Posted on: Friday, October 24, 2003

Merger of debit card networks challenged

By Paul Davidson
USA Today

The Justice Department yesterday sued to block First Data's $7 billion purchase of Concord EFS, saying the deal would create a powerhouse in the PIN-based debit card business and raise prices for consumers.

Concord owns Star, the largest PIN debit network, and First Data is the majority owner of NYCE, the third-largest.

"This merger of two of the three largest PIN debit networks will lead to higher prices to merchants, forcing them to pass on those price increases to many consumers," said Justice antitrust chief R. Hewitt Pate.

The combined company would process more than half of PIN debit transactions, Justice says.

The companies vowed to defend the merger in court, saying it would create cost efficiencies that would lower prices. Justice "elected to decrease competition and increase prices for consumers and merchants," First Data CEO Charlie Fote said.

PIN-based debit cards, which took off in the mid-1990s, let consumers punch in codes to make purchases. The cash is instantly debited from their checking accounts. Consumers used PIN-based cards to make more than $150 billion in purchases last year. The market is growing 20 percent a year, says Tim Willi of A.G. Edwards & Sons.

By contrast, signature debit cards, operated by Visa and MasterCard on their networks, also deduct money from checking accounts, but customers sign a receipt, as with a credit card. They are more expensive for merchants and can take as much as 36 hours to deduct cash from customers' accounts.

As a result, Justice officials say, merchants would be unlikely to replace PIN-based networks if First Data sharply raised prices. But company executives say that's unlikely because the two types of networks are part of a single market, of which a merged First Data would control less than 50 percent.

Washington lawyer Robert Doyle Jr. says the companies could settle the lawsuit and complete their merger before shareholders vote on the deal Tuesday, if First Data agrees to sell NYCE. In talks aimed at heading off the lawsuit, First Data apparently insisted on retaining a small stake in NYCE — a deal-breaker for Justice, Doyle says.

He says antitrust enforcers have a "very strong case." The lawsuit cites First Data documents saying the deal gives it "more leeway to set market pricing."

But First Data argues that two years ago, Justice approved Concord's purchase of Star, which gave it 60 percent of PIN transactions.

Concord stock fell $2.58 to $11 on the news. First Data rose 70 cents to $36.60.

Joining Justice in the suit were seven states and the District of Columbia.