Ed's Blog

Retailers appeal swipe fee settlement with Visa/Mastercard

By Ed Mierzwinski
Consumer Program Director

Yesterday, the National Retail Federation filed an appeal of last month's announced settlement order in an antitrust case involving price-fixing by Visa and Mastercard. In September, attorneys for U.S. PIRG and a senior official of Consumer Reports/Consumers Union had joined lawyers for NRF and numerous other retail associations in opposition to the settlement at a fairness hearing before the court.  Unfortunately, the judge ruled against us.

U.S. PIRG backs the merchants because non-negotiable swipe, or interchange, fees force all consumers, including cash customers, to pay more at the store and more at the pump because most merchants embed the fees in their prices. Our opposition to this settlement is generally summarized here.

Although the settlement order nominally grants merchants the right to surcharge for credit, which previously had been nearly impossible under Visa/Mastercard rules and under some state laws, and provides for a modest one-time payment to members of the merchant class, it allows Visa and Mastercard to continue to raise fees with no limit and also will virtually prevent any future lawsuits over payment systems pricing, even in new, as yet unenvisioned, payment schemes.

The fight over swipe fees paid by merchants has been long and complex and this appeal shows that it is not over. The merchants did win a large cash settlement in the mid-2000s in a case that focused on unfair  "honor all cards" rules but that settlement did not end all unfair practices. Merchant studies have documented that swipe fees continue to rise, despite technological advances. Federal Reserve economists (not to be confused with Federal Reserve lawyers or policymakers) have also documented that swipe fees are regressive. The Fed economists found that swipe fees transfer benefits to affluent rewards card customers from lower-income cash customers.

During the 2010 battle for Wall Street reform, merchants appeared to win a minor victory as an amendment by Senator Dick Durbin (IL) succeeded in limiting the swipe fees imposed by big banks on debit cards only, but the Federal Reserve has fiercely resisted full implementation of the Durbin amendment.

Among the many burdensome provisions of Visa/Mastercard contracts has been the difficulty merchants face in offering (legal everywhere) discounts for cash or surcharging for credit where it is not banned by state law. The Durbin amendment helped provide some clarity, but, under the recent settlement, while surcharging is a ballyhooed benefit to merchants, it still would not be easy. First, the settlement only allows surcharging where it is legal. In the 1980s-1990s, attorneys for Visa and Mastercard had convinced ten states (with 40% of the population) to ban surcharging.  But, historically, the contracts had made it virtually impossible to surcharge anywhere at all while the threat of massive monetary penalties for illegal surcharging had largely forestalled legal discounting for cash (the banks claimed the discounts were actually illegal surcharges).

Two recent developments may slightly ameliorate merchant concerns:

  • In October, U.S. District Judge Jed Rakoff struck down New York's anti-surcharge law, which had subjected violators to criminal penalties. Judge Rakoff said that in establishing speech rules allowing discounts but prohibiting surcharges, the law made a "virtually incomprehensible distinction between what a vendor can and cannot tell its customers" in violation of the First Amendment.
  • While the settlement order conditions surcharging rights not only on whether they are legal in a state, it also includes conditions requiring merchants to treat all competing cards the same way. This had been impossible, due to American Express rules, until a separate December decision that may assist merchants desiring to surcharge. In that case, that third card network, American Express, dropped its own restrictions on surcharging in its own court settlement  (ABC.com explains).

As we have previously argued, I doubt many big merchants will surcharge or discount, since they do not want to inconvenience their customers. Yet surcharging or discounting will likely be experimented with by smaller merchants with simpler product lines-- antique stores, car dealers, etc. This may aid in price discovery by consumers and help them to choose lower cost payment mechanisms, or even encourage them to haggle for even better deals.

Our bigger concern with the Visa/Mastercard settlement is that it contains sweeping restrictions on future lawsuits over anti-competitive practices in payment systems. It virtually immunizes Visa and Mastercard from future complaints. One warning sign of illegal practices is that prices continue to go up even when technology lowers costs. In the U.S., unlike the rest of the world, swipe fees have continued to increase even as new, better payment technologies have rolled out.

Finally, in a statement attacking the National Retail Federation's lawsuit appeal, American Bankers Association card czar Ken Clayton claimed that interchange pays for anti-fraud mechanisms and solely blamed Target, a merchant, for its recent breach.

“It doesn't surprise us, on the heels of a big-box retailer breach that put 40 million consumer accounts at risk, that the retail lobby once again puts its pocketbook above the interests of consumers.  Interchange, among other things, supports anti-breach efforts"

Certainly, Target faces much, but not all, of the responsibity for its breach.  But remember, among those "other things," the vast bulk of interchange goes to either bank profits or cardholder rewards-- just a teeny percentage goes to fraud prevention. As for the claim that fraud is all the merchant's fault, remember that the bank networks, as an oligopoly, have continued to use obsolete magnetic stripe technology forty years after it was first rolled out. Why? Because they can. That's what oligopolists do. They raise prices and resist technological advances as long as they can.

U.S. PIRG will likely continue our opposition to this settlement that serves the card network oligopolies at the expense of consumers, merchants and markets. It perpetuates unfair practices that force us all to pay more at the store and more at the pump.


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