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Visa/MasterCard Interchange Fee Settlement Analysis

Visa, MasterCard, and the country’s largest banks have agreed to pay $7.3 billion to about six million merchants in the U.S. to end a seven-year dispute over credit card interchange fees. The proposed settlement was reached to avoid a September trial date.  This litigation in the Brooklyn U.S. District court consolidated more than 50 lawsuits that went back to June 2005.  In these suits, merchants argued that Visa, MasterCard, and the issuing banks illegally conspired to set high interchange fees, thus violating the antitrust provisions of the Sherman Act. 

The settlement still requires the approval of U.S. District Judge John Gleeson, and it could be derailed if enough merchants opt out.  Some retailers are not happy with the settlement.  The National Association of Convenience Stores issued a statement saying the settlement fails to introduce competition into “a clearly broken market.”   Many retailers point out that the deal doesn’t address “structural flaws” of how interchange rates are set. 

In the long run, this agreement is a win for Visa, MasterCard, and the banks as it will release them from future antitrust lawsuits.  The total settlement amounts to two to three months of interchange fees collected by the card industry. 

In the short run, this is a win for merchants.  Here are the key takeaways for merchants:

  1. Cash Payments to Merchants - Visa, MasterCard, and their issuing partners will make a $6.05 billion cash payment to merchants to compensate them for previous interchange charges

    • This amount will be reduced by legal fees, payment disbursement costs, and merchants opting out of the settlement
    • When the settlement receives final approval, a claims process will outline the process for merchants to apply for their share of the $6.05 billion cash payouts.  Merchants will be notified of the claims process in late 2012 or early 2013
    • A potential formula for determining the amount of cash payout for an individual merchant might be a proportional formula as follows…

    • The payouts will likely follow a variation of the Pareto Principle or the 80/20 rule.   Based on a market size study we conducted a few years ago, we found that the top 10% of merchants processed 90% of the card sales in the U.S.   Therefore, about 90% of the $6.05 billion settlement will go to the top 10% of the largest merchants in the U.S.

 

  1. Temporary Reduction in Interchange Fees - Visa and MasterCard will lower interchange fees for U.S. issued credit cards by 10 basis points (0.10%) for a period of eight months, providing a total of $1.2 billion in additional relief to merchants

    • Here is a simple formula for estimating savings – [0.10% x annual Visa/MC credit card sales x 67%].  The 67% is 8 months divided by 12 months.
    • This provision will likely start in mid-2013

 

  1. Surcharging – merchants will be allowed to surcharge or charge higher prices on transactions paid with a credit card.  Having the ability to surcharge credit cards is an important win for merchants. Highly competitive markets like retail, travel, and hospitality may not utilize surcharges, but other markets like b2b, insurance, bill payment, etc. could leverage surcharging to reign in interchange costs and influence tender mix.

    • The surcharges will be subject to a cap and some limitations.
    •  Surcharging rules will likely be implemented in early 2013.
    • 10 states, including New York and California, have laws prohibiting surcharging.  These laws will prevent merchants in these states from taking advantage of the rule change.

 

  1. Buying Groups - merchants will be allowed to band together to try to negotiate better interchange fees for their members.  This provision is a form of collective bargaining for merchants with Visa and MasterCard to propose interchange adjustments.  However, Visa and MasterCard are under no obligation to accept the adjustments.

If this settlement is approved, the cash payouts and 0.10% interchange reduction are one-time wins for merchants.  Surcharging for credit card transactions can be a significant tool in some verticals to control interchange costs and influence long-term payment tender mix.  The collective bargaining may be window dressing since there is no obligation for the card networks to accept merchant proposals… we will just have to wait and see.

Comments

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

Thanks for an excellent article - great synopsis.

Which 10 states prohibit surcharging? As a b2b distributor with slim margins, this is important to us.

Topic Expert
Anand Goel
Title: CEO
Company: Optimized Payments Consulting
(CEO, Optimized Payments Consulting) |

The 10 states that prohibit surcharging are:
California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

What is the status of this settlement? Has it been approved?

Greg Gay
Title: CFO
Company: Mac Papers, Inc.
(CFO, Mac Papers, Inc.) |

In determining whether the surcharge prohibition applies, do you look to the state where the merchant is located, the state where the cardholder is located, or the state where the goods/services are exchanged? We have locations throughout the Southeast and process many of our credit card transactions in Florida for deliveries that take place in other states in the Southeast. If the customer is outside Florida, is the surcharge permissible?

Topic Expert
Anand Goel
Title: CEO
Company: Optimized Payments Consulting
(CEO, Optimized Payments Consulting) |

Brenda,

Judge Gleeson gave his preliminary approval of the settlement, which would award $7.25 billion to various retailers and merchants, on November 9, 2012. The final hearing and potential approval is scheduled to take place on September 12, 2013. With exception of the surcharge rules that went into effect on January 27, 2013, there will likely not be any movement on the settlement until later this year.

Topic Expert
Anand Goel
Title: CEO
Company: Optimized Payments Consulting
(CEO, Optimized Payments Consulting) |

Greg,

Our understanding is that surcharges cannot be applied to customers located in these 10 States. We are confirming with our legal counsel and will update this post shortly.

Here are specific State statues that limit surcharging - http://usa.visa.com/personal/using_visa/checkout_fees/index.html

Anonymous
(National Vice Pesident - Supplier Solutions) |

Any updates?

Anonymous
(CFO/VP of Finance) |

We have operations in Kansas so we researched the surcharge issue in some detail. Our firm is B2B and the law only applies to consumer transactions, so initially we believed it would not apply. The tricky part is that sole proprieters are considered consumers even when making a B2B transaction, and it is difficult to determine the status of a firm since Kansas does not require sole proprieters or fictitious names to be registered.

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