Last week’s big news was the announcement of a $6.24 billion settlement of monetary claims arising out of a 13-year-old class action suit brought by thousands of merchants against the two big card networks, Visa and Mastercard, and a number of large credit card issuing banks. This settlement is intended to replace the previous 2012 settlement of $7.25 billion, which was reduced to $5.7 billion after about 8,000 merchants opted out due to provisions that prevented them from suing over future interchange pricing. Ultimately, the previous settlement was thrown out by a federal appellate court in 2016 on the grounds that it was unfair to some merchants who would receive little or no benefit.
As my colleague Brian Riley pointed out in a overview posted on Payments Journal on September 19, 2018, the settlement is incomplete, leaving unresolved issues such as how much the card networks might raise interchange fees in the future, as well as “honor all cards” rules that require merchants to accept premium reward cards that charge a much higher rate on the premise that the cardholders are spending more. These cards are mainly marketed to compete with American Express, which recently won in the Supreme Court by a narrow 5-4 margin a lawsuit prohibiting merchants from “steering” customers to cards with lower interchange fees. How much this might affect future litigation against Visa and Mastercard is uncertain, as the two leading card networks have been found by the courts to jointly have monopoly power over the payment cards market while American Express has not.
Thus, although this settlement is an important milestone, assuming it is not thrown out itself, we may still see large merchants opting out in the belief that they can get a better deal suing the networks individually, as Walmart did, ultimately settling with Visa late last year for undisclosed terms. It is an open secret within the industry that large merchants have often been able to negotiate directly with the card networks for lower interchange rates and therefore have less need to resort to the courts. An article in Digital Transactions on September 18, 2018 reported that various merchant groups are once again divided over whether the monetary settlement is sufficient, with the National Retail Federation, the Retail Industry Leaders Association, and the National Association of Convenience Stores all complaining that the new settlement does not do enough to control future costs or increase the ability of merchants to negotiate interchange fees. Since the merchants obviously did approve the monetary settlement, they appear to be satisfied that past behavior has been adequately punished (or they just like money), but are signaling that they intend to continue to fight in the courts for further reforms.
In his Viewpoint In Search of a Profit: Falling ROA Sets the Stage for 2019 and Beyond, Brian Riley pointed out that in the previous settlement that was thrown out, “Visa and Mastercard only agreed to a 10 basis point reduction in interchange, and that only for eight months,” which suggests that the current settlement is unlikely to do much more. However, Brian also cautioned issuers that interchange will continue to face downward pressure. In light of the growing gap between interchange rates in the United States and other countries, in particular the European Union and Australia, merchants have a credible argument that interchange rates ought to be much lower than they are now, and it is only the lack of a strong regulator that has prevented the United States from doing the same (except, of course, through legislation such as the Durbin Amendment to the Dodd-Frank Act of 2010). It appears that on the issue of cost vs. value (that is, that interchange rates ought to be based on the actual cost of processing a transaction, as opposed to the value to merchants of accepting cards), the courts, regulators, and legislators have come down firmly on the side of cost. While the current U.S. administration, Congress, and Supreme Court appear to have little appetite for taking the side of merchants, this could change, particularly if there is another severe economic downturn, which seems likely given the length of the current expansion. There is also the possibility of a Democratic takeover of the House and perhaps the Senate in the November elections, and of a Democratic president in 2020, which could change the political dynamics in the U.S.
So what have we really settled? Not much, when you consider all the issues that remain. Money is always nice, and gives the networks and banks the chance to clear their litigation reserves. However, the merchants show no signs of being satisfied, and so this war seems likely to continue for some time. Card issuers should not take it easy, but should continue to search for new sources of revenue to reduce their reliance on interchange.