Mastercard and Visa settled litigation originally filed in 2005, during the Presidential administration of George W. Bush. The lawsuit was later updated during the Obama administration in 2012. Litigation centered around money claims for damages but still leaves open potential class action claims on payment card network rules.
Mastercard commented optimistically:
- “We are taking a significant step toward closing a chapter in a long-standing case,” said Tim Murphy, general counsel, Mastercard. “We can put this behind us and focus on continuing to innovate with our merchant partners to deliver the experience and convenience that consumers expect.”
Moreover, Visa added:
- “After years of thoughtful negotiation, we are pleased to be able to reach this agreement and move forward in our partnership with merchants to provide consumers convenient, reliable, secure ways to pay,” said Kelly Mahon Tullier, executive vice president, general counsel, Visa. “This outcome benefits all parties and enables us to focus more of our resources and attention to building the future of digital commerce together.”
However, the National Retail Federation appeared under-impressed.
- “The monetary settlement doesn’t solve the problem. Swipe fees cost retailers and their customers tens of billions of dollars a year and have been skyrocketing for nearly two decades,” NRF Senior Vice President and General Counsel Stephanie Martz said. “Ending the practices that lead to these anticompetitive fees is the only way to give merchants and consumers full relief once and for all.”
Friction exists between merchants and payment networks on pricing, rules and control. In what could be a perfect symbiotic relationship, where merchants need payment networks to process transactions and payment networks need merchants to provide transaction throughput, financial and operational issues divide the two groups.
Hot litigation topics include the pricing of payment acceptance, also known as interchange or “swipe fees”; and requirements that mandate all payment cards issued by the network, referred to as “Honor All Cards (HAC).” HAC is a sensitive issue because networks offer a wide array of products and often price interchange differently. For example, the baseline pricing of credit card interchange for a face-to-face credit card transaction might be 1.5% for Mastercard standard cards and 2.2% for premium cards such as the Mastercard World products. Networks argue that the premium products bring a higher spending customer than the standard general purpose credit card.
- The Financial Times summarizes events well.
Of particular concern to many merchants is the “honour (sic) all cards rule” imposed on them by both Visa and Mastercard. It states that a merchant taking any bank issuer’s Visa card, for example, must take all Visa cards. Merchant groups claim that the rule removes the incentive for banks to charge lower transaction fees.
- Under the deal, the two payment groups and banks including JPMorgan Chase, Bank of America and Citigroup, agree to pay $900m to the merchants on top of the $5.3bn agreed under a revised 2012 settlement. Visa’s share of the extra payout will be $600m, while Mastercard is liable for another $108m. Both companies had increased reserves to reflect their expected liabilities under the latest settlement.
The Federal court must sign off on the agreement but other issues remain. We will have to wait and see what the long-term impact is to credit card interchange. Another facet to watch is how many merchants will elect to forgo the settlement seeking higher damages, as Amazon, Starbucks, owes and 7-11 have, to have more control over the payments process. Merchants still object to “Honor All Cards” and issuers continue to build their receivables with the mass affluent.
At least for now, a major block of merchants are satisfied, and networks, who have accrued the litigation expense for several years have a conclusion. Yet, the deeper issue of friction between both parties remain core to payments.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group