An Historical Primer to the Largest Anti-Trust Settlement in History and the Changes That Will Affect Credit Card Companies

Scott E. Blakeley, Esq.
October 19th, 2012

In 2011, VISA and MasterCard accounted for more than 80% of United States credit and debit purchases. Despite the frequency with which customers use credit cards as a method of payment, certain policies implemented by credit card companies have made vendors reluctant to accept this form of payment. Traditionally, credit card companies have prohibited vendors from surcharging customers who use their cards. This places the burden on vendors to absorb interchange or “swipe fees.” Interchange fees, which are between 1% and 3% of the overall purchase, are incurred every time a vendor processes a credit card transaction, which amounts annually to roughly $40 billion to VISA to MasterCard.

For the past 15 years, vendors have initiated actions against credit card companies in an attempt to modify and eliminate some of their anti-competitive policies. In 2003, VISA and MasterCard paid a combined $3 billion to settle a lawsuit 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 the lawsuit against VISA, MasterCard and the major banks issuing their cards (includes JP Morgan Chase Co. and Bank of America), which before it takes effect, must be preliminarily approved by the Court. The preliminary approval should take place in the Fall of 2012 or early 2013. Since 2005, more than 50 lawsuits have been filed by vendors, including Kroger, PayLess, Safeway, and numerous trade associations, against these credit card giants. These suits, which have been consolidated in the U.S. District Court in Brooklyn, argue that these credit card companies partake in anticompetitive behavior by conspiring over interchange fees. The merchants contend that card giants 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 over seven years of litigation, the vendors, VISA, MasterCard, and the issuing banks have agreed to the largest antitrust settlement in United States history. The credit card companies have agreed to pay $5.2 billion to vendors in reparations. Additionally, they have agreed to reduce interchange fees, collected by the banks as revenue, for 8 months. This ten point basis reduction, which is set to begin in the Fall of 2012 or early 2013, 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 these credit card companies’ policies. For the first time, vendors will be allowed to pass along credit-card charges to customers through surcharges. Additionally, the settlement calls for the companies to negotiate with merchant-organized buying groups giving vendors more leverage at the bargaining table.

However, not all class members support the proposed settlement agreement. Wal-mart, Target, and the Home Depot, along with some retail groups are leading the way in encouraging other class members to reject the proposed settlement agreement claiming it still allows the duopoly of Visa/MasterCard limited legal liability and will prevent future litigation from reaching them. Without enough support, the agreement could fail and the attorneys will have to return to the drawing board in an attempt to please the major players affected by the litigation.

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