A key element of the deal — struck this week just before the retailers' huge antitrust suit was to go to trial — calls for Visa and MasterCard to sharply lower the debit-card transaction fees they charge stores beginning Aug. 1.
Retailers estimated the fee reduction will save stores $63 billion to $100 billion over the rest of this decade — savings they pledge to pass on to consumers.
"It's going to lead to better products and lower prices for every store in the United States," said Lloyd Constantine, lead lawyer for the stores, including Wal-Mart, Sears, Safeway and Circuit City.
At the heart of the lawsuit was Visa and MasterCard's "honor-all-cards" policy, which required any store accepting the companies' credit cards to also accept their debit cards.
That policy will die Jan. 1, 2004, under terms of the settlement, which a federal judge is expected to approve.
Few expect that a significant number of stores will begin rejecting Visa and MasterCard debit cards. The debit-card giants are far too popular — they control 70 percent of the debit-card market by some estimates — for that to happen.
More than 120 million customers used Visa debit cards last year, and those customers spent $250 billion on merchandise. "They vote with their cards," Visa USA vice president Daniel Tarman said.
But the settlement frees up merchants to clear more debit-card transactions through smaller, regional networks — companies with names like Star, NYCE and MAC that shoppers are used to seeing plastered on ATMs.
Those companies use touch-pads and personal identification numbers, or PINs, rather than customer signatures to clear transactions.
"Consumers will get used to using their PIN rather than a pen, and that will lower costs for consumers," said David Balto, a former Federal Trade Commission antitrust enforcer.
Lawyers for the retailers estimated Visa and MasterCard charges had averaged about 1.7 percent for large retailers and 2.5 percent for smaller retailers.
Under those estimates, clearing a $100 purchase for a large retailer cost about $1.75 to $1.80 via Visa or MasterCard networks, compared with 25 cents to 50 cents on a regional network. Visa and MasterCard had contended the discrepancy was much smaller.
Many experts also believe PIN-based transactions are safer for consumers than signatures because signatures are easier for criminals to forge than PINs are to steal.
That could force Visa and MasterCard to come up with new ways to woo consumers. Both companies already push anti-fraud protections — Visa, for example, stresses "zero liability" for customers and access to identify-theft insurance.
"They're good marketers. We know that," said Bruce Sokler, a partner at Washington, D.C., law firm Mintz Levin who specializes in antitrust cases. "They're not going to go away. They'll probably be pretty successful."
Still, as credit card company executives pointed out Thursday, there is no guarantee retailers will automatically pass on the windfall from the settlement or the money they save on fees, to their customers.
"That's something only time will tell," said MasterCard's general counsel, Noah Hanft.
The lawsuit was brought in 1996 in Brooklyn federal court, but the settlements came together — first a $1 billion deal with MasterCard, then a $2 billion deal for Visa — just before the trial was to begin this week.
People on both sides of the talks said U.S. District Judge John Gleeson, who oversaw the case, encouraged the sides to settle and insisted on keeping consumers' interest at the forefront of the talks.
In some instances, Constantine said, the judge allowed lawyers to use empty courtrooms and jury rooms to work out details of the settlement.
The retailers always contended that striking down "honor-all-cards" would encourage competition and give consumers more options for how to pay at the cash register.
If anything, the ruling should accelerate the already fast-growing market for debit cards, analysts say. By 2010, they're expected to be responsible for twice as many transactions as credit cards.
"People are pretty much maxed out," Constantine said. "They're spending the money that they have. And they're doing it with cash, checks and debit cards. We really are moving toward a cashless society."