Visa Inc. and MasterCard Worldwide reached a settlement with the U.S. Department of Justice (DOJ) and seven states to resolve antitrust allegations involving the companies' U.S. card acceptance rules. The settlement will enable merchants to post the costs of different payment types and to incent various types of payment with discounts or rebates.
Joining the DOJ in the action filed in the U.S. District Court for the Eastern District of New York were the states of Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas. Meanwhile, American Express Co., the third defendant in the action, is vowing to fight the civil complaint in court.
The settlement culminates a two-year investigation by the DOJ, which alleged that card brand rules put undue restrictions on merchants by forbidding them from promoting less expensive payment options and stifling price competition. Swipe fees cost U.S. merchants about $35 billion a year, according to the DOJ's website.
Under the terms of the settlement, merchants will be able to offer discounts or rebates to customers for using one brand of card over another (Visa versus MasterCard, for example) and for using a particular kind of card (debit versus credit, nonreward versus reward card, etc.). Merchants will also be allowed to post their pricings for customers to see, and to promote these different payment types.
"The card associations, as we know, have been loathe to allow any type of discount or differentiation between cards," said Los Angeles-based payment attorney Theodore F. Monroe.
"They want parity. For instance, on the Internet you can't present Visa first, then MasterCard, or present Visa as larger than MasterCard, or say you're giving a discount on Visa but not MasterCard. You can't say, 'I'm offering a discount on these types of cards, but not these ones.' That's gone now, and that's a historical change."
Yet the refusal of AmEx to take part in the settlement may complicate matters. For the time being, merchants who accept Visa and MasterCard but, not AmEx, can implement the new settlement rules right away, but merchants who take AmEx along with the other brands cannot.
AmEx cards tend to carry the highest swipe fees among the major brands - fees that AmEx said fund an extensive rewards program aimed at its relatively affluent client base.
Given its higher interchange costs, AmEx would probably suffer the most under rules that let merchants steer customers toward one payment type or another, observers have noted.
In a statement, AmEx said that rather than promote competition, the DOJ's new rules would suppress it further by giving an extra leg up to the two dominant card brands. Industry observers have noted that overhauling the card brands' interchange rules could dampen the market for rewards cards across the board.
"This is a really bad situation for AmEx because it offers its card members all these perks that are very expensive to implement, and the other card associations don't offer them," Monroe said.
Nevertheless, Monroe doubts whether the new acceptance rules will have great impact on the industry. He said many merchants will determine that it's too awkward and time-consuming to steer customers toward one payment form or another and that the practice will mostly be taken up by businesses selling big-ticket items.
"If you're going to take the time to offer the discount and go search for the discount, it's not worth it if the transaction's only 10 bucks - or really even if it's 100 bucks," he said. "But if it's for $1,000, or a $2,000 plane ride to Fiji or something, then it's probably worth it."
But Linda Mahy, Chief Executive Officer of payments consultancy Connective IQ Inc., said the settlement could prove to be a bad omen for a payment system that is increasingly under fire from federal regulators.
She feels the card brands "have spent way too much time and money" on coming to an agreement in the DOJ's lawsuit. "They've got to move on and counter this by improving their products and services," she said. "That means getting out there with mobile and getting into the [business-to-business] market.
They've been real laggards in B2B. With mobile applications and closed-loop systems out there, they could easily be disintermediated."
Mahy added that the antitrust settlement could "fuel the Durbin Amendment" because both promote an expansion of choices for merchants at the POS (the Durbin Amendment requires that merchants be able to connect to multiple back-end systems for debit payment routing).
But she added that such an array of payment choices will be a burden on merchants who have trouble comprehending the system as it is.
"I don't think we can allow this kind of confusion, either to the consumers or the merchants," she said. "The ISOs have an opportunity here to help educate the merchants, especially the mom-and-pops. This is a great argument for knowledge-based ISOs."
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