Fully, Finally, and Forever – For Now

by Patricia Hewitt 0

The long wait is over as a settlement hasbeen reached in the “Payment Card Interchange Fee and MerchantDiscount Antitrust Litigation”. Unlike the Durbin Amendment, whichresulted in months of speculation regarding the final rules, thecourt has issued its opinion, which we summarize here:

• Visa, MasterCard, and Issuers identified asdefendants will collectively pay approximately $7.8B into escrowaccounts which will be used to pay merchants directly. In effect,this means that interchange per se is not being regulated, as inthe Durbin Amendment, but rather that merchants will receive a cashsettlement. This is similar to the “Honor All Cards” lawsuit thatwas settled back in 2003.

• Merchants have won the right to surcharge credit cardtransactions either at the brand or product level subject to a capwhich must be equitable across all credit card competitive brands,including American Express, Discover, and PayPal.

• Merchants must disclose to the networks their intention toimpose a surcharge and provide proper disclosure to consumers atthe point of sale and on sales receipts.

• Merchants can opt-out of this agreement and pursue an individualsettlement.

• Visa and MasterCard have to establish a process that establishescollective bargaining rights for merchants.

• If the Durbin Amendment is overturned, merchants may surchargefor debit card transactions and may establish a minimum credit cardtransaction amount of not more than $10.
In the near term, we view the most important part of thissettlement agreement as the prohibition against further litigationby merchants on this issues. For the foreseeable future, it wouldappear that the interchange fee war in the United States iseffectively over and the industry will enter a period defined byaccelerated mobile product development and new business modelentrants albeit one based on an adjusted balance of power betweenits primary stakeholders and new considerations for all credit cardissuers.

On the other hand, over the long term, the dynamics of theimplementation of this agreement may have unpredictable results formerchants, issuers, and cardholders alike. To the extent thatsurcharging is actually instituted, we expect consumer reactionscould be significant, both in terms of animosity to merchants, aswell as potentially affecting payment choice. We will publishanalysis of this topic based on our consumer survey data.

With this key settlement, we consider it highly improbable thatCongress will take up the call to regulate credit card interchangefees or repeal the Durbin Amendment at least in the near future,although the ongoing negotiation processes could generate newdisputes that invite intervention. As the CFPB gains confidence andstabilizes its footing, we would look to that regulatory agency ashaving the most impact on the payments industry in the near futureeven with the two year anniversary of Regulation II getting closerwhich will highlight the Fed’s ability to adjust its original debitinterchange fee regulations.

Click here to download the full settlementfrom the PaymentsJournal library.Ken Paterson, VP for Research Operations atMercator Advisory Group, also contributed to thisPerspective.