A major settlement proposed in July is expected to be submitted to the U.S. District Court in Brooklyn later this week. The $7.2 billion class-action settlement between Visa, MasterCard and U.S. retailers was previously reached following seven years of litigation when retailers claimed card issuers and banks conspired to fix interchange fees charged to merchants that processed credit cards, resulting in millions of dollars in lost profits.
Interchange fees, or swipe fees, are what merchants pay Visa, MasterCard, other card issuers or banks to swipe a credit or debit card. U.S. merchants typically pay about 2 percent of a credit card transaction, which totaled about $20.5 billion in 2010. Merchants have argued that even though accepting credit cards increases their overall profits, interchange fees are too high. Banks, however, persist the fees are vital to cover their business costs, including fraud prevention and recovery. Banks argue that reducing interchange fees will result in increased fees charged to credit card customers, but retailers say their high fees force them to raise prices for merchandise and services to consumers.
Debit card interchange fees were regulated in 2010 when the Durbin Amendment, an addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act, was passed. Debit Card issuers can no longer charge merchants a 2 percent fee to swipe a card, but instead 21 cents plus .05 percent of the transaction. The intent of the law was to lower costs to merchants, which would then pass along their savings to consumers. Instead, however, banks have responded by increasing checking account fees in order to recoup their losses. Consumers have all but said goodbye to free checking accounts and rewards checking accounts offered by major banks.
The class-action settlement now going before the court is in response to merchants’ claims that banks and issuers have fixed interchange fees rather than opening them to a competitive market. In the suit, merchants asked fees be reduced from around 2 percent to just .5 percent. About 5 million retailers participated in the anti-trust law suit. The defendants’ settlement offer gives merchants the opportunity to charge credit card customers higher prices, a practice previously prohibited by merchant contracts.
Since the settlement was announced in July, however, many groups of retailers and trade associations have moved to block it. Wal-Mart, although not party to the original class-action suit, claimed the settlement does not stop card issuers from continuing to raise interchange fees in the future, but would instead prevent merchants from taking future legal action.
Ten of 19 plaintiffs in the lawsuit, in fact, announced they will ask U.S District Judge John Gleeson to reject the settlement. Like Wal-Mart, the retailers and trade groups against the settlement say it will not only allow swipe fees to continue to rise, which will increase costs for retailers as well as consumers, but will prevent legal challenges should future price-fixing occur.
“There is strong concern among our member companies that the proposed settlement will not achieve the litigation’s most critical goal — to fundamentally change a broken marketplace in which swipe fees are set,” Dawn Sweeney, president and CEO for the National Restaurant Association, one of the plaintiffs opposing the settlement, told the Associated Press. ‘‘We don’t expect any settlement to address every flaw of the current system, but we cannot allow it to lock in the worst elements.’’
Other plaintiffs in the case who hope to block the settlement include the National Association of Convenience Stores, National Grocers Association and National Community Pharmacists Association. In addition to Wal-Mart, groups against the settlement that were not party to the lawsuit, but would still be bound by its terms, include Target Corp., Starbucks Corp., Lowe’s Cos and the National Retail Federation—the largest retail trade group in the U.S.
Still other plaintiffs support the settlements terms, including Kroger Co—the nation’s largest grocery chain—and its No. 2 competitor, Safeway Inc., which have both stated the settlement will finally allow them to inform customers how swipe fees affect their total purchase costs. They claim increased customer awareness will allow consumers to make informed decisions concerning their payment methods, such as using cash as a less-expensive option.
“We think it will begin to produce real competition in the payments business and potentially lower costs for all consumers,” Melissa Plaisance, Safeway’s senior vice-president of finance, told Reuters.
Once the settlement is submitted for court approval Oct. 19, objecting merchants will have 30 days to submit arguments requesting the court reject its terms.
