The titanic battle between retailers and credit card issuers has finally been settled, and the end result doesn’t bode well for consumers. This week, the lawyers for Visa, MasterCard and the 13 massive banks named as defendants in a massive antitrust lawsuit agreed to pay America’s retailers billions of dollars in penalties and missed payments. As an added concession, the agreement will also allow retailers to tack on a surcharge to credit card purchases in order to make up for the money they’re losing in processing fees.
If you’re a retailer, that’s great news. The interchange fees that card companies and their affiliated banks charge merchants for processing credit transactions have been incredibly problematic for many small businesses. We calculate that during the years covered by the lawsuit, each of the five million merchants named as a plaintiff lost more than $10,000 in profits by surrendering 2% of every credit transaction to the card companies and banks.
While a 2% fee might seem trivial (even when it adds up to a $10,000 bill per retailer), this amount is much higher than what retailers in other countries pay for processing. Currently, merchants in Australia pay just 0.5% in interchange fees, and merchants in the European Union pay only 0.3%.
As part of the settlement, the defendants – including Capital One, JPMorgan Chase and Sun Bank – will shell out a total of $7.25 billion to the jilted retailers. Over $6 billion will be in cash, and the remaining $1.2 billion will come as a “swipe fee reprieve” Visa and MasterCard. All in all, the settlement would be the largest ever paid out in an antitrust lawsuit and more than double the amount that Visa and MasterCard were forced to pay Wal-Mart in a similar suit back in 1996. The interchange fee rates, however, will remain the same – and that’s the problem.
As many retail experts have pointed out, this settlement is just a Band-Aid on a larger problem. The market will remain anti-competitive, only this time merchants will be given the option to transfer their woes to consumers via surcharges. “Consumers are the losers today and consumers will be the losers if this agreement goes through,” said Doug Kantor, a National Association of Convenience Stores attorney.
A follow-up letter to Congress signed by the executive vice president of public affairs for the Retail Industry Leaders Association put the problem in starker terms: “The U.S. electronic payments market is broken and it is in desperate need of reform.” The letter goes on to implore lawmakers to pass legislation regulating credit card swipe fees – like they did with the Durbin Amendment to regulate debit fees in 2010.
There’s no way to know how much of an impact this settlement will actually have on consumers if it’s accepted by Judge John Gleeson. Instead of applying a surcharge to card purchases, merchants also have the option of offering consumers a discount for using cash. This method is already in use by many gas stations around the country, and it seems to be effective so far. And if retailers do decide to tack on the surcharges, it’s a safe bet that they’ll be within the tolerable limits for most consumers. After all, stores don’t want to lose customers any more than banks do.
Still, we’re inclined to agree with the retailer lobby. This settlement doesn’t address the major issues involved in the lawsuit. In truth, we don’t really think it ever will, because the banking lobby has far too much sway in Washington. But as long as Wall Street continues to run the show, consumers will continue to pay the price in the long run. We paid it in new banking fees when legislation lowered the cap on debit card swipe fees, and we’ll likely pay it again when merchants like Wal-Mart attempt to take back some of their money from the banks. But then again, things could be worse. At least our economy isn’t tanking as hard as Europe’s, right?