Daily Management Review

Visa, And Mastercard Resolve Credit Card Fees For $30 Billion


Visa, And Mastercard Resolve Credit Card Fees For $30 Billion
In order to reduce credit and debit card costs for retailers, Visa and Mastercard came to an estimated $30 billion settlement. Some of the savings were probably passed on to customers in the form of lower prices.
One of the biggest antitrust settlements in American history was unveiled on Tuesday, and if approved by the courts, it would settle the majority of the accusations made in a countrywide lawsuit that started in 2005.
Some detractors argue that it might not go far enough, claiming that fees would stay high and the savings would only last temporarily.
Businesses have long accused Visa and Mastercard of imposing excessive swipe fees, also known as interchange fees, on consumers using credit or debit cards and of preventing them from using less expensive payment methods by enforcing "anti-steering" regulations.
According to Bankrate.com, swipe fees consist of minor fixed costs in addition to a percentage of the total selling amounts. They typically range from 1.5% to 3.5% each transaction.
As part of the settlement, Visa and Mastercard agreed to guarantee an average rate that is seven basis points lower than the existing average for five years, and to lower swipe rates by at least four basis points, or 0.04 percentage points, for three years.
Additionally, the two card networks decided to do away with the anti-steering clause and cap prices for five years.
Retailers would have more leeway to charge surcharges or give discounts to customers whose cards have higher interchange fees.
Many already alert clients that using cards instead of cash would result in higher payments at the register.
According to court documents, the fee rollbacks and caps alone are worth $29.79 billion. Visa calculated that over 90% of the settlement merchants are small firms.
Visa and Mastercard agreed to a settlement while denying any wrongdoing.
Separate statements were made by Mastercard General Counsel Rob Baird stating that the agreement provided businesses with "substantial certainty," and Visa's North American president Kim Lawrence stating that it addressed "true pain points" cited by small firms.
Visa's stock ended the day down 0.2%, while Mastercard's increased 0.2%.
The agreement was reached a year after a $5.6 billion class action settlement involving Visa and Mastercard, which involved around 12 million retailers, was affirmed by a federal appeals court in Manhattan.
A few retailers chose not to participate in the settlement and are suing on their own behalf to recover damages.
In an email, Adam Levitin, a law and finance professor at Georgetown University, stated that those retailers might be against Tuesday's settlement because it would legally bind them.
According to Levitin, American retailers will continue to incur the highest swipe fees in the developed world, on average 219 basis points.
"If that's the result of nearly two decades of litigation, then the settlement is a huge loss for U.S. merchants," he said.
Appeals are conceivable, and Tuesday's settlement needs to be approved by U.S. District Judge Margo Brodie in the Brooklyn borough of New York City. This permission is probably not needed before late 2024 or early 2025.
"It's a bad deal for merchants," said Doug Kantor, general counsel of the National Association of Convenience Stores, in an interview. "It provides very small, very temporary relief, but afterward Mastercard and Visa will be free to raise rates, and the agreement doesn't provide a mechanism to slow an increase."
The settlement needed additional examination, according to the Retail Industry Leaders Association, which represents companies that employ over 42 million Americans, but it was "a mere drop in the bucket."
Small banks and credit unions would complain, according to TD Cowen analyst Jaret Seiberg, because major retailers like Walmart might strike partnerships with larger banks for credit cards that provide discounts at the register.
However, he claimed that because retailers can charge an additional fee for airline and cash-back credit cards—though few will, as they would prefer to close deals than forgo fees—the agreement represents "extraordinary concessions" made by Visa, Mastercard, and banks.
The settling merchants recruited Nobel Prize-winning economist and expert Joseph Stiglitz, who stated in an affidavit that the settlement may give them "very substantial" savings. 
"Competition among merchants results in these cost savings being passed on to customers in the form of lower prices," Stiglitz added.
Visa and Mastercard agreed to cover up to $170 million of the plaintiffs' attorneys' fees and costs, according to the plaintiffs' attorneys.
The Credit Card Competition Act is a piece of legislation that certain US senators have supported, allowing merchants to accept Visa and Mastercard credit cards through alternative payment networks.
Wolfe Research analyst Darrin Peller stated that the settlement on Tuesday "likely takes some wind out of the sails" of that attempt.
In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Eastern District of New York U.S. District Court, No. 05-md-01720, is the case.