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Visa, MasterCard Agree to $7.25B Antitrust Settlement

  • By Andrew Deichler
  • Published: 7/16/2012
Visa, MasterCard and 13 banks agreed to the largest antitrust settlement in U.S. history late last week in the U.S. District Court for the Eastern District of New York. The effort could put to rest a seven-year antitrust lawsuit with retailers related to interchange fees.

If approved, the settlement would award more than 7 million merchants $7.25 billion for years of being overcharged on interchange fees, according to a statement by law firm Robbins Geller Rudman & Dowd LLP, which represented the plaintiffs. Additionally, the settlement would require Visa and MasterCard to modify merchant rules and allows retailers to encourage cheaper forms of payment.

The Electronic Payments Coalition posted an in-depth explanation of the settlement. Visa and MasterCard, along with JPMorgan Chase, Bank of America, Citibank, Wells Fargo, Capital One and other top banks, have agreed to establish a fund of $6.05 billion to pay retailers. The defendants can reduce the payment up to 25 percent, based on sales volume for merchants who opt-out. If 25 percent of the plaintiffs opt out, the defendants have the option to terminate the settlement.

Merchants also would receive a deferred cash payment representing an interchange fee reduction of 10 bps over an eight-month period while the new rules are being integrated. The money would be deposited into an escrow account, to be paid to eligible merchants (an estimated value of $1.2 billion). The merchant surcharge rule on credit and charge cards would also be eliminated in most states.

The settlement also allows merchants to charge checkout fees to consumers, but establishes rules around them. Maximum allowable checkout fees are set at three different levels:

•    the brand/network level (Merchant Discount Rate)
•    the product level (MDR minus rate adjustment), and
•    the maximum checkout fee cap (formula based).

Merchants must also provide “clear disclosure” on any checkout fees, to ensure that consumers are not being charged more than the merchant is paying to accept cards. Checkout fees must also be applied to all credit cards if the merchant is surcharging Visa and MasterCard. Merchants must register with the network and their acquirer 30 days prior to surcharging.

Additional rules:

•    The court will also certify an “injunctive class” establishing “go forward rules,” in an effort to prevent further challenges from merchants to point-of-sale rules.
•    “Properly formed” merchant buying groups—those that adhere to DOJ guidelines—can meet with networks to enter into commercially reasonable deals at their discretion.

Bonny E. Sweeney, senior antitrust partner at Robbins Geller Rudman & Dowd and its principal litigator in the case, called the settlement historic. “In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers,” she said.

The order granting final approval by the U.S. district court is expected in mid-to-late 2013.

NACS pushback

Despite the settlement, one of the staunchest supporters of the lawsuit, the National Association of Convenience Stores (NACS), rejected the proposal. NACS said in a statement that the settlement does not introduce competition and transparency into the interchange fee market, and allows Visa and MasterCard to “shield” the fees from market forces.

NACS Chairman Tom Robinson, president of Robinson Oil Corp., said that the proposed settlement would allow credit 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.”

Though the proposed settlement is massive, NACS said it actually amounts to less than two months worth of interchange fees. Additionally, there are “no fundamental market changes” that would constrain the card companies from continuing to raise rates where merchants would essentially be paying for their own settlement and more, the association added.

NACS acknowledged that the settlement does allow retailers to show consumers some of the costs of accepting credit cards, “but only under very limited circumstances with strict oversight by Visa and MasterCard.” NACS sees these circumstances as making the settlement “unworkable for virtually all merchants.”

According to NACS, the settlement threatens the future of the payments landscape. “Visa and MasterCard will be able to use their power in the market to prevent new entrants, like PayPal, from expanding their share of the market,” the association said. “And the proposed settlement allows Visa and MasterCard to continue to require that merchants accept all of their credit cards no matter how expensive they make those cards.”

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