Swipe Fee Settlement Bad, Retailers Say

Several retail trade groups and merchant advocates intend to fight a pending antitrust settlement that has Visa and MasterCard paying merchants some $7.2 billion in cash and discounts. The groups claim that the court-approved agreement would perpetuate unfair trade practices, cripple innovation, and continue to place unfair rules on retailers.

Last week the National Retail Federation (NRF), the Retail Industry Leaders Association (RILA), and seven other large retail-related groups sent an open letter to leading members of congress, complaining that the litigation pending in the U.S. District Court for the Eastern District of New York — case No. 05-1720 — “entrenches the Visa/MasterCard duopoly.”

Calling on Congress to pay attention to a state court settlement may have been the group’s way of escalating the issue and, perhaps, garnering attention from lawmakers and Americans more generally.

“The proposed settlement, which was negotiated by Visa, MasterCard and lawyers purporting to represent the merchant community, is one-sided and preserves the very anticompetitive actions that were the genesis of the lawsuits,” the groups said in the letter.

“Given the important oversight role of Congress and your continued interest in this important issue, we write today to urge you to reject the false claims from the card networks and their representatives,” the groups said. “The proposed settlement does nothing to resolve the failures in the electronic payment market and continued Congressional involvement in these issues is imperative. We look forward to keeping you fully informed as the legal process moves forward and the chorus of objections grows.”

Hidden Fees Are at the Issue’s Heart

“The underlying issue is that the [payment card] networks use their overwhelming market power to impose unfair rules and outrageous fees on retailers who accept plastic,” said Brian Dodge, a RILA spokesman. “Visa and MasterCard centrally set fees that are ultimately paid by merchants and collected by issuing banks. With two fee schedules imposed by two companies that control 70 percent of the marker there is no meaningful competition.”

Interchange or swipe fees can be nearly invisible to some merchants that simply must pay whatever Visa and MasterCard dictate without recourse.

According to the NRF, “combined credit and debit card swipe fees tripled over the past decade to about $50 billion a year – driving up prices an estimated $427 for the average household – before [the] debit swipe [fee] was capped by the Federal Reserve last year. Credit card swipe averages about 2 percent of each transaction, and amounts to about $30 billion a year, or $250 per household. Swipe fees are the second or third-highest expense for most retailers, behind employee salaries and health care benefits.”

$7.2 Billion Payment is Not the Point

The long-standing litigation was supposed to help retailers gain better fee visibility and acquire some means of negotiating both fees and rules with Visa and MasterCard.

Instead, the NRF, RILA, and other retail advocate groups believe that the pending settlement exchanges a penitence for maintaining the status quo.

The settlement pays merchants just $6 billion in damages, and offers a brief swipe fee discount worth an estimated $1.2 billion. Merchants who had used either network as long ago as 2004 could be eligible for a portion of the settlement, but given that some 8 million American businesses could qualify and that large merchants would receive the lion’s share of the payment, small and medium sized retailers could get just pennies, according to the NRF.

The settlement would also allow merchants to charge shoppers a payment card fee to compensate for the network’s credit card or debit card swipe fees.

Three Concerns for Retailers

There are, perhaps, three issues related to the settlement that retailers, particularly small or mid-sized merchants, should consider.

First, the proposed settlement, which was announced in July, does not seem to place any restriction on the Visa and MasterCard duopoly, nor does it prevent the two companies from continuing to impose arbitrary fees on merchants, according to the NRF and RILA. What’s more, the settlement also makes Visa and MasterCard immune to future litigation.

These fees have a direct impact on merchants, and having an ability to pass Visa’s or MasterCard’s fees directly to customers is an unsatisfactory solution.

Second, the proposed settlement may give the Visa and MasterCard networks additional power to squish innovative payment alternatives.

As Dodge, the RILA spokesman, pointed out, “the settlement expands the definition of ‘card networks’ broadly enough to include emerging mobile payments. The networks desperately want to smother possible competing payments technology in the crib and this proposed settlement could do that.”

Mobile phone and web technology could soon produce payment solutions that are better than current payment cards, giving Visa or MasterCard any additional power to fight these innovations will not be good for merchants.

Third, leaving the Visa and MasterCard networks intact does nothing to stop them from imposing unfair or even dangerous rules on merchants.

“Those rules are many. But at the core they prevent merchants from exerting any pressure on the networks to negotiate or compete,” Dodge said.

One possible example of a poor rule could be the Payment Card Industry (PCI) Digital Security Standard (DSS). This PCI standard makes merchants solely responsible for ensuring that payment-card account numbers are safe — rather than addressing the fact that payment cards are not generally secure. If Visa and MasterCard simply made the card itself secure, millions of merchants could focus on business and hundreds of millions of consumers would be safer.

Richard J. Sullivan of the Federal Reserve Bank of Kansas City speaking at the 2010 Harvard University Workshop on the Economics of Information Security conference, pointed out that the PCI DSS standard’s “slow adoption and disputes” where evidence that it was a one-sided approach undermines ultimate payment card security.

The proposed settlement does nothing, according to the retail groups, to give merchants a role in defining these sorts of rules.

Visa and MasterCard Believe the Settlement is Fair

“We believe settling this case is in the best interests of all parties,” said Joseph W. Saunders, chairman and chief executive officer of Visa Inc. in a statement released when the proposed settlement was initially announced in July “We are comfortable with the terms, which we do not anticipate will impact our current [profit] guidance. Visa is well positioned to help drive the migration to electronic payments in the U.S. and globally.”

“This agreement should remove the distraction of litigation for all parties,” said Joshua R. Floum, general counsel of Visa Inc. “We will go forward with a focus on helping retailers grow their businesses and providing them with efficient and valuable payment options.”

Summing Up

Legal settlements can be complex and multifaceted. The payment card networks and a U.S. District Count believe that this settlement is fair compensation for several years of interchange fee price fixing. Several merchant associations representing roughly eight million businesses believe that the proposed settlement does not do enough to product merchants from what could be a duopoly.

Target, a leading multi-channel merchants, perhaps summed up the retailer’s position best in its official comment about the settlement.

“The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards in order to allow Visa and MasterCard to continue charging unfair fees. We will continue to explore our options while working toward a solution that represents true reform.”