The Visa-MC Settlement: Who Gets What, and Who Really Won?

What's Next In Payments®
12:49 PM EDT July 15th, 2012

Huge payments news hit the wires as markets closed last Friday: Visa, MasterCard and their issuing partners had reached a settlement agreement with merchants, potentially resolving a legal battle that has been ongoing for seven years.

Lead counsel for the plaintiffs announced on July 13 the terms of a settlement that could eventually be worth as much as $7.75 billion. Some have called the decision a win for merchants, but not everyone is convinced.

To settle the suit, merchants will be compensated in three ways. First, Visa, MasterCard and their issuing partners will make a $6.05 billion cash payment to merchants to compensate them for previous interchange charges. Second, Visa and MasterCard will lower card acceptance fees by 10 basis points for a period of eight months, providing $1.2 billion in additional relief to merchants, the statement from Robins, Kaplan, Miller & Ciresi LLP explains — the only time period for which the networks have agreed to lower interchange fees.

The third part of the settlement may have the largest impact on consumers’ day-to-day shopping experiences: merchants will now be permitted to charge higher prices on transactions paid for with a credit card, a practice that had been prohibited by the networks’ earlier terms. But many, including MasterCard’s own Jim Issokson, doubt merchants will use this new power: “We don’t anticipate that merchants will impose a checkout fee,” he writes.

In addition, another $525 million will be set aside to resolve claims filed by merchants suing individually, a list that includes Kroger from 2005, Safeway, and Rite Aid, Reuters reports. 

While many of the settlement’s major features have been made clear, a deal is far from being finalized. For one, the New York district judge overseeing the case has yet to approve the settlement’s terms. Additionally, members of the plaintiff class will also be given an opportunity to opt out of the settlement currently on the table. 

But should the settlement be finalized in its current state, perhaps its most interesting legal feature is that it prevents other merchants who don’t opt out of the class from, in the future, filing additional lawsuits. That’s a result of  what Reuters refers to as “extensive litigation releases.” Indeed, the agreement defines the settlement class to be “consisting of all persons, businesses, and other entities that as of the Settlement Preliminary Approval Date or in the future accept any Visa-Branded Cards and/or MasterCard-Branded Cards in the United States.”

Early reports claimed the result to be a win for the plaintiffs. “The settlement is a victory for retailers,” the Wall Street Journal’s Robin Sidel and Andrew Johnson wrote in plain language. But that assessment has since been disputed by prominent members of the retail community.

“It would not surprise me in the least if merchants object to the injunction as sham relief,” said Mallory Duncan, general counsel for the National Retail Federation, in exclusive comments to PYMNTS.com. While the settlement is “very long,” Duncan allows, in the end it “may not be particularly effective.” 

A widely available public statement issued by the NRF says the ultimate value of the settlement to merchants may depend on the injunction component of the agreement, whereby merchants may now charge higher prices for transactions completed with credit and debit cards. “Unless it is [effective],” the statement reads, “the card market will stay broken and neither merchants nor their customers will achieve a long-term benefit.” 

National Association of Convenience Stores President Tom Robinson was also skeptical of the benefit to merchants. “Not only does the proposed settlement fail to introduce competition and transparency, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces,” Robinson said on behalf of one of the case’s class plaintiffs.

Others doubt the settlement will improve cardholders’ wellbeing. “It’s hard to make the case that this helps consumers,” writes Forbes’ Daniel Fisher, noting that card transactions are already essentially free for them. “Cash customers will win, and people who took advantage of credit cards with rich rewards and cash-back programs will likely lose,” he says.

American Bankers Association President Frank Keating says the deal unfairly favors merchants, who in his view “will likely seize this opportunity to ask Congress for even more handouts.” Other organizations, including the Consumer Bankers Association and the Electronic Payments Coalition, say the settlement proves that the legal system, not Congress, should resolve what CBA CEO Richard Hunt referred to as “complex market disputes.”

The merchants had sued the card companies for antitrust violations, alleging that the fees they charge for card payments, known as interchange, had been illegally determined through collusion. Grocery store operator Kroger was among the first to sue in 2005, seeking triple damages for fees paid back to Jan. 1, 2004, along with an injunction against some of the network’s practices.

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