Wednesday, June 25, 2008

There ARE Some Things Money CAN Buy.

I've got a "New Campaign Idea" for MasterCard... Here goes:

Screw with Wal Mart: $1.0 Billion

Screw with American Express
: $1.8 Billion
Screw with Discover: $3.0 Billion?

IPO to cover damages: Priceless!

"Under the terms of the agreement, MasterCard will pay American Express up to $1.8 billion. This follows an earlier agreement with Visa to settle similar claims for up to $2.25 billion. Subject to certain performance criteria, American Express would receive more than $4 billion for agreeing to drop its claims against the two credit card networks. The combined antitrust settlement is the largest in U.S. history."

From the Wall Street Journal:

American Express Co. has reached a $1.8 billion settlement with MasterCard Inc. over the card issuer's lawsuit with the payment processor over allegations MasterCard, Visa Inc. and some member banks prohibited financial firms from issuing credit cards through American Express.

Meanwhile, American Express Chairman and Chief Executive Ken Chenault said credit indicators have weakened "beyond our expectations" amid continued weakening in U.S. business conditions. He added it is "too early to assess the impact," but that the antitrust settlement should "help to lessen the impact of this weakening economic cycle."

Beginning in the third quarter, MasterCard will make 12 quarterly payments of $150 million, contingent upon the performance of American Express' U.S. Global Network Services Business. MasterCard will take a $1 billion charge in the second quarter.

"We are pleased to have reached a settlement with terms that will enable us to keep our strong balance sheet intact," said MasterCard President and Chief Executive Robert W. Selander. He added that "eliminating the uncertainty" of a prolonged court case is in the best interest of shareholders.

In 2004, American Express sued Visa, MasterCard and eight of their member banks for imposing rules that had prohibited financial institutions from issuing credit cards through American Express. The lawsuit was filed shortly after the U.S. Supreme Court let stand a lower-court ruling that forced Visa and MasterCard to allow their member banks to issue credit cards on rival networks.
Visa agreed to a $2.25 billion settlement in November. Coupled with the MasterCard payments, American Express will receive $880 million annually for the next three years.

# # #

If you’re reading with a sense of deja vu, that’s because Visa and MasterCard have spent lots of time in court defending themselves from antitrust allegations. Let’s review:

In 1996, merchants filed a
class-action lawsuit against Visa and MasterCard alleging they were attempting to monopolize the debit card market. On the eve of trial in 2003, the parties agreed to a boffo $3.4 billion settlement, called the largest in an antitrust case. The lead counsel in that case was Lloyd Constantine of Constantine & Partners.

MasterCard's settlement with AmEx is only Part 1. As I posted in this blog a couple weeks back, Lloyd Constantine is heading up Discover's antitrust lawsuit and seeking $6 Billion in damages. (Visa said at the time the amount was ``dramatically overstated'' and MasterCard called the suit "baseless.'' Maybe MasterCard might want to look up the word "baseless" in a dictionary. They might also consider the savings derived from representing themselves in court since their attorneys aren't getting any better results. Here's a better idea... admit wrongdoing and just pay up. Then consider ceasing and desisting with these types of business practices. After all, Visa and MasterCard have demonstrated this behavior for many years now and their track record in court is dismal.

In 1998, the DOJ brought a successful antitrust lawsuit against Visa and MasterCard arguing that the companies colluded to fend off competiton. In 2004, the Supreme Court let stand a Second Circuit ruling that ruling that Visa and MasterCard violated antitrust laws when they barred banks that issued their cards from also issuing AmEx and Discover cards.

In 2004, on the heels of the Supreme Court’s ruling, AmEx filed this lawsuit against Visa, MasterCard and eight of their member banks for imposing rules that had prohibited financial institutions from issuing AmEx cards. Even though the DOJ’s lawsuit had forced Visa and MasterCard to drop their exclusionary rules, Boies explained to the WSJ yesterday that a private company that is hurt by an antitrust violation can sue for “historical damages plus future damages from the historical acts.”

As part of this settlement, AmEx dropped the member banks from the lawsuit but not Mastercard. “The size of this settlement, along with earlier court rulings, underscores the seriousness of the damage done by the illegal boycott,” said Ken Chenault, AmEx’s CEO. “We plan to move forward with the litigation to hold MasterCard accountable for the illegal actions that blocked banks from working with us for many years.” Yeah, to the tune of $1.8 Billion.

The question nobody's asked is "How much did Visa and MasterCard profit over and above the settlements by engaging in this type of corporate rogueness? They have been found guilty time after time against "major players" (Wal*Mart, AmEX, Discover, etc) in the industry. These major players are the ones laced with deep pockets, one's who can withstand the enormously expensive and time consuming process involved with taking these big boys on. Smaller players such as Pay By Touch, a company of which I was a founding member, aren't as fortunate.

