June 28, 2005, 12:00 AM

Merchants sue MasterCard, Visa over ‘exorbitant’ interchange rates

30minphotos.com leads five merchants in filing a class action suit charging MasterCard International, Visa International and their merchant banks with illegally fixing interchange rates—the fees merchants must pay to accept credit cards.

Five merchants have filed a class action suit charging MasterCard International, Visa International and their merchant banks with illegally fixing interchange rates-the fees merchants must pay to accept credit cards.

Lead plaintiff in the lawsuit-filed last week in U.S. District Court in Connecticut-is 30minphotos.com, a national online boutique photo service. The lawsuit asks for an injunction to prevent the two card associations and their members from collectively setting interchange fees and asks for yet-to-be determined damages.

The suit contends that the two card associations conspire to set interchange rates, causing merchants to pay supra-competitive and exorbitant fees for card acceptance. Merchant acquirers typically pass increases in interchange on to the merchant in the form of higher discount rates. As a result, the interchange fee acts as a minimum merchant discount fee, according to the lawsuit.

In the suit, the merchants also argue that because Visa and MasterCard have combined market share of 73% of the general-purpose card market, they can raise interchange fees without losing merchants.

The merchants also contend that increases in interchange are not based on increased costs. “Interchange fees are just a way that credit card companies squeeze merchants to enhance their revenue stream,” says Mitch Goldstone, president and CEO of 30 Minute Photos Etc. “There’s absolutely no need for these fees to be so high.”

Online retailers especially have little recourse but to accept the fees because 100% of their businesses require credit card acceptance, Goldstone says.

In a statement, Noah J. Hanft, MasterCard general counsel, said that the lawsuit is “misguided, and MasterCard looks forward to defending interchange, which is necessary for the operation of a four-party system and has been found lawful, efficient and pro-competitive.”

Visa would not discuss specifics of the suit. But in a statement, Paul Cohen, vice president of Visa USA, said that the association plans to “vigorously defend interchange-a business practice that has been both successful in the marketplace and found to be legal in federal court.”

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