Read Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel Online
Authors: Lloyd Constantine
Tags: #Antitrust, #Business & Economics, #History, #Law, #Nonfiction, #Retail
Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (33 page)
As Kurt Vonnegut said, “and so it goes”, and will continue to go with no end in sight, sometimes with my participation but mostly without. I enjoyed my part of the journey.
L.C.
N.Y.C.
May 2012
October 6, 2011
Charging for Debit Cards Is Robbery
By LLOYD CONSTANTINE
When Bank of America told its customers recently that it would start charging them $5 a month to use debit cards, it argued that it was forced to make that change because of regulations that altered the economics of the cards. Other banks agreed. The chief executive of JPMorgan Chase, Jamie Dimon, put the effects of the regulations this way: “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.” Both banks were responding to the Federal Reserve’s actions to limit the interchange fees banks charge stores each time a debit card is used for a purchase.
But the banks’ simplistic statements are merely an attempt to rationalize and obfuscate one of the largest illegal transfers of wealth from consumers to banks in American history.
Debit cards were developed by banks as a replacement for paper checks. When a consumer pays with a debit card instead of a check, the bank saves money. In the 1980s, Visa calculated the savings at
55 cents to $1.60 per check. The savings is much higher today. For decades, Bank of America, the founding owner and member of Visa (originally called BankAmericard) and all of the Visa and MasterCard banks, including Chase, hid the identity of their debit cards from stores by designing them to look and function like their signature authorized credit cards and by charging stores the same price for debit and credit transactions. Banks did this despite the fact that purchases made with a debit card didn’t involve a loan from the bank, posed very little fraud risk and were extravagantly profitable to banks because they eliminated the costs of processing and clearing checks.
The practice of deceiving stores and forcing them to accept overpriced debit transactions was challenged in a 1996 antitrust lawsuit against Visa and MasterCard, in which I was the lead attorney for the plaintiffs. In 2003, that resulted in a $3.4 billion settlement to stores, a court order to redesign the debit cards and a reduction in the price banks charge stores for common debit transactions—to an average of 42 cents per transaction from an average of 63 cents.
However, that lower price was still much too high, as the Federal Reserve well knew. The Fed had been established in 1913 in large measure to end the then widespread practice of banks’ charging a similar “interchange” fee for the use of paper checks. Those check interchange fees were slowing the growth of interstate commerce, and the Fed quickly prohibited them. The interchange fees that banks now charge stores for debit transactions are economically and functionally identical to the check interchange fees prohibited by the Fed almost a century ago.
When A.T.M. cards were first used at stores as point-of-sale debit cards, no interchange fees were charged. In many instances debit card networks like Shazam and Tyme actually paid stores to accept debit transactions. They did this so banks, which owned the networks, could reap the huge profits of eliminating checks. But Bank of America,
Chase and their Visa/MasterCard partners wanted to have their burgers and eat them, too. They instituted the illegal practices challenged and eliminated in the Visa Check antitrust litigation. Later, the Dodd-Frank Act directed the Fed to continue the process of addressing high and anticompetitive debit interchange fees by examining whether the banks could justify those fees on the basis of the costs banks incurred in processing debit card transactions. After initially deciding that debit interchange fees should be lowered from 44 cents to 7 to 12 cents, the Fed, in yet another huge handout to big banks, revised the fee range to 21 to 24 cents.
That is the change in economics which Bank of America cites as it at-tempts to begin charging a large new fee to its debit cardholders. It’s a free country, but also one where competition is supposed to prevail and prevent companies, including banks, from simply raising the price of their burgers without suffering the competitive consequences. Recently, Netflix learned that a company can’t adopt a big price increase without suffering the consequences. When it tried to, it lost hundreds of thousands of its customers.
Retail customers of Bank of America and of any other bank that follows its lead should swiftly move their business. I am certain that other banks will welcome the competitive opportunity that Bank of America has given them with its arrogant and disingenuous action and justification.
Lloyd Constantine, a commercial litigator, is the author of
Priceless:
The Case That Brought Down the Visa/MasterCard Bank Cartel.
(published in the
New York Times
on October 6, 2011)
B
EYOND BEING THE reason for my life, and for virtually everything worthwhile in it, my family deserves thanks for helping me with this book and the work it chronicles. Each made important contributions. My wife, Jan, the first and best antitrust lawyer in our home, taught me explicitly and by osmosis and was my advisor on the case and the manuscript. She was the Penelope I returned to after this Odyssey.
