$7B+ Interchange Settlement: And Industry Reacts

By Matt Pillar, chief editor

As you well know by now, the charges filed back in 2005 by a class of retailers claiming that Visa, MasterCard and some large banks were colluding to manipulate interchange fees has resulted in a $6.6 billion cash settlement offer, the card brands’ attempt to cut a fall trial off at the pass. The offer includes an additional $1.2 billion temporary (eight-month) reprieve of 10 basis points on interchange fees, and gives retailers the option to impose their own surcharge for credit and debit usage. If approved and executed, the deal would be the largest private antitrust settlement in history.

So, why are retailers rejecting it in droves?

The settlement doesn’t hold the card brands accountable for anything more than offering a payout, a brief break, and a “sure, go ahead and levy a surcharge on card usage, if you dare” attitude. There’s no transparency into how, when and why fees are set. No flexibility in the “take it or leave it” attitude about merchant card acceptance. And, continued ability to manipulate rates and, therefore, manipulate the entire payments landscape.

Not so surprising, then, that Target, Wal-Mart, NACS (the national association of convenience stores), the NGA (National Grocer’s Association) and the NRF (National Retail Federation) have all said, “thanks, but no thanks.” As you might expect, the devil is in the details. Reading the responses from retail advocates is telling of those details.

“This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market, including for emerging payment methods, particularly mobile payments,” said NACS Chairman Tom Robinson.

“The proposed settlement would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees, which already cost consumers tens of billions of dollars each year,” said a statement from Walmart.

“The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards in order to allow VISA and MasterCard to continue charging unfair fees. We will continue to explore our options while working toward a solution that represents true reform," read a statement from Target, which kicked off the opposition almost immediately on the heels of the settlement announcement.

For perspective, those tens of billions of dollars Walmart cites add up to $50 billion paid by merchants and consumers, up from $16 billion in 2001. The NRF reports these fees cost the average household more than $400 per year, so Walmart has a pretty good point. At Litle, Payment Evangelist Tom Pouliot makes a few good points of his own. I was particularly interested in what he had to say about the settlement and its potential impact on future payment technology adoption.

“If merchants do decide to surcharge credit cards, does this mean all new payment types that enter the market will also be surcharged?” Pouliot asks. “Seemingly, in order for a new payment type to succeed it needs to match the lowest payment scheme in price. Further, merchants will likely impose a surcharge to consumers if they use this payment type to help overcome the cost of adoption — likely driving down consumer usage even further.” Pouliot contends that in effect, the card brands will now have the tools to maintain their ubiquity by inhibiting acceptance of new payment types. “Basic economics tell you that in this environment, any new payment type will face minimized adoption.  Last time I checked wasn’t competition a good thing?”

You can red plenty more of Pouliot’s analysis here. Meanwhile, weigh in below with your rants, raves, and comments on the interchange settlement.