Abstract
Regulations and legal issues are changing the credit card industry from a number of different
angles. Congress and the President gave the industry a victory when they passed a bankruptcy reform
bill heavily lobbied-for by the card industry, but now seems on the verge of writing some data
security laws that could hinder the industrys ability to operate. There are also several legal
issues that threaten to shake up the industry as well, including big fights with the associations
pitted against both each other and their merchants.
Visa and MasterCard face new challenges from two directions. First, both associations and eight
of their members are being sued by American Express and Discover for damages relating to the
antitrust ruling that went against the two bankcard associations in 2001. And second, a class action
suit from five merchants seeks damages based on collusive behavior in setting interchange rates.
Interchange has become an increasingly important earnings driver for issuers as purchase volume
growth has outstripped receivables growth (see Figure 1 below) and any actions to decrease
interchange revenues could dramatically harm issuers, and possibly drive them to use their newly won
right to issue AmEx and Discover cards.
Using examples from some international incidences of legal challenges to interchange, Mercator
Advisory Group discusses the possible outcomes, and the impact that this suit could have on the
competitive balance of the industry.
Bankruptcy reform has been heralded as a major victory for the card industry, with most estimates
of the industrys benefit ranging from $1 billion to $1.5 billion, and some as high as $4 billion
annually. However, Mercator Advisory Groups analysis of the available data has concluded that the
benefits have been drastically overestimated, and are likely to be only a fraction these estimates.
"A series of data security breaches in 2004 and early 2005 have raised the likelihood of
government regulations of the data collection and brokerage industry. Given the card industrys
heavy reliance on collecting, buying, and selling data, any restrictions will directly impact the
operations of the industry. In addition, the Card Systems Inc. incident threatens to bring added
scrutiny to the data storage practices of the entire card industry. This could well result in new
regulations, and eventually new costs to everyone in the value chain," says Brian OKeeffe,
Director of Mercator Advisory Groups Credit Advisory Service.
All three of these subjects, as well as the business impact to the various parties involved, are
discussed at length.
The report is 26 pages and contains 6 exhibits.
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