6.  Missing-out on Lower Debit Card Rates

When merchants operate under a bundled billing arrangement, they may also be at some disadvantage with regard to debit card Interchange.  In the spring of 2003, Visa and MasterCard agreed to settle their respective class action antitrust lawsuits with Walmart and other retailers.(7)  The settlement of what is commonly referred to as the “Honor-All-Cards” case inevitably resulted in the creation of dozens of new, lower debit card Interchange rates.

Not all merchants enjoyed this Interchange relief.  In particular, many merchants processing under a bundled discount agreement receive no benefit at all.  In fact, these new rates provided their processors with an unintentional yet substantial windfall.  Not unlike the earlier case where we discussed withheld interchange on refunds, processors wound up keeping the “debit card differential.”  That is, when debit cards began to enjoy a lower Interchange rate, that difference stayed with the processor.  Using the formula, D = I + A + P, we see that for debit cards, “I” decreased for the processor while the merchant continued to pay the same old discount, “D.”  In essence, this is a case of the processors’ costs going down while the merchants’ costs stayed the same.  The processor was responsible for paying less Interchange to the card-issuing bank, while collecting the same fees from merchants.

What makes this issue so important is that is that debit card usage represents a significant percentage of overall card transaction volume.  In the one year period ending Sept. 30, 2006, Visa reported that debit cards represented approximately 43 percent of the U.S. dollar volume crossing their card networks.(8)  In its SEC registration statement, Visa revealed that in the 12 months ending in June of 2006 approximately 36.4 percent of worldwide dollar volume crossing its card networks was in the form of debit transactions.(9)  The Nilson Report stated that in 2006, 54% of all card transactions (card-present and card-not-present) were transacted with debit cards and this is expected to increase to 58% by 2011.(10)

It should be noted that because debit card Interchange rates typically have higher per-item fees than credit card rates, processors processing merchants with very low ATVs operating under the bundled model would suffer a loss instead of realizing the windfall.  Most processors, however, enjoy a large aggregate debit card windfall, because as we learned earlier, the ATV for all four brands averages about $80.

(7) Wal-Mart Stores, Inc. v. VISA U.S.A., Inc., 396 F.3d 96 (2d Cir. 2005). & United States v. VISA U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003)
(8) Press Release: Visa Reports 11.1 Percent Third-Quarter Growth in U.S. Sales Volume on Visa-Branded Cards, Nov. 21, 2006,
(9) Securities and Exchange Commission, Form S1 Registration Statement, Visa Inc., Filed 11/09/07, p. 13.
(10) The Nilson Report, October 2007, Issue 889, Pages 7, 8, 9