July 18, 2012, 2:24 PM

Visa and MasterCard agree to settle an antitrust suit on swipe fees

The terms mean retailers can charge credit card users a fee for using them.

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Payment card networks Visa Inc. and MasterCard Inc., along with a number of major credit card issuing banks such as Bank of America, Citibank and JPMorgan Chase, have agreed to settle a lawsuit originally filed in 2005 by retailers and retailer association groups that alleged the companies violated antitrust laws. At issue were the interchange, or swipe, fees credit-card issuing banks charge retailers for each credit card transaction.

When a consumer pays with a credit card, credit card issuers charge the merchant an average of 2% to 3% of the value of that transaction, according to the National Retail Federation, a retail industry trade group that was not party to the suit. It estimates that merchants pay about $30 billion in credit card swipe fees annually. The settlement, valued at $7.25 billion according to a statement issued by Robins, Kaplan, Miller & Ciresi LLP, the attorneys representing the retailer plaintiffs, includes a $6.05 billion cash payment and a temporary, eight-month reduction in interchange fees charged merchants participating in the suit, valued at $1.2 billion.

It is unclear whether the settlement will help web retailers negotiate for lower interchange fees, as credit-card issuers consider online, card-not-present transactions riskier than store-based transactions and charge online retailers higher interchange rates accordingly.

The settlement terms also change some of the rules Visa and MasterCard have required merchants to follow, namely one that prohibited merchants from charging customers a fee to pay with Visa or MasterCard. Under the settlement, stores will be able to charge consumers more if they pay with credit cards, although it is unclear if they actually will do so. Laws in 10 states already prohibit retailers from imposing fees for credit card use and the settlement does not change that. MasterCard, in a statement, said it anticipates that retailers will not impose checkout fees, “particularly because the value merchants derive from card acceptance far exceeds their costs.”

The settlement terms also say Visa and MasterCard will have to let merchants negotiate interchange fees collectively.

“The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers,” says K. Craig Wildfang, co-lead counsel for the plaintiffs in the case, adding that the terms of the settlement should help reduce merchant costs in the long run.

Mallory Duncan, senior vice president and general counsel at the National Retail Federation, says only time will tell if the settlement terms actually drive long-term changes in the payment industry. “The money is significant but money is only temporary,” she says. “What we need are changes in the rules that bring about transparency and competition that would be here for years to come. The test will be whether the injunctive relief is meaningful. Unless it is, the card market will stay broken.”

The suit represented approximately 7 million U.S. merchants, including grocer Kroger Inc. and drugstore chain Rite Aid Corp., and retail trade groups, including the National Association of Convenience Stores and the National Grocers Association. The National Association of Convenience Stores has rejected the proposed settlement, saying terms do not introduce competition and transparency into the swipe fee system.  It is unclear if the group’s rejection will affect approval of the settlement. MasterCard says it expects to start making the negotiated changes in late 2012 or early 2013 after the court grants preliminary approval of the settlement. The suit was filed in U.S. District Court in the Eastern District of New York.

MasterCard, in a statement, said it decided to settle the suit “based on our belief that MasterCard and our stakeholders are best served by an amicable resolution,” noting that it had strong defenses to all claims but that settling let it avoid years of litigation. Visa did not respond to a request for comment.  

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