Last week the National Retail Federation (NRF), the Retail Industry Leaders Association (RILA), along with seven additional big retail-related groups sent an open letter to leading members of congress, whining that the lawsuit pending in the U.S. District Court for the Eastern District of New York — case No. 05-1720 –“entrenches the Visa/MasterCard duopoly.”
Calling on Congress to listen to a state court settlement might have been the group’s method of escalating the matter and, possibly, garnering attention from lawmakers and Americans more commonly.
“The proposed settlement, which was negotiated by Visa, MasterCard and lawyers purporting to represent the merchant community, is one-sided and preserves the exact anticompetitive activities that were the genesis of the suits,” the groups said in the letter.
“Given the important oversight role of Congress and your continuing interest in this important issue, we write today to urge you to reject the false claims from the card networks and their agents,” the groups stated. “The proposed settlement does nothing to solve the failures in the electronic payment market and continued Congressional involvement in these issues is crucial. We look forward to keeping you fully informed as the legal process moves forward and the chorus of objections grows.”
Hidden Fees Are in the Issue’s Heart
“The underlying problem is that the [payment card] networks utilize their overwhelming market power to impose unfair rules and outrageous prices on retailers that take plastic,” said Brian Dodge, a RILA spokesman. “Visa and MasterCard centrally set fees which are ultimately paid by merchants and collected by issuing banks. With two fee schedules imposed by two firms that control 70 percent of the mark there’s not any meaningful competition.”
Interchange or swipe charges can be almost invisible to a merchants that just need to pay whatever Visa and MasterCard dictate without recourse.
According to the NRF,”joint debit and credit card swipe fees tripled over the past decade to about $50 billion annually — forcing up prices an estimated $427 for the average household — before [the] debit swipe [fee] was capped by the Federal Reserve this past year. Credit card swipe averages about 2% of every transaction, and amounts to approximately $30 billion annually, or $250 per family. Swipe fees would be the second or third-highest expense for most retailers, behind worker salaries and medical care benefits.”
$7.2 Billion Payment Isn’t the Point
The longstanding litigation was supposed to help retailers gain better fee visibility and get a way of negotiating both rules and fees together with Visa and MasterCard.
Instead, the NRF, RILA, and other retail urge groups think that the impending settlement exchanges a penitence for keeping the status quo.
The settlement pays merchants just $6 billion in damages, and provides a brief swipe fee reduction worth an estimated $1.2 billion. Merchants who had used either network as long ago as 2004 might be entitled to some of the settlement, but given that some 8 million American companies could qualify and that big merchants would get the lion’s share of the payment, small and medium sized retailers could become only cents, according to the NRF.
The settlement would also allow merchants to charge shoppers a payment card fee to compensate for the network’s credit card or debit card swipe charges.
Three Concerns for Retailers
There are, perhaps, three issues associated with the settlement that retailers, especially small or midsize merchants, should consider.
The proposed settlement, which was declared in July, does not appear to place any limitation on the Visa and MasterCard duopoly, nor does it forbid the two companies from continuing to impose arbitrary fees on merchants, according to the NRF and RILA. What is more, the settlement also makes Visa and MasterCard resistant to future litigation.
These charges have a direct effect on merchants, and being able to maneuver Visa’s or MasterCard’s fees directly to clients is an unsatisfactory solution.
Secondly, the proposed settlement may provide the Visa and MasterCard networks added capability to squish innovative payment choices.
As Dodge, the RILA spokesman, pointed out, “the settlement expands the definition of ‘card networks’ broadly enough to include emerging mobile payments. The networks desperately need to smother possible competing payments technology in the crib and this proposed settlement may do this.”
Mobile phone and internet technology could soon produce payment solutions which are better than current payment cards, providing Visa or MasterCard any extra capacity to fight these innovations won’t be helpful for merchants.
Third, leaving the Visa and MasterCard networks intact does nothing to prevent them from imposing unfair or perhaps dangerous rules on merchants.
“Those rules are lots of. But at the heart they prevent merchants from exerting any pressure on the networks to negotiate or compete,” Dodge said.
One possible example of a bad rule might be the Payment Card Industry (PCI) Digital Security Standard (DSS). This PCI standard makes merchants solely responsible for making sure that payment-card account numbers are secure — instead of addressing the fact that payment cards aren’t generally secure. If Visa and MasterCard just made the card secure, countless merchants could concentrate on company and hundreds of millions of customers would be safer.
Richard J. Sullivan of the Federal Reserve Bank of Kansas City talking at the 2010 Harvard University Workshop on the Economics of Information Security conference, pointed out that the PCI DSS standard’s”slow adoption and disputes” where proof that it was a one-sided approach undermines ultimate payment card safety.
The proposed settlement does nothing, according to the retail groups, to provide merchants a part in defining these kinds of rules.
Visa and MasterCard Believe that the Settlement is Fair
“We consider settling this case is in the best interests of all parties,” said Joseph W. Saunders, chairman and chief executive officer of Visa Inc. in a statement released when the proposed settlement was originally announced in July”We’re familiar with all the terms, which we don’t anticipate will impact our present [gain ] guidance. Visa is well positioned to help drive the migration to electronic payments in the U.S. and internationally.”
“This arrangement should eliminate the distraction of litigation for all parties,” said Joshua R. Floum, general counsel of Visa Inc.”We will proceed with a focus on helping retailers grow their businesses and providing them with efficient and precious payment choices.”
Legal settlements can be complicated and multifaceted. The payment card networks and a U.S. District Count believe that this settlement is reasonable compensation for many years of interchange fee price fixing. Several merchant associations representing approximately eight million companies feel that the proposed settlement doesn’t do enough to merchandise merchants from what might be a duopoly.
Target, a top multi-channel merchants, perhaps summed up the merchant’s position best in its official comment about the settlement.
“The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and extend no long-term relief for consumers or retailers. Moreover, Target doesn’t have any interest in surcharging guests using credit and debit cards to be able to allow Visa and MasterCard to keep on charging unfair fees. We’ll continue to explore our options while working toward a solution that reflects true reform.”