Tuesday, October 14, 2008

Discover To Make a Killing and I'm Lovin' It!

About four months ago I blogged about Discover's $6 Billion lawsuit against the duopoly called Visa and MasterCard.  Here's a direct quote from that post:

MasterCard's settlement with AmEx is only Part One. Lloyd Constantine is heading up Discover's antitrust lawsuit and  is 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."

Even armed with this helpful advice - (and I know they got it because James Issokson, Vice President, Reputation Management, MasterCard International (Hi Jim!:) subscribes to this blog)  MasterCard remained "clueless" as to what "baseless" means.     So...what do they do?  At the very last moment (their modus-operandi, designed to squeeze every last penny from their anti-competitive/unethical  practices) as jury selection in this baseless case was set to begin, they decided to settle rather than go to court and risk triple damages.

Never has there been two companies I'd love to see fall on their collective butts more than these two "snakes in the grass."   I have my reasons for feeling the way I do and here they are: (from a previous post in this blog)

"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" in the industry. These major players
(Wal*Mart, AmEX, Discover, etc) are laced with deep pockets and can withstand the enormously expensive and time-consuming process involved with taking these big duopoly 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 both classified" 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  what they were currently paying? They wouldn't, and Visa and MasterCard knew it.  That's why retailers like SuperValu only allowed biometrics to be ACH based.  V/MC froze us out of the market and it cost PBT (and me) millions.  (FYI - Discover provided PBT with a special interchange rate)

Based on the V/MC track record in these anti-trust lawsuits, I'm thinking that shareholders of Pay By Touch should bring a class-action lawsuit against Visa and MasterCard.  Better yet, if we could file a "baseless" one maybe in 5 years we'll read an announcement similar to this one..

Visa has reached an agreement in principle with Discover to settle litigation pending since 2004,” Visa said Tuesday. “The specific terms of the settlement are still being negotiated and will be made available when a final agreement has been reached.” MasterCard issued a similar statement.

Based on the fact that pretrial rulings by U.S. District Judge Barbara S. Jones in August were favorable to Discover, the case had  base.  Looks like MasterCard's comments regarding the case were the only thing that was "baseless" here.  

I'm taking a wait and see approach on Visa's position that the $6 Billion was "dramatically overstated" as the terms have yet to be released.  But Visa and MC  settled with American Express for $4.05 Billion, and I suspect that this amount will be higher...

On a personal note, I've been involved in the payments industry for a long time and it absolutely thrills me to see companies that operate the way this duopoly known as Visa and MasterCard operate take $4 billion dollar hits.    

In a post entitled:"There Are Some Things Money CAN buy" I stated that they solved their problem by IPO'ing.  I even suggested a new ad campaign for MasterCard:

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!

Here's the article from the Chicago Tribune...I'll follow up with the amounts that both Visa and MasterCard have to shell out when it's announced. Here's hoping it's the whole $6 Big Ones! 
Discover settles antitrust suits against Visa, MasterCard
By James P. Miller | Tribune staff reporter  1:52 PM CDT, October 14, 2008

Discover Financial Services Inc., which has been pursuing antitrust claims against credit-card industry rivals Visa Inc. and MasterCard Inc., reached settlement agreements with both companies as the lawsuit was about to go to trial.

Terms haven't yet been disclosed, but the Riverwoods company has been seeking billions of dollars in damages from the two firms.

Discover hasn't issued a statement yet, but the settlements were disclosed as jury selection was set to begin in a Manhattan federal court.

MasterCard and Visa issued statements confirming that they had reached agreement in principle on an out-of-court accord with Discover and that the parties are discussing specific terms of the settlement. Details will follow the conclusion of those talks, the two companies said.

Discover sued in 2004, alleging that MasterCard and Visa had improperly damaged its business by pursuing a policy in which banks were forced to choose between issuing their cards or issuing cards issued by Discover.

