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Mr. Charles said he did not expect much of the payment, which includes
more than $6 billion in cash and an eight-month reduction in credit card
transaction fees worth $1.25 billion, to reach him. And while the
settlement is noteworthy because it allows merchants for the first time
to charge more when customers pay with a credit card, Mr. Charles said
he had no plans to do so. (In the past, credit card companies have not
objected to retailers, like gas stations, that give a discount to
customers who pay cash.)
“When somebody’s in my store, I want them to be impressed by both the
quality of my products and the service they receive,” he said. “And if I
suddenly have to get into a conversation where I’m penalizing them if
they use a credit card, it doesn’t make for very good customer service.”
But even if he wanted to impose a surcharge, Mr. Charles is one of many
merchants who would not be able to, because of a sort of Catch-22
provision in the settlement that makes it effectively impossible for
establishments that accept American Express to take advantage of the new
rules.
Although the settlement was announced with fanfare in July by the
lawyers who negotiated it, the celebration may have been premature. Some
merchants and retail advocates, including four organizations that are
plaintiffs in the lawsuit, oppose the deal because, they say, it offers
too little and will make it harder to take legal action against credit
card companies in the future. The settlement is still subject to court
approval and is unlikely to become official before the middle of next
year.
“There’s nothing there,” said Mallory Duncan, senior vice president and general counsel at the National Retail Federation,
a trade association that was not involved in the lawsuit. He called the
cash and fee reductions a “drop in the bucket” compared with the amount
banks had overcharged merchants to process credit cards.
The lawsuit was filed in 2005 on behalf of some seven million merchants who claimed that MasterCard and Visa
had colluded, separately, with banks to eliminate competition and
increase the price of their credit card transactions. Since then, the
interchange fees, or so-called swipe fees, small merchants pay card
networks have risen as the networks have plied cardholders with rewards,
said David Robertson, publisher of the Nilson Report, which tracks the card industry.
In 2011, Visa and MasterCard accounted for 68 percent of credit card
spending at merchants, according to the report, and the two companies’
grip on the market is likely to make retailers think twice before applying a surcharge. “Customers are very temperamental now,” said Nancy Alinovi, who owns two consignment shops called Adore Designer Resale Boutique in the Raleigh, N.C., area. “It’s much harder to get them to spend their money.”
Ms. Alinovi said she would never apply a surcharge. “However,” she
added, “I love that we have the ability to do that, the freedom to do
that.”
That freedom, however, is limited. Under the agreement, a merchant that
added a surcharge to Visa or MasterCard transactions would also be
required to add the surcharge to American Express transactions, if the
merchant took American Express. (Half of those who accept Visa and
MasterCard also take American Express, said David Darst, an analyst who
covers the industry for Guggenheim Securities.)
But American Express has its own rule that says merchants must treat
every form of electronic payment equally — and that means that to add
the surcharge to American Express transactions, the merchant would have
to add it to every other card it accepted, including debit cards. But
both Visa and MasterCard prohibit surcharges on debit cards — Catch-22! —
which effectively means merchants cannot add a surcharge to any
transaction.
In reality, few merchants would impose a debit surcharge even if Visa
and MasterCard permitted it. “Debit is the product that merchants want
to encourage customers to use, so if you have a rule that says if you’re
going to surcharge American Express you’re going to have to surcharge
debit, you might as well have a rule that says no surcharge,” said Gary
B. Friedman, a lawyer in New York who represents merchants in a separate
class-action lawsuit against American Express.
Noah J. Hanft, MasterCard’s general counsel, said the company was not
trying to use the rules set by other networks as a shield against
competition. “We can’t fix the problems that other brands have with
their rules,” he said. “We can only fix issues with our rules, but we
have to ensure that there’s a competitive marketplace. We’re not going
to enter into an agreement that’s not fair to our cardholders.” Visa
officials declined to speak on the record.
The settlement’s impact will also be limited by state law. Ten states
that together constitute 40 percent of the United States population have
banned surcharges on credit card purchases, “and I don’t think anything
would restrict the banks and networks from lobbying other states to do
the same,” said Henry M. Polmer, a Washington lawyer who specializes in
electronic payment networks.
One element of the settlement that intrigued Mr. Charles, the
confectioner, was a provision requiring Visa and MasterCard to negotiate
transaction rates with merchants that banded together as a group. “It
would theoretically allow merchants to negotiate a lower cost of
interchange, which right now is out of control and growing,” he said.
“But how do you negotiate when there’s only one game in town?”
The settlement’s detractors echoed that sentiment. “Merchants are
allowed under the law to form buying groups right now, even without a
settlement,” said Douglas Kantor, a Washington lawyer who represents NACS,
the convenience store trade association, which was a party to the
lawsuit but rejected the settlement. “The problem has always been, Visa
and MasterCard don’t bargain with those groups in a fair way.”
If the settlement received court approval, Visa and MasterCard could
obtain unusual freedom from future lawsuits over transaction pricing.
Not only would existing merchants lose their right to sue, but claims
from merchants created in the future would be barred from court as well.
The card companies would be protected not just from claims made in this
suit, but also from claims that could have been made but were not. “The
release is remarkably overbroad,” Mr. Kantor said. “There are all kinds
of rules that aren’t touched by the settlement at all, and it releases
them to abuse merchants with those rules in perpetuity.”
But a lawyer for other plaintiffs, H. Laddie Montague Jr., said the
provision was a reasonable protection for the credit card companies.
“They don’t want to settle today,” he said, “and have a merchant
tomorrow who accepts their credit cards refile and start the whole thing
over.”
Albert A. Foer, a longtime observer of the case and founder of the American Antitrust Institute,
based in Washington, said the settlement was too complicated to say yet
whether merchants, and ultimately consumers, would benefit. The judge
overseeing the case, Mr. Foer said, “is going to have to seek greater
clarity before he or anybody else can say with any certainty what all
the practical implications of the settlement will be.”
URL: http://www.nytimes.com/2012/08/09/business/smallbusiness/visa-and-mastercard-settle-lawsuit-but-merchants-arent-happy.html?pagewanted=all
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