NACS Says No to Visa, MasterCard

Industry group rejects proposed $6.6 billion antitrust settlement over credit-card swipe fees

Published in CSP Daily News

ALEXANDRIA, Va. -- The National Association of Convenience Stores (NACS) has rejected the proposed settlement of the longstanding antitrust litigation between merchants and the credit-card industry, and the National Association of Truck Stop Operators (NATSO) is still evaluating whether to accept the settlement. Both are class plaintiffs in the seven-year legal action.

Merchants are seeking a fundamental change in the rules and practices of the credit-card industry, which dictates interchange (swipe) fees a merchant pays to banks each time a credit card is used.

The settlement is being seen by some as a victory for retailers, which will get more control over how people pay, and removes a legal threat for the major card companies, reported The Wall Street Journal. It could potentially raise prices for some goods and services for consumers who prefer using cards to cash and checks. It does not apply to debit cards.

Visa, MasterCard and U.S. financial institution defendants have signed a memorandum of understanding to enter into a settlement agreement to resolve the class plaintiffs' claims in the multi-district interchange litigation (MDL). The claims originally were brought by a class of U.S. retailers in 2005.

Click here to view the full text of the memorandum of understanding.

Visa also has reached an agreement in principle to resolve the claims brought against Visa by a group of individual retailers in the same MDL litigation. The proposed settlement payments for both the class and individual claims would be approximately $6.6 billion, of which Visa's share would represent approximately $4.4 billion.

Click here to read Visa's full press release.

MasterCard's share of the cash portion of the settlements will total $790 million on a pre-tax basis. As a result, the company will incur an additional $20 million pre-tax charge in its second quarter 2012 financial statements. MasterCard had previously recorded a $770 million charge in its fourth quarter 2011 financial statements.

U.S. merchant class members will receive a 10 basis points reduction in credit interchange rates for eight months, which will be implemented by MasterCard withholding this amount from U.S. issuers. In addition, the settlement agreement requires that MasterCard negotiate in good faith with any lawful merchant buying group in an effort to reach a commercially reasonable agreement.

MasterCard will also be required to make modifications to its No Surcharge Rule to allow U.S. merchants the ability to impose checkout fees on credit cards, subject to certain conditions that are intended to protect cardholders. Merchants have agreed to provide consumers with disclosures and limit the level and circumstances in which they may impose checkout fees on a cardholder which are designed to avoid unfair, unexpected or exorbitant fees.

There are also provisions in the settlement that prevent MasterCard cardholders from being unfairly targeted with checkout fees relative to cardholders of competing credit card networks such as American Express, Discover and PayPal, should those networks enforce rules that restrict surcharging. State laws that may limit or prohibit surcharging are not impacted by this agreement.

Click here to read MasterCard's full press release.

Because the proposed settlement does not introduce competition and transparency into the broken credit-card swipe fee market, the NACS board, comprised of more than two dozen merchants, unanimously rejected the proposed settlement agreement, the group said.

"Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces," said NACS chairman Tom Robinson, president of Santa Clara, Calif.-based Robinson Oil Corp. "This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market including for emerging payment methods, particularly mobile payments. Consumers and merchants ultimately will pay more as a result of this agreement--without any relief in sight."

The proposed settlement is the largest antitrust settlement in U.S. history, NACS said, but it only amounts to less than two months' worth of swipe fees, based on the estimated $50 billion in swipe fees collected by the credit-card companies on an annual basis. Worse, there are no fundamental market changes that would constrain Visa and MasterCard from continuing to raise rates to a point where the net effect is to make merchants pay for their own settlement--and then some.

As a class plaintiff in the litigation, NACS sought a trial to establish that the anticompetitive practices engaged in by the credit card industry are illegal. NACS also pushed to end the practices engaged in by the credit card companies that don't allow for market competition.

"Even the monetary agreement in this proposal is a mirage," said Robinson. "Merchants won't get these funds for years and will have paid more than that through increased swipe fees long before they see those funds."

The proposed settlement does allow merchants to show consumers some of the costs of accepting credit cards, but only under very limited circumstances with strict oversight by Visa and MasterCard. That oversight makes the settlement unworkable for virtually all merchants.

"Visa and MasterCard will continue to separately price-fix fees for thousands of their bank members. This means that banks won't have to set their own prices and compete like other businesses throughout the U.S. economy. And Visa and MasterCard can continue to police how merchants price their products and stop them from showing consumers the cost consequences of using different credit cards--unless merchants drop American Express," he said.

The proposed settlement also sets a dangerous path for the future of the payments landscape, said NACS. Visa and MasterCard will be able to use their power in the market to prevent new entrants, like PayPal, from expanding their share of the market. And the proposed settlement allows Visa and MasterCard to continue to require that merchants accept all of their credit cards no matter how expensive they make those cards. 

"NACS does not accept this proposed settlement, and we reserve the right to fight it if other class representatives do accept it," said NACS president and CEO Henry Armour. "There is plenty of time for merchants to make thoughtful decisions related to this proposed settlement. We hope and expect that, as they have the time to review it, many other merchants including class representatives will decide to reject this proposal."

Robinson added, "NACS has sought for years to bring competition and transparency to the credit-card swipe fee market. This proposed settlement does not come close to providing even a minimal level of the competition and transparency that merchants, their customers and the U.S. economy need."

NATSO announced that it will carefully review a proposed settlement in antitrust litigation between merchants and the credit-card industry before deciding whether to accept it.

"NATSO will carefully review the impact of the settlement and will examine whether it will go far enough in fixing this broken system," said Lisa Mullings, president and CEO of NATSO. "The size of this monetary award will make headlines, but we must carefully evaluate whether the settlement goes far enough to ensure competition and transparency in the credit card industry."