WaMu’s Move to MasterCard Underlines Intense Card Competition

Washington Mutual Inc.'s decision to switch its 10.5-million-card debit portfolio to MasterCard International from Visa U.S.A., though a big win for MasterCard, doesn't necessarily herald a trend, observers say. At the same time, it throws into relief a bylaw Visa quietly put into place in 2003 that penalizes large debit-card-issuing members that defect to the rival bank card network. MasterCard, which filed a motion in federal court in September 2003 challenging the rule, says it may raise the issue again in court. “We continue to believe it's unlawful and should not be applied,” says a MasterCard spokesperson. What Washington Mutual's move does underscore, says Les E. Riedl, senior vice president at Speer & Associates, an Atlanta-based consulting firm, is a more general point: the intense state of rivalry in the card market, which now embraces both American Express Co. and Discover Financial Services Inc. “You're seeing very aggressive competition,” he says, particularly in the fast-growing debit card segment. Both AmEx and Discover are actively wooing banks that have been allied for years with Visa and MasterCard. With respect to debit specifically, Discover is acquiring the Houston-based Pulse electronic funds transfer network, which processes both PIN and signature-based debit. “There's still healthy growth in the credit card business, but it's a mature business,” says Riedl. “Alternatively, anybody focused primarily on the credit card side you can expect to look at debit.” Signature-based debit transactions have ballooned 25% annually in the past three years, compared to a growth rate of 7% for credit cards, according to a recent study by the Federal Reserve System. With many product features in common between the two bank card associations, Seattle-based Washington Mutual, the third-largest debit card issuer in the country, likely based its decision on unique factors that would not necessarily apply in the case of other Visa banks. “The decisions between [going with] Visa or MasterCard are not black and white,” says. “It comes down to looking at very specific, finite advantages for that kind of issuer.” He says such factors as support for new products and technology, voice in the association, and fit with the bank's overall retail strategy likely influenced the decision. For example, MasterCard's PayPass technology, which replaces card swipes with radio waves and enables contactless tap-and-go payments as cash replacements at high throughput locations such as fast-food restaurants, is gaining a higher profile among banks' decision makers. “The two things getting traction are prepaid and RFID,” says Riedl. Though it has conducted RFID tests overseas, Visa so far has not introduced the technology in the U.S. Though MasterCard offers a slight interchange advantage to debit card issuers, Riedl says this likely would not play a role in a decision to switch from Visa. “It's a penny or two per transaction plus five to 10 basis points, but if you're looking at the cost of re-issuing cards and a conversion, the interchange advantage is not the most compelling factor,” he says. Although Washington Mutual would ordinarily incur Visa's so-called settlement fee, which it introduced as a bylaw two years ago to discourage major debt card issuers from defecting to other brands in the wake of the Wal-Mart settlement, Riedl says this was likely reduced or eliminated through negotiations with both Visa and MasterCard. “I would not be certain [that Washington Mutual will pay the fee],” he says, “certainly not at the full level.” Visa's fee applies to top-100 debit card issuers that switch to another brand or allow their debit card volume to decline below certain levels. In the fall of 2003, the card company revised its bylaw to apply only to MasterCard (Digital Transactions News, Nov. 14, 2003). MasterCard's fight against Visa's exit fee may not be over, even though a federal court judge had disallowed its original challenge as out of her jurisdiction while her ruling in a case the U.S. Justice Department had brought against both card associations was under appeal. The judge, Barbara Jones, in October 2001 struck down a rule both bank card associations had in place that for years had barred members from issuing cards with either AmEx or Discover. She invited MasterCard to re-enter its objection to Visa's settlement fee if her ruling were upheld on appeal. The U.S. Supreme Court refused last October to consider an appeal from the bank card associations. As a result, the MasterCard spokesperson says, the card company is “considering whether or not” to renew its challenge to the Visa settlement fee. Washington Mutual has said it will start re-branding its debit cards to MasterCard by the end of the year. Neither the bank nor MasterCard would discuss the terms of the multi-year contract.