The Wal-Mart Case Hits MasterCard with a $763 Million Charge

MasterCard International took a $763.5 million charge against earnings in 2003 to account for its share of the settlement of the massive Wal-Mart class-action suit, documents filed yesterday reveal. As a result of the charge, the bank card association sustained a $385.8 million loss last year, compared to net income of $116.4 million in 2002 and $142 million in 2001. According to MasterCard's 10-K filing with the U.S. Securities and Exchange Commission, the charge stems from MasterCard's agreement in the settlement, reached last spring, to pay $1 billion over 10 years to Wal-Mart Stores Inc. and other merchants to settle the merchants' claims they had been overcharged for payment transactions as a result of the card networks' policies requiring merchants to accept the networks' debit cards if they accepted their credit cards. In the settlement, Visa agreed to pay $2 billion. MasterCard's charge represents the present value of its 10-year obligation, discounted at 8%. A charge Visa took to account for its obligation contributed to a $1.8 billion loss it recorded for its fiscal year ending last Sept. 30. In the filing, MasterCard says the charge also covers possible costs arising from action by merchants that opted out of the plaintiff class in the Wal-Mart case. These cases, brought by chains including Best Buy Stores, Home Depot, and Toys R Us, are expected to be tried in the U.S. District Court for the Eastern District of New York. MasterCard's filing also indicates the association recognizes risks from various other legal, regulatory, and competitive factors, including efforts by American Express Co. to recruit banks to issue its cards, a Visa requirement that effectively prevents its 100 largest debit card issuers from shifting to the MasterCard brand, and the ability of merchants to reject the banks' debit cards while still accepting their credit card brands. This ability, which resulted from the Wal-Mart settlement, has already led Wal-Mart and “a small number of (other) merchants” to announce they will stop accepting MasterCard's signature-based debit product, the company's filing says. Wal-Mart's decision took effect Feb. 1. This newfound right, it says, “may adversely affect our ability to maintain and grow our debit business in the United States.” In addition, regulators in Europe and Australia are subjecting the bank card networks' interchange-based pricing structure to intense scrutiny, the filing notes. While reporting the adverse impact of the settlement fee, the MasterCard filing also indicates the association realized an 18% increase in revenue last year, to $2.23 billion. According to figures in the filing, MasterCard's total transactions jumped 9.5% last year, to 15 billion, with all of the growth coming at the point of sale for purchases.