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23 July 2012

Visa, MasterCard and Major Banks Agreed to Pay Retailers At Least $6 Billion

Visa, MasterCard and major banks agreed to pay retailers at least $6 billion to settle a long-running lawsuit that alleged the card issuers conspired to fix the fees that stores pay to accept credit cards. As part of the settlement, announced on July 13th, stores from Rite Aid to Kroger will be allowed to charge customers more if they pay using a credit card. At a time when shoppers increasingly are using credit and debit cards, merchants will face a dilemma: Whether to charge shoppers extra for using plastic, and if so, how to do so without angering them.

Marilyn Landis, who was last year’s chairman of the National Small Business Association, said that the settlement is a victory for small businesses across the country because it could ultimately lead to banks lowering the fees they charge stores for customers’ credit card purchases.

Visa Inc, Mastercard Inc and banks issuing their credit cards have agreed to a settlement valued at $7.25 billion and will allow stores to encourage customers to use cheaper forms of payment, according to settlement papers filed on Friday in a lawsuit in Brooklyn federal court. The settlement, if approved by a judge, would resolve dozens of lawsuits filed by retailers in 2005, accusing the companies of fixing fees for processing credit and debit card payments and prohibiting stores from steering their customers to cheaper forms of payment. It is believed to be the largest antitrust settlement in U.S. history.

Visa said the proposed settlement payments, including costs incurred by MasterCard Inc. and card- issuing banks, would be about $6.6 billion. That amount would include about $525 million for individual claims.

«We believe settling this case is in the best interests of all parties,» Visa Chief Executive Officer Joseph W. Saunders said in a statement. The agreement, which provides for a temporary reduction in rates for merchants and allows them to impose surcharges on customer purchases, follows a seven-year legal battle with U.S. retailers that accused the two largest payment networks of conspiring with banks to fix swipe fees, or interchange. «It’s been an extraordinarily intense and difficult settlement to reach,» K. Craig Wildfang, a lead lawyer for the plaintiffs, said in a phone interview. «Everything about this case is big and complicated.» «But here we are and it’s a truly historic accomplishment,» he said.

Consumers could feel effects of the settlement, too. Part of the agreement includes changes to Visa and MasterCard rules that will allow retailers to implement a surcharge for customers who pay with a credit card, which are more expensive transactions for merchants to process since they aren’t subject to the caps on interchange fees imposed by the Durbin Amendmen. The Durbin Amendment was enacted in 2010 as part of a broad financial markets overhaul and lowered the swipe fee charged to merchants when they accept debit cards from customers.

It’s been contentious because banks have lost revenue from not being able to charge as much for those transactions. Retailers say the fee they’re charged now is still too high. «Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases,» said MasterCard general counsel Noah Hanft in a statement.

Because the proposed settlement does not introduce competition and transparency into the broken credit card swipe fee market, the NACS Board of Directors, comprised of more than two dozen merchants, unanimously rejected the proposed settlement agreement.

«Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces,» said NACS Chairman Tom Robinson, president of Santa Clara, Calif. -based Robinson Oil Corp. «This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market including for emerging payment methods, particularly mobile payments. Consumers and merchants ultimately will pay more as a result of this agreement — without any relief in sight.»

The proposed settlement is the largest antitrust settlement in U.S. history, but it only amounts to less than two months’ worth of swipe fees, based on the estimated $50 billion in swipe fees collected by the credit card companies on an annual basis. There are no fundamental market changes that would constrain Visa and MasterCard from continuing to raise rates to a point where the net effect is to make merchants pay for their own settlement — and then some.

In a negotiated settlement to resolve the seven-year-old case, Visa agreed to pay $4.03 billion to settle the class-action lawsuit while MasterCard and banks that issue cards and were also part of the suit will pay $2.02 billion, according to documents filed in federal court in New York. The two will also have to cut their so-called «swipe» fees for eight months that could give the merchants another $1.2 billion in relief. They will have to allow merchants to impose a surcharge on credit card transactions, subject to a cap.

The deal includes a little more than $6 billion in cash for damages, of which Visa will pay $4.4 billion and MasterCard will pay $790 million. As part of the settlement, credit card companies have agreed to reduce for eight months so-called swipe fees, that businesses pay credit card companies for card transactions they process.

Associated Press