When you use your credit card to pay for groceries, your focus is likely to be how much you are paying for the items in your cart. But each time you swipe your credit card, the business you are patronizing has to pay a fee to the credit card company, called an interchange fee.
The fee varies, but averages around 2% of the purchase price and can be higher for online transactions. The average American household pays over $300 each year in interchange fees -- the highest in the world.
Doug Kantor, an attorney representing the National Association of Convenience Stores, said that because the convenience store profit margins are 1 to 3 percent, the stores can't survive unless they pass the fees onto their customers. "Customers are paying these fees and are completely unaware because using a credit card appears to be free to the consumer," Kantor says. This is because interchange fees are typically passed on to the consumers in the form of higher prices on goods and services.
Over seven million merchants filed an anti-trust private class-action lawsuit in 2005 against Visa, MasterCard and member banks alleging price-fixing of interchange fees and complaining about restrictions that prevent merchants from providing discounts for other payment methods. A settlement was reached in July 2012 and parties are currently waiting for Final Approval from a federal court in Brooklyn.
What are the settlement terms?
As part of the settlement, Visa and MasterCard along with their network banks will pay $6 billion to merchants. A 10 basis point reduction in credit interchange rates will be given to all U.S. class merchants, which is worth an additional 1.2 billion. While some merchants currently offer a discount to cash customers, the settlement will now allow merchants to charge a checkout fee for credit purchases.
"Our decision to settle is based on our belief that MasterCard and our stakeholders are best served by an amicable resolution," said Noah Hanft, MasterCard's General Counsel and Chief Franchise Integrity Officer in a statement issued in July 2012. "Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases. We believe that today's settlements should resolve all issues with the merchant community."
In a statement issued by Visa in July 2012, Joseph W. Saunders, Chairman and Chief Executive Officer of Visa Inc said "We believe settling this case is in the best interests of all parties. We are comfortable with the terms, which we do not anticipate will impact our current guidance. Visa is well positioned to help drive the migration to electronic payments in the U.S. and globally."
Why are many merchant groups opposed to the settlement?
Most, if not all, major merchant associations have spoken out against the settlement, including the National Restaurant Association and National Grocers Association. Kantor said that the biggest problems with the settlement are that it doesn't address the fact that Visa and MasterCard set the fees for their bank, eliminating price competition benefits, and it doesn't remove on merchants with regard to credit cards. Because the settlement will be split between many merchants, each owner's portion may be relatively small, compared to the fees paid. "To come away from 7 years of litigation and have the situation worse is not what merchants had in mind," Kantor says.
Another issue concerning some merchants is that the settlement prohibits them from filing future lawsuits over interchange fees, even if new technologies are created for payments. "Through the releases from further liability, the settlement allows the banks and credit card companies to continue to raise interchanges fees even if the practices are extended into mobile payments or any new payment systems. This binds future merchants who aren't even born yet to these terms." says Ed Mierzwinski, Consumer Program Director at U.S. Public Interest Research Group.
How might the settlement affect you?
Merchants are likely to continue to build interchange fees into prices and customers who pay by cash or debit card will effectively pay those buried interchange fees. "The one who is paying unfairly high is the person who uses cash or debit, because they are helping to subsidize a fee that it isn't being caused by their transaction," says John Ulzheimer, President of Consumer Education for SmartCredit.com. Under the settlement, merchants are now able to charge a fee for credit customers; Ulzheimer anticipates that in the future, retailers will experiment with a dual pricing system (one price for cash/debit and another for credit customers).
Many experts and merchants predict that after eight months of reduced interchange fees, rates will return to previous levels and possibly even increase. Merchants may pass increased costs on to customers through raising prices or charging a checkout fee. "If it's approved, consumers will continue to pay extra money for the swipe fees. Their pockets will be secretly drained and they won't know how it happened," Mierzwinski says.