Visa, MasterCard Settle Merchants’ Swipe-Fee Lawsuit

Visa Inc. (V), MasterCard Inc. and some of the biggest U.S. banks agreed to a settlement of at least $6.05 billion in a price-fixing case brought by retailers over credit-card swipe fees.

The total value of the settlement is $7.25 billion to a class of about 7 million merchants in the U.S. that accept Visa and MasterCard credit cards and debit cards, a law firm for the merchants, Robins Kaplan Miller & Ciresi LLP, said in a statement.

Visa, the world’s biggest payments network, said its share of the settlement filed yesterday in federal court in Brooklyn, New York, was about $4.4 billion. Visa said the proposed settlement payments, including costs incurred by MasterCard Inc. (MA) and card-issuing banks, would be about $6.6 billion. That amount would include about $525 million for individual claims.

“We believe settling this case is in the best interests of all parties,” Visa Chief Executive Officer Joseph W. Saunders said yesterday in a statement.

The agreement, which provides for a temporary reduction in rates for merchants and allows them to impose surcharges on customer purchases, follows a seven-year legal battle with U.S. retailers that accused the two largest payment networks of conspiring with banks to fix swipe fees, or interchange.

Intense, Difficult

“It’s been an extraordinarily intense and difficult settlement to reach,” K. Craig Wildfang, a lead lawyer for the plaintiffs, said in a phone interview. “Everything about this case is big and complicated.”

“But here we are and it’s a truly historic accomplishment,” he said.

The dispute began in 2005, a year before MasterCard’s initial public offering and three years ahead of San Francisco- based Visa’s. Merchants alleged the companies violated antitrust law by fixing the swipe fees, which average about 2 percent of the purchase price. Proceeds generate more than $40 billion a year for U.S. banks.

The case had been set for trial in September before U.S. District Judge John Gleeson in Brooklyn.

The settlement includes a $6.05 billion cash payment, according to yesterday’s filing. That amount would be reduced if some plaintiffs don’t agree to participate.

The settlement also provides for a temporary rebate of about one-tenth of a percentage point on the fees charged retailers, according to the filing. The agreement includes modifications in Visa and MasterCard rules to allow merchants to tack surcharges on to bills based on the fees.

Market Unreformed

Those rule changes wouldn’t take effect in states where laws specifically prohibit credit-card surcharges, said Douglas Kantor, a lawyer for the National Association of Convenience Stores. The association said yesterday in a statement it wouldn’t participate in the settlement, saying the agreement offers too much to Visa and MasterCard and is unfair to merchants.

“The settlement doesn’t reform the market,” Kantor said. “It will still have Visa and MasterCard setting the fees so the banks don’t have to compete.”

MasterCard, the world’s second-biggest payments network, said the settlement would cost it $790 million.

“Our decision to settle is based on our belief that MasterCard and our stakeholders are best served by an amicable resolution,” Noah Hanft, general counsel for the Purchase, New York-based company, said in a statement. “We know that merchants care about their customers and anticipate that they will not impose checkout fees, particularly because the value merchants derive from card acceptance far exceeds their costs.”

Visa Rises

Visa rose 2.3 percent to $126.91 in extended trading in New York. MasterCard advanced 2.9 percent to $442.

The agreement follows a 2010 settlement with the Justice Department in which the two payment networks agreed to allow merchants to steer customers to different credit cards or other forms of payments by offering incentives. New York-based American Express Co. (AXP) is still fighting the government lawsuit.

American Express, the third-biggest U.S. network, and No. 4 Discover Financial Services (DFS), based in Riverwoods, Illinois, aren’t defendants in the merchants’ lawsuit.

Visa and the banks that issued its cards would be responsible for two-thirds of the settlement in the merchants’ suit, while MasterCard and its card-issuing banks will pay the rest, the companies said in February 2011 regulatory filings.

Visa Escrow

Visa’s share would be paid from a litigation escrow account established under a plan designed to have the costs incurred by U.S. banks that owned the company before its 2008 initial public offering, according to its statement yesterday. When Visa deposits money into the escrow account, it has the effect of a stock repurchase. Visa had $4.28 billion in uncommitted funds set aside to cover litigation at the end of March.

