Visa to Prepay US Merchants

Visa Inc. (V - Analyst Report) on Monday said it would prepay $682 million to complete a major legal settlement with US merchants in order to get a discount of more than $100 million. The company will make the transaction either on Sept. 30 or the business day after the court order, whichever is later.

The prepayment will wipe out the $800 million it still owes through 2012. In 2003, the settlement ended a class action lawsuit against Visa and MasterCard Inc. (MA - Analyst Report) that accused them of conspiring to fix prices and restrict trade. Visa has agreed to pay $2 billion over a period of 10 years, in equal annual installments of $200 million.

Visa is the de facto leader in payments, facilitating one out of every two card-based payments globally. Though over half of personal consumer expenditures in the U.S. are still conducted in cash/checks, this trend is changing quickly with debit cards gaining popularity.

With strong economies of scale and pricing power, Visa remains well positioned to grow revenue by capitalizing on the increasing consumer preference for debit and the ongoing global secular shift toward electronic payments. However, given its prominent position within the payments industry, the company will continue to be subjected to litigation risk.

MasterCard has also agreed to prepay for a similar discount last month. The company will prepay $335 million of its remaining obligation of $400 million. The installment term for MasterCard was $100 million annually through 2012.

Earlier, the two companies had agreed to pay about $4 billion to American Express Co. (AXP - Analyst Report) and $2.75 billion to Discover Financial Services (DFS - Analyst Report) as the credit card networks charged Visa and MasterCard with damaging their business. It was alleged that Visa and Master prevent banks from offering other cards if they issue Visa or MasterCard cards.

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