IS THIS A FAIR AND CORRECT IDEA OF HOW THE VISA CREDIT VISA CREDIT CARD MANAGE THEIR COMPANY.
Back when I was studying antitrust law my professor came up with a great analogy for how the credit card market functions. Think of a singles bar. The men pay a cover charge to get in, while the women get in for free. Inside thrives a marketplace where the two sexes mingle, laugh and possibly even go home together.
This marketplace has a cost — bars have employees and electric bills — but that cost doesn’t fall evenly on all the participants. Instead it falls on the group with the greatest incentive to pay. In the case of the singles bar, it tends to be the men. Women won’t go to the bar unless it’s free, and men won’t go unless there are women there. So the men gladly pay to gain access to the women who got in for free. (Dry cleaning is a two-sided market that works the other way; women pay far more than men to clean their shirts because dry cleaners figured out a long time ago that men tend to be dogs who will simply go without dry cleaning if the price is too high.)
Last night’s $6 billion Visa settlement turns all this on its head. For years, merchants have been the men in the singles bar, paying most of the costs of operating a ubiquitous electronic network that brought them enormous benefits (imagine what retail sales figures would look like if everybody paid by cash or check). But then they got thinking: Why aren’t the women paying? How did we up getting stuck with the bill? And thus was born a string of antitrust lawsuits, the latest of which settled yesterday.
Under the settlement, Visa, Mastercard and a collection of banks including Barclays, Chase, Capital One and Wells Fargo will pay $6 billion in cash and reduce their so-called “interchange fees” by 10 basis points for eight months after the deal is signed. They’ll also drop boilerplate language in their contracts with merchants that prohibit stores from charging more to customers who pay with plastic.
Merchants led by Wal-Mart (“Everyday low pricing”) looked at all that money flowing to the credit-card companies each month and thought, what if that was mine? And then they teamed up with entrepreneurial law firms including Robbins Geller (nee Lerach Coughlin Stoia), Berger & Montague and Robins Kaplin to assemble class actions that accused the credit card companies of conspiring to set processing fees too high.
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