Archive for the ‘Credit Cards’ Category

American Express Follows Visa and MasterCard in Allowing a Surcharge on Credit Card Transactions

Thursday, February 20th, 2014

The U.S. District Court in Brooklyn, New York, made history last December by approving on a final basis, the largest anti-trust class action lawsuit ever filed.  That record breaking lawsuit was the culmination of several suits filed by a number of parties against Visa and MasterCard, which suits were eventually combined into a class action suit.  Among other things, the class action suit against Visa and MasterCard claimed an anti-trust violation of the two card companies, and several issuing banks, by their purported collective efforts to artificially set interchange fees.  When a merchant accepts a credit card as a form of payment for goods or services, that merchant is often charged a fee by the underlying credit card company, which fee is a percentage of the total amount charged.  This is called an interchange fee.  That interchange fee has historically been 1-3% of the transaction.

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$7.25 Billion Anti-trust Credit Card Fee Settlement Receives Preliminary Approval

Wednesday, November 21st, 2012

Despite the objections of more than half of the plaintiffs, merchants, and trade associations, New York federal Judge John Gleeson granted preliminary approval to the $7.25 billion class action settlement, first announced in July, between merchants and Visa, MasterCard and a large number of banks on Nov. 9, 2012.  Pending final approval, this deal would be the largest federal antitrust settlement in U.S.history. The proposed class alleged that the bank defendants fixed the prices of interchange fees paid by merchants when customers use Visa and MasterCard credit cards.

Terms of Settlement

The settlement arranges a $6.05 billion fund and allocates that Visa and MasterCard modify their rules. It provides for an eight-month reduction in interchange fees (worth $1.2 billion), which Visa and MasterCard have agreed to. Furthermore, Visa, MasterCard, and the banks will have to pay approximately $6 billion of the cash settlement amount. This settlement also allows merchants to put a surcharge on credit card purchases so long as the fee is capped and that a disclosure is provided for these extra charges.

Plaintiff Objections

Ten of the nineteen named plaintiffs filed objections to the preliminary approval on Nov. 2, stating that this settlement will not only impede the production of competition in this dysfunctional competition-lacking market, but will worsen the market for merchants as well. They argued that the restrictions in this settlement will hinder their limited ability to surcharge Visa and MasterCard transactions. The plaintiffs further disputed that the this settlement “…is a thinly disguised attempt by Visa and MasterCard and the bank defendants to improperly get immunity from merchant claims going forward, immediately and forever” and that “[it] improperly sacrifices the interests of generations of future merchants…”

IPOs

This case began in 2005, when class actions were brought by merchants against the defendants. The merchants asserted that the banks controlled the Visa and MasterCard’s board of directors along with the interchange fee amounts. Visa and MasterCard announced their initial public offerings (IPOs), redeeming and reclassifying the stock held by their banks and transferring new shares to the banks. The merchants then argued that the agreements preceding the IPOs were in violation of the federal antitrust laws, which eventually led to a settlement, while both plaintiffs’ and defendants’ motions for summary were pending.

This article is in re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation [All Cases], No. 05-MD-1720,E.D.N.Y. More information on individual plaintiffs, objecting named plaintiffs and the bank defendants can be found in case documents.

Appeals

NACS (National Association of Convenience Stores) and many other merchant groups are looking to appeal the Nov. 9 decision. The merchant community is concerned that the settlement fails to bring desperately needed transparency and competition to the current electronic payments market, and that the settlement continues to violate the antitrust laws and merchants’ rights to due process. The Merchant groups still have a shot to make their case, as only legal defects int he proposal were heard at the preliminary approval hearing; the overall fairness factors of the proposal will not be fully considered until a later date.

Alternatives for Merchants

In case this settlement does eventually receive Judge Gleeson’s final approval, alternatives such as Google Checkout exist, which offers to process online merchants’ card transactions for as little as 1.9% of sales over $100,000 per month. Microsoft is also working on its own innovation, Microsoft Wallet, to compete with Google. Another company, LevelUp, has developed its own system that allows them to forego interchange fees altogether, focusing costs on managing customer acquisition and loyalty programs that are tied to its payment system. All of these systems focus on pushing costs one way or another to get to the bottom line.

The Required Notice of Intent to Surcharge

Friday, September 14th, 2012

Upon preliminary approval of the class action lawsuit proposed settlement between vendors and VISA and MasterCard, vendors will obtain the right to surcharge their customers for interchange fees incurred as a result of a credit card transaction. However, vendors should be aware of timing and notice requirements regarding the same.

As a starting point, the right to surcharge will begin sixty days after preliminary approval of the proposed settlement by the District Court.  However, before the vendor begins taking advantage of the right to surcharge, certain notices must be provided to the vendor’s customer and VISA and/or MasterCard, and these notices must be given within certain time limits of the beginning of the surcharging.

The settlement agreement provides that a vendor who wishes to surcharge must, within thirty days prior to the surcharge to the customer, give advanced notice of intent to impose a surcharge to the relevant credit card company chosen for the transaction and to the customer.

The notice must provide clear disclosure to the vendor’s customers of the vendor’s surcharging practices, at the point of interaction or sale with the customer, in a manner that does not disparage the brand, network, issuing bank, or the payment card product being used.

Further, the information on the vendor’s surcharging practices at the point of interaction must include: (i) the amount of any surcharge that the vendor imposes, (ii) a statement that the surcharge is being imposed by the vendor, and (iii) a statement that the surcharge that the vendor imposes is not greater than the applicable Visa or MasterCard Credit Card Cost of Acceptance, which is in effect a calculated average interchange rate.

Lastly, the vendor should provide clear disclosure of the dollar amount of the surcharge on the transaction receipt provided by the vendor to the customer.

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

Thursday, 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.