My son, Isaac, is the truly talented writer in our family and also a professional editor. His tough, concise, but loving complete edit of the manuscript improved it immeasurably. He also gave the book its title. My daughter, Sarah, worked on the
Merchants’
case as a paralegal, doing a skillful analysis demonstrating the lack of competition between Visa and MasterCard. She also accompanied me to Amsterdam for work on the case with European merchants and bankers. Elizabeth, our youngest, completed our family and gave a jolt to all our efforts. It is not coincidental that this work began right after her arrival. She accompanied me to Brussels, helped me with the “Dance of Death” speech to the European bankers and told me to “go for it.”
Kaplan, my publisher, took a chance on a sixty-two-year-old first-time author. Two people there provided guidance and assistance with the final manuscript. Dedi Felman, my editor, along with my son, took a guy who loved to write and started to turn him into an author. My sessions with
Dedi were among the best classes I’ve ever attended. Don Fehr, Kaplan’s editorial director, was the green light and the overall shepherd of this book.
Many of the greatest influences in my life and in this case are mentioned in the book, but one is not—my legal mentor, John Chipman “Chip” Gray. More than anyone, Chip taught me to be a litigator, and by his example, one with a social conscience.
Three women typed the manuscript, fixed my grammar and punctuation, and cheered the old man on in the case and the book. They are Evelyn Maldonado, Mamie Mellerson, and Melanie Martorell.
Many of the people at Constantine &Partners, now called Constantine Cannon, are mentioned in Priceless as the key events are discussed, but not all. Many unnamed, who shall remain that way because of their number, did superb and important work. A few, however, will be mentioned. If I was Ferrante, then Michelle Peters was Teicher in the case and in writing this book. A team of six paralegals became C&P’s angels of mercy, especially in the crucial endgame year. Alison Ross, Kevin Potere, Kristin Uscinski, Jason Lipton, Michelle Kennedy, and Lauren Harrison were so smooth and proficient in their seemingly effortless coordination that I called them the “Boston Celtics”—those of the Cousy, Sam Jones, Sharman, K.C. Jones, Russel era.
C&P’s direct clients in the
Merchants’
case, the Big Five retailers and the three trade associations, placed their faith in an eight-lawyer firm to challenge the banking industry and their law firms with an army of attorneys. They were great teammates, counselors, and friends throughout and to this day.
Finally, I want to acknowledge and thank my worthy and skillful adversaries, among them lawyers who were before, or during the
Merchants’
case became, friends and still are. Patton needed Rommel. Rafa needs Roger. I needed them.
L.C.
N.Y.C.
A
affirmative litigation bureaus,
7-8
American Banker,
163
American Express
antitrust dispute with Visa,
30-31
exclusionary rules against,
89-90
suit against Visa and MasterCard,
238
Visa call for boycott of,
11-13
Visa/MasterCard exclusionary rules and,
53
amicus curiae briefs,
123
Anderson Consulting,
164-65
Angelidis, Ellenore,
201
anti-steering rules,
57-58
Antitrust Division,
21
Antitrust federalism,
22
antitrust settlements,
229
Arquit, Kevin,
67-68
,
187
,
198
,
239
Ashenfelter, Orley,
147
“Aspirational conflicts,”
31
ATM networks (regional and local),
14
,
25
,
148
attorney work product,
91
B
Baer, Bill,
47
Balto, David,
228
Bank of America,
149
Bank One,
149
Barclays Bank,
182
Benedict, Jim,
87
Benston, George,
140
Bernie’s Army Navy Store,
70
Bingaman, Anne,
54
Bomse, Steve,
107-8
,
116
,
117-18
,
147
,
187
Booz, Allen and Hamilton,
26
,
153
,
182
Brett, Barry,
12
Brickman, Lester,
191
Bronstein, Phil,
131
Brosnahan, Brian,
66-67
Burlington Coat Factory,
71
Burns, James MacGregor,
4
Burns, Mary Ellen, ix, x
Burton, Eve,
131
C
cable TV joint venture investigations,
29
Cain, Moe,
202
Canada per capita debit use,
105
Canter, Mike,
204