By Patti Murphy
To hear some merchants talk, the proposed settlement in an antitrust lawsuit filed against Visa and Mastercard regarding interchange is on the skids. Leading merchant group the National Retail Federation, and several large merchants, have asked the U.S. District Court judge overseeing the case to reject the settlement, which came on the heels of the judge's decision not to reject the case out of hand, as requested by Visa and Mastercard.
Visa, Mastercard and card-issuing banks already settled a portion of the lawsuit in 2018, resulting in payouts of about $6 billion to merchants. This latest settlement proposal focuses on the remaining allegations contained in a 2005 class-action lawsuit alleging the card brands' and issuing banks' pricing and rules amount to antitrust activities.
The proposed settlement is detailed in a 262-page document. In broad strokes it calls for:
Visa and Mastercard said the proposed settlement contains real concessions. "By negotiating directly with merchants, we have reached a settlement with meaningful concessions that address true pain points small businesses have identified," said Kim Lawrence, Visa president for North America.
Lawyers who negotiated the deal on behalf of merchants said in a press release that the settlement will deliver nearly $30 billion in savings just in the first five years following approval.
"This settlement is the culmination of eight years of hard-fought litigation and detailed painstaking negotiations," said Steve Shadowen of Hilliard Shadowen LLP, one of the attorneys who helped negotiate the settlement. "It provides comprehensive market-based solutions to too high [interchange], while providing immediate fee relief to merchants as they make these new competitive tools work for them." Not so, argued NRF General Counsel Stephanie Martz. She characterized the settlement as "a backroom deal struck without the input of major retailers or the trade associations that protect the interests of small Main Street merchants."
In a letter to U.S. District Court Judge Margo Brodie, the NRF complained the proposed settlement fails to end the card brands' practice of centrally setting "default" fees instead of letting card-issuing banks compete against one another over interchange.
The NRF said it also wants a deal that eliminates the networks' honor-all-cards rules, which dictate that merchants can't pick and choose which Visa or Mastercard credit/debit cards they accept (for example, refusing to accept rewards cards that carry higher interchange while accepting lower-cost plain vanilla cards).
"The proposed settlement does not even approach the type of relief that is required," the NRF argued, adding that it comes on the eve of a trial that has been nearly a generation in the making.
Walmart also wants the court to reject the proposed settlement. The mega-retailer wrote that smaller merchants and their attorneys "sold out" their larger competitors by not pressing for an end to the honor-all-cards rules. "It is the honor-all cards rules that inhibit competition, and any 'equitable relief' settlement that leaves those rules in place offers only illusory relief, increases the likelihood that litigation over the central restraints at issue in this case will continue for decades, and fails to enforce antitrust laws," Walmart asserted.
Target, one of many merchants that opted out of the 2018 settlement agreement, complained about the lack of an opt-out clause in the current proposal. Like other opponents, it sees the proposed settlement as a bad deal for not eliminating the honor-all-cards rule. In addition, the proposed settlement "would provide cover for a naked price-fixing agreement between Visa and Mastercard," Target insisted.
@Richard Crone of @Crone Consulting LLC disagrees. He described the proposed settlement as a "seismic shift," especially because merchants would be allowed to steer customers to lower cost payment methods and negotiate directly with the card brands on interchange rates.
"This strategy isn't just for giants like PayPal, but a tool for all merchants, big or small, to optimize their transaction costs," he said.
Elaina Smith, CFO, Superior Bancard, has a different take. "The proposed agreement implies merchants have the ability to offer different surcharges based on the type of card present [e.g. rewards vs. plain vanilla]. But how are they going to know?" she asks. It would require the ability to look up the bank identification number [BIN] on every card presented for payment, as well as explaining this to customers "in a non-confusing way."
Larger merchants would benefit the most financially if Judge Brodie decides to approve the proposed settlement. Crone estimates that Walmart, alone, stands to save $261 million from a three-year moratorium on interchange hikes. The "really big winners," Crone determined, would be payment facilitators (dominated by PayPal) which stand to save $606 million over three years.
And there's more. Based on Crone's calculations, the big money is in elimination of the anti-steering rules. Perhaps the biggest winner in that category would be PayPal. With a merchant base of 35 million, PayPal would wield a lot of negotiating power.
Crone said the market outlook is particularly good for all mobile wallets, which would be allowed to charge for top of wallet positioning. "[T]he settlement is set to invigorate competition among mobile wallets, but PayPal is in the best position to benefit," he said. "This is not to say that the others, namely Apple Wallet, Google Wallet, Amazon Pay and Walmart Pay, will not aggressively leverage their platforms to do the same."
ISOs and agents shouldn't be left out of the winner's circle, Crone added, noting that it is up to each how much of the basis point reduction gets passed along to merchants. He sees ISOs as prospective buying groups, suggesting they could create their own "buying groups" and negotiate directly with the card brands for lower interchange rates.
Not likely, said Smith. "They're not going to listen to us," she said. Crone concedes PayPal and other large payfacs are set to be the big winners when it comes to buyers group negotiations.
While Mastercard and Visa are proposing to make major concessions on interchange and rules, the card brands aren't losing money, since interchange gets paid to issuing banks. Besides, "they'll find other ways to make money," Smith said.
In fact, no sooner was the ink dry on the proposed settlement than news broke that Mastercard was hiking its "acquirer brand volume fee" to 14 basis points (0.14 percent) from 13 basis points. Based on 2023 volume—Mastercard said it handled $2.591 trillion in transactions in 2023—that one basis-point increase will add $259.1 million to Mastercard's balance sheet.
The Merchants Payments Coalition, in a press release, described the increase as "part of an unending pattern." Mastercard and Visa, combined, have raised or created new brand fees "at least 40 times since 2011 alone, according to the MPC.
"This new increase proves the credit card companies are continuing to take advantage of Main Street," said Doug Kantor, general counsel for the National Association of Grocery Stores. "They made a show of 'settling' legal claims, but nothing in the settlement limits the fees that go directly to Visa and Mastercard." Kantor also put in a plug for passage of the Credit Card Competition Act, stating it would establish "fair market competition." That legislation, authored by Senator Dick Durbin, would ostensibly allow merchants to process Visa and Mastercard payments across less expensive third-party networks, such as Pulse.
Merchants aren't the only parties getting hit with price hikes; ISOs, too, are paying more. Smith explained how one fee Superior pays to Mastercard—a settlement advisement fee—has been ratcheted up from $300 per month per BIN to $1,000 a month per BIN. 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink. You can reach her at patti@proscribes.net.
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