Practical Ecommerce

Visa, MasterCard Settlement Not an Automatic Win for Merchants

Visa, MasterCard and 13 of the country’s biggest banks have agreed to pay $7.25 billion to retailers in a settlement from a lawsuit over price-fixing on credit card transaction fees. The settlement, on behalf of about 7 million retailers, could be the largest antitrust class-action settlement in U.S. history.

The settlement must still be approved by the Eastern District U.S. Court of New York. Also, not all plaintiffs are happy with the settlement. For example, the National Association of Convenience Stores opposes it.

The settlement would give merchants — ecommerce and brick-and-mortar — new rights to impose a surcharge on credit card transactions, subject to a cap and other limitations. The rules governing such surcharges would probably be implemented in early 2013.

Independent of the settlement, 10 states currently prohibit credit card surcharges. Merchants would not be able to surcharge in those states, which are New York, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.

Merchants also would be allowed to band together to try to negotiate better rates on the interchange fees.

Lastly, Visa and MasterCard would temporarily reduce the interchange fee for eight months for all merchants covered in the suit.

First Reaction

In my opinion, the three entities involved with the settlement — Visa, MasterCard, and the judicial system — do not fully understand credit card costs at the merchant level. Therefore, my first reaction was caution. I’m sure good will come out of the settlement. However, I don’t believe it will be automatically good for the average merchant.

I had a similar reaction when Congress passed the Durbin Amendment, which lowered debit card interchange rate last year. In general, I thought it was a big win for merchants but I knew it was not an automatic win for every merchant. There are many merchants who have yet to receive a penny in reduced debit card interchange rates. I also believe the Durbin Amendment fostered misleading sales tactics that hurt some merchants in their pricing negotiation. In fact, I’ve seen everything in the marketplace that I predicted in my June 2011 article “Durbin Amendment May Foster Deceptive Credit, Debit Processing Fees.”

Like the Durbin Amendment, I also believe this recent settlement will foster misleading sales tactics. It may indirectly lead to new fees and possibly merchant complacency.

Potential Benefits of the Settlement

  • Settlement payments. $7.25 billion paid to 7 million merchants in cash and temporary rate reduction.

  • Temporary rate reduction. Many merchants would receive a 0.10 percent rate reduction for eight months starting sometime next year. A 0.10 percent reduction is a $1.00 for every $1,000 in credit card processing.

  • Rate reduction through combined merchant negotiations. There should be benefits to many smaller merchants. However, I’m sure Visa and MasterCard still need to determine how they will control and implement this process. It could take months to do this both at the Visa and MasterCard level and at the processing level.

  • Merchant surcharging. The rules for surcharging would not be available until early 2013. I’m guessing the rules would include posted signage, notices, and other methods to ensure customers know and agree to be surcharged.

Potential Negatives of the Settlement

  • Temporary rate reduction. As with the Durbin Amendment, many merchants may never see the temporary 0.10 percent interchange rate reduction — depending on how it is implemented. Instead, their merchant account provider may reap the temporary profits.

  • Rate reduction through combined merchant negotiations. Be careful on this one. I predict that by next week there will be salespeople telling merchants that they can offer them far better rates because the merchant account provider they represent gets better rates than other providers under the new settlement. Also, I bet by this time next year there will be merchant account providers claiming they can offer the lowest rates in specific industries because of the settlement — whether they can or cannot. Merchants will simply need to do their due diligence going forward.

  • Merchant surcharging. It would not surprise me if airlines were the first to surcharge. They tend to surcharge for just about anything. However, it still needs to be determined if or how surcharging can take place for the average merchant. Will the large retailers surcharge? If so, surcharging may be more acceptable by customers at small merchant websites and locations.

    If surcharging does not become commonplace, it may be a doubled-edge sword for the merchants that do surcharge. It may not be good to be the first merchant on the block or on the web to surcharge. Before surcharging, merchants should understand what they are trying to accomplish. Are they just trying to recover processing costs, trying to drive customers to other forms of payment, or are they trying to drive customers away? Surcharging may have the possibility of doing all three.

  • Rates and fees. While the settlement addressed temporary interchange rate reductions, group negotiations, and surcharging, it did not address the transparency of how rates and fees are to be levied. For example, Visa introduced a new “Fixed Acquirer Network Fee (FANF)” in April. Because of that, an ecommerce merchant processing $200,000 per month in Visa transactions is paying $120.00 more per month for a fee that didn’t exist in March. I don’t believe there is anything in the settlement to stop the card companies from creating new fees or increasing old ones. Further, many merchants actually pay more for the FANF than Visa charges because the provider marks-up the fee to the merchant.

    The same is true with the Visa Acquirer Processing Fee — “APF.” Many merchants never received Visa’s debit card APF reduction earlier this year. In fact, as I explained in “Credit Card Providers Increasing Rates and Fees,” my May 2012 article, some providers actually increased APF at the same time they were getting a cost reduction from Visa.

    I believe most ecommerce merchants can expect more fees or increases in existing fees in the future either from the card companies or the providers.

Merchant Complacency

Should surcharging become commonplace for merchants and accepted by customers, merchants may become complacent and assume their surcharging is covering the cost of processing credit cards. Meanwhile, card companies and providers alike could continue to create new fees or increase existing ones. No matter how surcharging pans out, merchants need to monitor these card processing expenses to ensure they are not overpaying.

Next Month

Next month I will start a series to help merchants negotiate better rates and fees — as well as better terms and conditions. I had originally planned the article for this month because of the influx of proprietary gateways. However, the Visa and MasterCard lawsuit settlement gives new reasons for merchants to understand how to negotiate in this industry.


Phil Hinke
Phil Hinke
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Comment ( 1 )

  1. Carlos Rivera August 10, 2012 Reply

    I’m glad we have someone like you, Phil, watching our backs from the fee-happy credit card industry. You’re a fair-practice superhero in my eyes.

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