American Express filed a similar complaint against Visa and MasterCard, and those two companies earlier agreed to settle the Amex lawsuit for up to $4.05 billion.

Under terms of its spinoff from former parent Morgan Stanley, Discover will pay Morgan Stanley the first $700 million recovered from the two defendants, and to split 50-50 any amount of the settlement proceeds above $1.5 billion, until Morgan receives a total of $1.5 billion.

Pretrial rulings by U.S. District Judge Barbara S. Jones in August were favorable to Discover, and probably increased the likelihood that Visa and MasterCard would settle, experts said at the time.

While details are scant so far, said Keefe,Bruyette & Woods analyst Sanjay Sakhrani in a report to investors, "we believe there is the potential for Discover to do something with a chunk of the money it receives such as: 1) add to the loan loss reserve and/or 2) using proceeds to spend towards some type of marketing campaign."

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Look for Debit Transactions to Dominate Card Payments

The number of debit card transactions has already surpassed the number of credit card transactions, and now, in the midst of the "credit" crisis, issuers have begun to tighten the screws, resulting in lower credit limits.  End result?  Debit cards will be used more often and they'll be used for higher ticket items, normally reserved for credit cards.  This bodes well for companies like HomeATM which can reduce the cost of processing debit transactions on the web.  Here's a story that ran this morning on CBS...

Credit Card Terms Taking Turns For Worse, Vera Gibbons On How Issuers Are Tightening The Screws To Protect Themselves - CBS News
(CBS) The impact of ultra-tight credit markets is hitting your credit cards, and you might not even realize it.

On The Early Show Tuesday, financial contributor Vera Gibbons explained that lenders are tightening terms in numerous ways, and you need to be aware of all of them to avoid possible trouble down the road.

Behind the changes is the simple fact that lenders want to protect themselves from bad debt, so they're tightening standards and practices in hopes of avoiding defaults by credit card users.

What are they up to?


This is the biggest and perhaps most ominous change of all -- and something many consumers won't realize has happened to them until it's too late. Here's what's scary: You don't have to "mess up" in order for a company to lower your credit limit. Big companies such as American Express, Bank of America and others say they can and will change terms at any time, based on market conditions and the economy in general. Any "perceived risk" can also lower your limit. That includes a decline in credit scores or late payments on other bills.

How much are credit limits being cut? In some cases, the cuts are big, Some companies are lowering the limit to right above your balance, and as the balance drops (meaning, as you pay off your debt), the credit limit drops, too. That makes it VERY easy to exceed your credit limit.

Credit card companies DO have to inform you that they're lowering your credit limit, but who really reads those small-print pamphlets that come in the mail? Consumers may not know their limit has dropped until they go over it and incur a large fee. Even worse than a fee, however, is how this affects your credit score. When a credit limit is lowered, it appears that you're using a much larger percentage of your available credit. That lowers your credit score, making it more difficult to obtain a mortgage, car loan, or even another credit card.


Something else to keep your eye on: Banks are cancelling un-used -- and thereby, unprofitable -- accounts to eliminate the costs of maintaining those accounts. An inactive card can also be cancelled if your risk profile changes. That also hurts your credit score. Again, you may not realize this is happened. If you just have the card on hand "for emergencies," you're probably not paying any attention to it. But now, more than ever, you want to protect your credit score and keep it as high as possible.


If you consider all those credit card offers in your mailbox, you'll be glad to hear that companies are sending out fewer solicitations. HSBC has sent out 54 percent fewer offers this year; Citibank, 45 percent fewer. But if you don't have great credit, that's bad news for you. When you get those offers in the mail, it means you've been pre-approved for a card. But if you have to search out cards and apply on your own it can, once again, lower your credit score. Plus, it's simply a pain in the neck, AND it's getting harder and harder to qualify for good cards. You may have to settle for one with a much higher interest rate.