Case in point...Visa and MasterCard "defined" a "more secure" biometric transaction as a "less secure" Card Not Present (CNP) transaction. In reality, a biometric transaction is inherently more secure than a "card present (CP) transaction, let alone a CNP transaction. There's not an analyst alive who would disagree. But Visa and MasterCard did. The end-result of Visa/MC defining biometrics as a CNP transaction was severe in terms of preventing retailer participation. After all, why would a retailer switch to biometrics in order to pay a higher fee than they were currently paying? That's why retailers like SuperValu only allowed biometrics to be ACH based. And it cost PBT (and me) big. There tactics were successful with Pay By Touch because of V/MC's stronghold in the payments industry.

A second case in point...Why did PIN Debit took so long to take hold in the bricks and mortar space when it's more secure and preferred by customers? The answer is simple. Visa and MasterCard (and the banks) make more money on signature debit. Who cares that it's less secure? Who cares that it's preferrred by consumers? That's why rewards programs are mostly attached to signature debit and why some banks charge consumers to use PIN Debit. It's nuts.

So don't expect this to end when Discover wins it's $6 Billion from these guys. Pay By Touch is gone, but companies like HomeATM aren't going to stand by idly IF Visa/MC try and starve them out, as they did Pay By Touch.

Debit Cards Dominate China's Bank Card Market

As the U.S. grapples with soaring gas prices, many pundits have put the blame for the rise on the shoulders of the frenetically expanding economies in China and India. There's just too much demand and the market can't keep up, they say.

Want proof of just how fast that Chinese economy is growing? Try this: The total number of credit cards in China nearly doubled in the past year, according to the People's Bank of China, which is the nation's central bank.

A recent report at (article included below) laid out the details: "China had more than 104.73 million credit cards in circulation at the end of March, up 92.9 percent since a year ago."The report goes on to say that "China's total bank cards, including debit and credit cards, topped 1.58 billion by March 31, up 29.1 percent over the year." As those numbers indicate, debit cards are far and away the most popular choice of plastic. They make up 93 percent of the card market. Still, a near doubling of the number of credit cards in the world's most populous country is an event that is sure to draw attention, especially as companies from around the world race to do business in China.

This growth coincides with a spending boom in India, the world's second-most populous country. The has a fascinating article about buying habits of the 20- and 30-somethings in India. The article says younger Indians are charging items like flat-screen TVs, iPods and sunglasses in ever-growing numbers. The big problem in India: huge interest rates. According to the Washington Post, "In India, even the lowest credit card interest rates hover around 20 percent, and the average lending rate is 34 percent, which includes a 12 percent service tax on the interest." Holy Cow! (as the late great Harry Caray would say!)

That's two to three times the
average lending rate for cards in the U.S., according to's latest rate report. Add on the Indian government's "service tax" on the interest, and those rates for consumers in India become downright outrageous. The prevailing thought seems to be that this Asian growth isn’t going to stop anytime soon. Can it continue at the breakneck pace that we’re seeing now? Noper...growth like this never lasts forever, especially when it may be creating a generation of folks buried in debt with 34 percent APRs. It certainly bears watching, though, as Americans deal with their own credit card burden.

Here's the article from the

Number of China's credit card holders doubles in quarter
Created: 2008-6-25 - Author:Zhang Fengming

THE number of Chinese credit cards almost doubled in the first quarter, the central bank said yesterday. China had more than 104.73 million credit cards in circulation at the end of March, up 92.9 percent since a year ago, the People's Bank of China said yesterday on its Website.

China's total bank cards, including debit and credit cards, topped 1.58 billion by March 31, up 29.1 percent over the year, the central bank said.
Debit cards still dominate China's bank card market, accounting for 93.4 percent of the market total.

Bank card-based transactions accounted for 25.6 percent of the country's total retail sales, up from last year's 21.9 percent. Transaction value on bank cards rose 58 percent year on year to 824.6 billion yuan (US$119.5 billion).By the end of March, 203 institutions, including 168 domestic banks, had joined UnionPay, the sole trans-bank transfer system in China. China is adding point-of-sale card terminals at shops and restaurants to ease payments by bank cards, especially in the run-up to the Olympics when a large number of foreign tourists is expected.

Banks are also installing more automatic teller machines to extend their networks.About 804,500 merchants accept bank cards while there are 137,600 ATMs on the mainland. Encouraging the use of bank cards help cut money laundering and make it easier to track merchants' business transactions and tax payments.

Global banking executives see China's credit-card business as promising, although no quick profits are expected within three years, an industry survey said earlier. Bank of East Asia issued its yuan-backed debit cards in May, the first overseas bank to issue yuan-denominated bank cards in China. Banks including HSBC and Standard Chartered are awaiting regulatory approval for their own cards.

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