of those participants so that they accept the card, issue more cards, use the card,” Mr. Sheedy said.

At checkout counters, meanwhile, consumers are quietly tugged in one direction or the other.

Safeway, 7-Eleven and CVS drugstores automatically prompt consumers to do a less costly PIN debit transaction. The banks, however, still steer consumers toward the more expensive form of signature debit. Wells Fargo and Chase are among those that offer bonus points only on debit purchases completed with a signature.

Visa says it does not care how consumers use their debit card, as long as it is a Visa. But for now at least, the company says the only way to ensure that a purchase is routed over the Visa network is to sign.

“When you use your Visa card, you have a chance to win a trip to the Olympic Winter Games,” a new Visa commercial promises.

The commercial does not explain the rules, but the fine print on Visa’s Web site does: nearly all Visa purchases are eligible — as long as the cardholder does not enter a PIN.