“Our first take is that the settlement terms are better than expected for the networks -- most importantly, credit interchange is only being cut 10 basis points for eight months,” Jason Kupferberg , a Jefferies & Co. analyst, said in a note to clients. “This outcome should be positive for shares of Visa and MasterCard.”

Defendants in the case include Bank of America Corp., Citigroup Inc. (C), Wells Fargo & Co. (WFC), Capital One Financial Corp. (COF), Barclays Plc (BARC) and HSBC Holdings Plc. (HSBA)

Frank Keating, president and CEO of the American Bankers Association, described the settlement as a win for retailers, though not for consumers.

Banking Industry

“While the banking industry may not like all the results in this case, our industry is ready to put this matter behind us and continue playing a critical role in our nation’s economic growth and job creation,” he said in a statement.

Before their IPOs, Visa and MasterCard were controlled by consortiums of the largest banks. After regulatory actions around the globe targeted the fees, the banks took the payment networks public in hopes of evading antitrust liability, the merchants alleged in court filings.

Few publicly traded retailers would be willing to apply surcharges because making one form of payment more expensive would impede the spending of consumers already struggling through a weak U.S. economic recovery, said Paul Swinand, an analyst for Morningstar Inc. (MORN) in Chicago.

“The risk of ticking off the customer would keep most big national companies from doing it,” Swinand said.

Consumers who use credit also spend more, which may curtail purchases, especially high-priced items such as electronics and jewelry.

Psychological Barrier

“They don’t want to put up a psychological barrier on spending,” said Russell Walker, a professor at Northwestern University’s Kellogg School of Management. Adding surcharges “would be an immediate bump to revenue, however that discounts any reaction that customers would have,” he said.

The possibility of a new revenue stream may be too much for some merchants to pass up. In industries with less competition, such as airlines, adding surcharges may be easier, Walker said.

Last month in Australia, where retailers can apply surcharges, regulators set limits after concerns that merchants were applying fees above transaction costs.

“If you have an opportunity to levy a fee, do you just cover the cost, or do you create a new revenue source?” Walker said.

What probably will emerge in the U.S. is that the ability to add surcharges will give major chains such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) more leverage in negotiating swipe fees, according Ed Mierzwinski of the U.S. Public Interest Research Group in Washington.

Chains’ Clout

Large chains already use the clout of their transaction volumes to negotiate lower swipe fees than smaller competitors and having surcharges will boost that advantage, Walker said.

“If you are a larger retailer, you can expect more power,” Walker said. “For the smaller retailer, it will be harder to be treated in the same manner.”

Even if retailers don’t impose surcharges, the settlement also allows the use of incentives and discounts to steer consumers toward payment forms with lower fees. Some gas stations are already doing this by offering lower prices per gallon for debit or cash than for credit.

What large retailers would do with a decline in credit card swipe fees remains to be seen. Retail industry advocates say the savings from a reduction in interchange costs will bring down prices for consumers. Home Depot Inc. (HD) lowered prices on more than 3,000 products following the cut in debit card swipe fees mandated by the Dodd-Frank Act, according to American Banker.

Handout

The Electronic Payments Coalition, which represents Visa, MasterCard and banks, counters that retailers aren’t passing on savings. The trade group says the reduction in debit-card swipe fees was an $8 billion handout to merchants.

“The question is are you shifting dollars from banks to consumers or from banks to merchants?” Swinand said.

The National Retail Federation, which is not a party to the lawsuit, expressed reservations about the settlement.

“The money is significant but money is only temporary -- it’s here today and spent tomorrow,” Mallory Duncan, the federation’s general counsel, said in a statement. “What we need are changes in the rules that bring about transparency and competition that would be here for years to come.”

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporters on this story: Christie Smythe in federal court in Brooklyn, New York, at csmythe1@bloomberg.net. Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; David Scheer at dscheer@bloomberg.net

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