A Historical Primer to the Largest Anti-Trust Settlement in History

Ronald A. Clifford, Esq.
September 13th, 2012

As most vendors are aware, credit card companies impose a fee on vendors for most credit card transactions between the vendor and its customer, commonly referred to as the interchange or swipe fee.

In 2011, VISA and MasterCard accounted for more than 80% of United States credit and debit purchases.  Traditionally, credit card companies have prohibited vendors from passing the interchange fee to their customers.  This places the burden on vendors to absorb interchange fees.  Interchange fees, which usually equal between 1% and 3% of the transaction, amount annually to roughly $40 billion for VISA to MasterCard transactions alone.

For the past fifteen years, vendors have initiated actions against credit card companies in an attempt to modify and eliminate what they believe to be anti-competitive policies.  In 2003, VISA and MasterCard paid a combined $3 billion to settle lawsuits by stores over their “honor all cards policies,” which forced retailers who accepted credit card payments to accept debit card payments from the same company.  More recently, in 2010, Congress passed the Durbin amendment to the Dodd-Frank financial overhaul law, which was aimed at ensuring that interchange fees were reasonable and proportional to the costs incurred.  However, although this amendment cut interchange fees on debit card transactions in half, it left credit card interchange fees untouched.

The greatest victory for vendors may have come in the form of a recently proposed settlement agreement of a class-action lawsuit against VISA, MasterCard and several major banks issuing their cards (including JP Morgan Chase Co. and Bank of America).  Preliminary approval of the settlement by the District Court should take place between fall of 2012 and early 2013.  Since 2005, more than fifty lawsuits have been filed by vendors and numerous trade associations against VISA and MasterCard.  These suits, which have been consolidated in the U.S. District Court in Brooklyn, New York, argue that in the past VISA and MasterCard partook in anticompetitive behavior by conspiring over interchange fees.  Specifically, it is argued that VISA and MasterCard engage in price-fixing to maintain high interchange fees as well as unfairly ban vendors from compelling customers to use cheaper methods of payment, such as cash or check.

After more than seven years of litigation, the vendors, VISA, MasterCard, and the issuing banks have agreed to the largest antitrust settlement in history.  The settlement is threefold.  First, VISA and MasterCard have agreed to pay $5.2 billion to vendors in reparations.  Second, they have agreed to reduce interchange fees for eight months by ten basis points.  This ten point basis reduction is valued at approximately $1.2 billion.  However, the most significant portion of the proposed settlement agreement stems not from the financial compensation of the plaintiffs, but from the agreed alterations to VISA’s and MasterCard’s policies regarding surcharging.  For the first time, vendors will be allowed to pass interchange fee to customers.

If the settlement agreement is preliminarily approved by the District Court, there is a 180 day opt in and opt out period where companies can choose to be part of the settlement class.  Sixty days into the opt in/out period, and within thirty days prior to surcharging, the vendor can begin surcharging its customers upon written notice of intent to surcharge being sent to the customer and the credit card company involved in the transaction.

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