No Surprise In NRF Appealing Swipe-Fee Settlement

By Jeffrey Green (@epaymentsguy)

In no big surprise, the National Retail Federation last week filed an appeal to U.S. District Judge John Gleeson’s December approval of a $5.7 billion class-action settlement with Visa and MasterCard, and several issuers, over credit card interchange fees. After all, 8,000 retailers, representing about a quarter of the networks’ volume, formerly rejected the proposal and opted out, and the federation earlier had deemed the settlement as being “deeply flawed.”

The question is, will the 2nd U.S. Circuit Court of Appeals overturn Gleeson’s ruling in the 8-year-old case? Early reaction to the settlement decision was mixed, with some retailers expressing pleasure, while others, led by the federation, were anything but satisfied.

Among the key aspects of the settlement upsetting the federation and others is that it prevents merchants from ever contesting the networks over similar issues. Some also believe the amount of the penalties is insufficient, given the cost merchants ultimately pay in interchange as part of the discount rate they pay their acquirers to handle their card transactions. Under the settlement, retailers are free to surcharge their credit card-paying customers to recoup their interchange-related costs.

The federation has not held back on its negative views of the settlement. “The settlement does nothing to reform the price-fixing payments system that has let credit card swipe fees skyrocket over the past decade and nothing to keep them from continuing to soar in the future,” Mallory Duncan, federation senior vice present and general counsel, said in a Jan. 2 press release announcing the appeal. “Instead of lowering fees, the card industry’s settlement proposes that merchants pass them along to consumers in the form of surcharges. That is absolutely the opposite of what retailers sought, and major retailers have soundly rejected surcharging.”

Moreover, Duncan said, “the only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class-action lawyers who stand to collect half a billion dollars in fees without fixing the problem and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process.”

Credit card interchange fees cost merchants and their customers an estimated $30 billion a year and have tripled over the past decade, according to the federation.

Gleeson has noted that times have changed since the lawsuit was first filed. Both Visa and MasterCard, for example, are now public companies that answer to investors, whereas before, as member associations, they were controlled by major banks on their boards.

In a sense, skeptics would say, that’s still the case, as some of the nation’s largest banks also are major investors in the networks. And when competing for business, the network that drives the most revenue often wins, and interchange is revenue for card issuers.

Still, not everyone believes the retailers have a chance at succeeding in their appeal. Thomas Brown, a partner in the antitrust practice group and co-chair of the practice at Paul Hastings, tells PYMNTS.com he considers the federation’s chances “a longshot.”

“Judge Gleeson’s decision is well-reasoned, and I doubt that the Second Circuit is going to overturn the decision,” he said.

And David Evans, chairman of Global Economics Group and a lecturer at the University of Chicago Law School, contends the “retailers have missed the big message in Gleeson’s ruling and in the advice he got from the court-appointed expert: The retailers don’t have a very good chance of getting a class certified or winning on the merits given the facts and antitrust law in this country.”

“Sounds like the merchants are tilting at windmills at this point,” he tells PYMNTS.com.

In any case, there’s no end in sight for litigation on the interchange front. Some merchants, including Target, have sued the networks in separate interchange litigation, while both Visa and MasterCard filed their own lawsuits seeking to counter the arguments of merchants opting out of the settlement.

For more of Jeff Green’s commentary and full-length reports, visit his full profile page here.