Set Visa, Master Card And Markets Free: Approve The Credit Card Interchange Fee Settlement

Last August, years of expensive litigation and a comprehensive evidentiary process culminated in a meeting of the minds among warring litigants to antitrust litigation that challenged the practice by which credit card networks set “interchange” fees (the fee paid by merchants to card issuers when consumers pay by credit card).  On September 12 of this year, the settlement goes before the judge for a final approval—approval that is highly appropriate despite the high-profile efforts of some disenchanted retailers to orchestrate opposition to the settlement.

In the end, the settlement that the Judge preliminarily approved is consistent with longstanding case law that has consistently held that the manner in which Visa V +1.49% and MasterCard MA +2.87% set interchange fees does not violate antitrust law.  Despite no finding of a violation, the settlement provides billions of dollars to merchants and gives them the primary privilege that they have sought for years: the right to impose fees on customers who pay with credit cards (in addition to the longstanding legal right to provide discounts for paying with cash).  The settlement even gives retailers the opportunity to band together in groups to negotiate interchange fees.  Most important for ordinary consumers, however, is that by refusing to condemn the process by which interchange fees are established as anticompetitive, the settlement preserves the principle that interchange fees should be set by market processes instead of judges or politicians.

Indeed, the retailers’ antitrust claims were pretty far-fetched to begin with: does anyone really believe that Visa and MasterCard have ganged up on retail behemoths such as Wal-Mart and 7-Eleven so that ordinary consumers can acquire frequent flyer miles and free magazine subscriptions?  Yet that is the crux of the retailers’ case.  Little wonder that the overwhelming majority of them have seen the light and realized a good settlement when it is staring them in the face.

Prior courts have consistently found that the process by which Visa and MasterCard set interchange fees serves a competitive and pro-consumer purpose.  Rather than forcing every one of the 6,000 or so credit card issuing banks in America to sit down and bilaterally negotiate an interchange fee with tens of thousands of merchants, Visa and MasterCard sets a fee (as well as other terms and conditions) for the various cards issued by banks in their network.  In turn, by agreeing to accept Visa or MasterCard as payment, merchants agree to the fee structure.  In setting the applicable fee, the card networks seek to balance the two sides of the market between consumers and merchants.  If the interchange fee is too high, merchants will refuse to accept the card.  If merchants don’t pay enough, then consumers must bear a disproportionate part of the cost of the network through higher annual fees and other costs and will stop using cards, turning to archaic payments such as cash, checks, or even traveler’s checks.  Overall, the interchange fee paid by merchants averages about 2% of the transaction value, seemingly a small price to pay to avoid the hassle of handling cash, the risk and delay of checks, and perhaps most important, the cost and risk to retailers of running their own credit operations.

Yet despite this promised payout of billions of dollars plus winning their long-sought right to charge consumers for credit card use, some large retailers are threatening to opt-out of the settlement and continue litigation on their own.  Although the legal basis for their gripe is unclear, one thing is clear: they have raised no new arguments that would suggest that decades of caselaw should be overturned by finding interchange fees to be anticompetitive.  What’s more, they have provided no evidence that consumers would benefit from throwing out the settlement and continuing expensive and likely fruitless litigation.

To date, the powerful retailers leading the dissenting group have found few small businesses willing to mount their bayonets as well.  Their reluctance to follow the lead of the big box retailers is not suprising given the history of the issue.  In 2010, big box retailers rammed through the so-called “Durbin Amendment” as a midnight rider to the Dodd-Frank financial reform legislation, named after its primary sponsor, Illinois Senator Richard Durbin.  The Durbin Amendment imposed punitive price controls on debit card interchange fees, slashing the fee paid by big box retailers in half at least, and potentially even more depending on the outcome of litigation sponsored by the same group of large retailers.  While big box retailers have thus seen substantial cost savings from Durbin’s special interest gift, many small retailers are actually paying higher debit fees as a result of the Durbin Amendment and companies that specialize in many small transactions (such as kiosk movie vendor Redbox) have also seen their fees rise—higher costs that have been passed on to consumers.  Little wonder then that most small businesses are reluctant to be burned again and to reject an exceedingly favorable settlement.

Why then are some big box retailers so militant about trying to block the settlement?  One suspects the real reason is a political, not legal strategy: the settlement threatens to put to rest once and for all a series of litigation that has hung over the American payment card market for years.  Indeed, the most recent credit card litigation followed immediately on the heels of identical litigation brought against debit-card issuers that was settled on favorable terms to the retailers almost a decade ago.  Before the ink was even dry on that settlement, however, the merchants launched virtually identical litigation challenging credit cards before the same judge.  Given this history of opportunistic litigation, provisions contained in the preliminary settlement that cut off repetitive, speculative legal ventures by big box retailers and their lawyers make tremendous sense from a perspective of judicial economy, not mention the extraordinary benefit to consumers and the economy from resolving the longstanding uncertainty associated with continued litigation over the cornerstone of the electronic payments market.  Moreover, all parties will still have an opportunity to present their continued concerns to the court, and it—which by all indications has acted fairly and patiently toward all the parties in this extended, fractious dispute—undoubtedly will address any legitimate legal concerns if it decides to grant preliminary approval of the settlement.

But a settlement—while good for American consumers and the economy—would be bad for lawyers, lobbyists, and the big box retailers spearheading dissent.  The retailers bamboozled a majority of Congress into supporting the Durbin amendment as a purported correction to the supposed antitrust problem of Visa and MasterCard’s market dominance.  But once the credit card litigation is settled without a legal holding that interchange fees are anticompetitive, merchant lobbyists will have lost their last fig-leaf of cover for their special interest pleading.  Not only would that make it more difficult to impose price controls on credit cards it would provide support for a much-needed rollback of the Durbin Amendment’s price controls on debit cards.