Used to be that no-fee, zero-percent credit card offers were a dime a dozen. Carrying a lot of debt? Transfer to one of these cards for free, and pay zero percent interest for a year. Now, if you even qualify, the offers are more likely to be for six months. You're also likely to pay a balance transfer fee of 3 percent or more. If you're looking for a good zero-percent card offer (AND you have good credit), Chase and Discover still have a few deals.


Mess up once and that's it, you're out of luck. Banks won't hesitate to increase your interest rate or impose big fees if you pay late, etc. It used to be that if you were a good customer, you could call and basically apologize, explain your mistake, and ask that the fee be removed or your rate re-adjusted. But no longer. Card companies are holding firm to their punishments, and no amount of cajoling will change their minds.

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More on Doctored POS Machines Made in China

Fraud Ring Funnels Data From Cards to Pakistan - WSJ.com

European law enforcement officials uncovered a highly sophisticated credit-card fraud ring that funnels account data to Pakistan from hundreds of grocery-store card machines across Europe, according to U.S. intelligence officials and other people familiar with the case.

Specialists say the theft technology is the most advanced they have seen, and a person close to British law enforcement said it has affected big retailers including a British unit of Wal-Mart Stores Inc. and Tesco Ltd.

The account data have been used to make repeated bank withdrawals and Internet purchases, such as airline tickets, in several countries including the U.S. Investigators haven't pinpointed the culprits. Early estimates of the losses range of $50 million to $100 million, but the figure could grow, said the person close to British law enforcement.

The scheme uses untraceable devices inserted into credit-card readers that were made in China.

The devices selectively send account data by a wireless connection to computer servers in Lahore, Pakisan, and constantly change the pattern of theft so it is hard to detect, officials say.

"Pretty small but intelligent criminal organizations are pulling off transnational, multicontinent heists that only a foreign intelligence service would have been able to do a few years ago," said Joel F. Brenner, the U.S. government's top counterintelligence officer.

U.S. intelligence officials, including senior National Security Agency officials, are monitoring the case, in part because of its ties to Pakistan, which has become home to a resurgent al Qaeda.

The scheme comes on the heels of the August indictment of a fraud ring that stole more than 40 million credit-card numbers from U.S. companies, including TJX Cos., the parent company of TJ Maxx.

In March, security officials at MasterCard Inc. saw a pattern of potential fraud in northern England. Meanwhile, a security guard at a U.K. grocery store noticed suspicious static on his cellphone and alerted authorities. Scotland Yard learned of the report and eventually connected it with the warning from MasterCard, according to the person close to British law enforcement.

Examining the store's credit-card readers, investigators discovered a high-tech bug tucked behind the motherboard. It was small card containing wireless communication technology.

The bug would read an individual's card number and the corresponding personal identification number, then package and store the data. The device would once a day call a number in Lahore to upload the data to servers there and obtain instructions on what to steal next.

A MasterCard spokesman declined to discuss details of the case but said safeguarding financial information is a top priority for the company.

There is no obvious visual indication that a machine has been altered, but those with the bugs weigh about four ounces more. For the past several months, teams of investigators have been weighing thousands of machines across Europe with a precision scale.

So far, investigators have found hundreds of machines in at least five countries: Britain, Ireland, Belgium, the Netherlands and Denmark. They have turned up at European grocery chains including Asda, which is owned by Wal-Mart; Tesco; and J Sainsbury PLC, according to the person close to British law enforcement.

A spokeswoman for Asda said, "It's subject to a police investigation, so we can't comment." A spokeswoman for Sainsbury denied its stores were hit by the scheme. A spokeswoman for Tesco said: "We're aware that this was an issue for retailers." She said Tesco tested its devices and is confident they are now secure.

The device can be told to copy certain types of transactions -- for example, five Visa platinum cards or every tenth transaction. It can also be instructed to go dormant to evade detection. On average, only five to 10 card numbers would be phoned in to Pakistan, the person close to British law enforcement said.

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