Visa and Mastercard agreed to a $30 billion settlement with merchants in March, but a judge has indicated she won’t approve the settlement. The deal was reached after a nearly two-decades long legal battle between retailers and the credit card companies over transaction fees.
The initial sentiment after the settlement was merchants had secured a hard-won victory over the credit card giants. Once the dust cleared, retailers realized the deal would only amount to a 0.04% reduction in interchange fees over the next three years. That might be the reason a New York judge has chosen not approve the settlement.
“As Yogi Berra was fond of saying, ‘It’s like deja vu all over again,’” said Don Apgar, Director of Merchant Javelin Strategy & Research. “This lawsuit began in 2005 and has been settled twice before, until the courts struck down those prior settlements for various reasons.”
In response to the news, Visa and Mastercard issued statements that they were disappointed with the judge’s decision to strike down what they considered a fair and acceptable solution to the nearly lengthy litigation.
“All parties involved were glad to see this saga drawing to a close with the negotiated settlement between Visa, Mastercard and the merchant class that would have delivered some $30 billion in fee reductions and additional flexibility for merchants in how they accept cards, particularly rewards cards that carry higher acceptance fees,” Apgar said.
A Drop in the Bucket
After the settlement, many retailer trade groups began to voice their opposition to concessions they felt were a drop in the bucket. A major sticking point was Visa and Mastercard would still have the power to determine transaction fees going forward.
“This latest wrench was tossed in the settlement gears by the National Retail Federation (NRF), a trade association that represents most of the leading enterprise retailers, grocers, and e-commerce brands,” Apgar said. “The NRF claims the proposed settlement did not go far enough in the level of financial relief it provided and did not address their core objections to payment card pricing.”
The NRF was also concerned that the settlement didn’t free merchants from the “honor all cards” rule. Visa and Mastercard require merchants who advertise branded card acceptance to accept all cards from that brand. Some card types, particularly those that offer airline miles, cash back, or other consumer rewards, carry higher acceptance fees for merchants.
The latest settlement would have allowed merchants to upcharge consumers for accepting those card types, but the NRF wanted the rule to be eliminated entirely.
“It destroys the brand value for card companies,” Apgar said. “Because what’s the point of having a Visa card if you’re not sure if a merchant will accept it? They also took issue with so-called ‘price fixing’ by the card brands. If Visa can’t set pricing for Visa cards, who can? Never in the history of commerce has it been considered that a buyer should tell the seller how much to charge for their products.”
The Benefits of Branded Cards
With so much focus on fees, the benefits of credit cards have been relegated to the sidelines. The branded payment card has fueled shopping growth, growth in spend per visit, and driven positive trends in every metric merchants measure. E-commerce, mobile commerce, and contactless payments have all been powered by payment cards.
Transaction time at the point-of-sale is dramatically faster, cashier training requirements are reduced, and the risks and expense of handling large amounts of cash are gone.
“Sadly, the great benefits that branded card acceptance has brought top large chain retailers are being completely ignored in these conversations,” Apgar said. “Cards have been part of our daily shopping lives for long enough that merchants have stopped tracking the benefits and focus solely on the expense of the fees to accept cards.”
It’s worth noting that a significant group of enterprise merchants, including Walmart, have opted out of the settlement. However, it’s likely they opted out to preserve their rights to sue the card brands separately in the future, though no actions have been brought to court yet.
Back at Square One
After the initial enthusiasm died down, it was clear the Visa and Mastercard settlement was more symbolic than substantive. All indications were, however, that the lengthy process had reached its conclusion, and that U.S. District Judge Margo Brodie, who is presiding over the case, would approve the settlement.
Judge Brodie didn’t immediately indicate the reasons she wouldn’t approve the deal, but she will provide a written opinion explaining her decision. If the settlement isn’t approved, there has been speculation the judge could recommend the case go to trial. In the absence of a trial, both parties would be back at square one to renegotiate a new settlement.
“The NRF’s position is card payments should be free to the retailer,” Apgar said. “The challenge is card issuers have two income streams: fees from merchants and fees and interest from cardholders. If merchant fees are removed, every card could have a $199 annual fee, no rewards, and a 29.99% APR. Granted, there’s room to improve card pricing and structure, but rarely does progress happen when one side pushes relentlessly in court to get everything for free.”
