Call it the settlement that settles nothing. An economic analysis by the Federal Reserve Bank of Boston of the recent settlement of antitrust litigation brought by the U.S. Department of Justice and 17 state attorneys general against Visa Inc. and MasterCard Worldwide concluded the agreement won't work.
The Justice Department's suit alleges the card companies' rules prevent merchants from telling consumers about differences in card fees and prevents merchants from incentivizing the use of cheaper cards with discounts, rebates and other rewards. It also alleges this is a violation of the Sherman Antitrust Act.
According to court documents in United States of America et al. v. American Express Company et al. (No. CV-10-4496, U.S. District Court for the Eastern District of New York), Visa and MasterCard agree to allow merchants to advertise and encourage the use of a particular card brand through discounts, rebates or other incentive plans.
They also agree to allow merchants to tell customers the estimated or actual costs to the merchant when a customer uses a particular type of card. The final judgment stipulates that while Visa and MasterCard agreed to the terms of the settlement neither company admits wrongdoing.
A third party, American Express Co., did not join the settlement and reportedly is vowing to continue to defend itself against the Justice Department's antitrust allegations.
AmEx, with its highly selective base of cardholders and its array of member benefits, typically charges higher fees than its competitors. In response to a query from The Green Sheet, AmEx confirmed it has decided to press on with its defense against the DOJ allegations.
The Federal Reserve of Boston issued a Public Policy Discussion Paper in July 2011 looking at what was then the proposed, now finalized, settlement.
According to the paper, written by Director of the Consumer Payments Research Center Scott Schuh, Senior Economist Oz Shy, Senior Economist and Policy Advisor Joanna Stavins, and Boston Federal Reserve Vice President Robert Triest, the settlement "represents a significant step toward promoting competition in the credit card market."
However, the authors also stated, "merchants are unlikely to be able to take full advantage of the ... settlement's new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers' credit cards."
The authors pointed out that the United States, unlike countries in most of the rest of the world, does not regulate interchange fees on credit cards. Antitrust settlements in other countries often result from the assumption that card networks fix interchange prices rather than allow market forces to determine the rates. The result is other countries regulate interchange fees.
"To our knowledge, the United States is the only country that does not allow card surcharges, but permits cash discounts," the authors wrote. Instead of imposing more regulation, the new U.S. settlement elects to use market forces to channel customers to the merchants' preferred card option, the paper noted.
The paper identified a weakness in this approach, stating, "The basic problem is that merchants lack sufficient information to disclose fees or differentiate their prices according to the method of payment.
"In practice, however, merchants may not be able to use these privileges effectively because they may not know the exact merchant fee on each credit card until long after the transaction has taken place, and even then merchants typically learn only their aggregate monthly fees and not the specific fee for accepting a given card."
Interchange fees, which make up the bulk of what merchants pay for card services, range from below 1 percent to more than 3 percent, the paper noted. "Merchants may be aware of this range, but they currently do not have all of the information they need to enable them to match an individual credit card presented by a consumer to the corresponding merchant fee for that card," the authors wrote.
"Therefore, merchants would not be able to disclose the relevant card fees to their customers or to completely and accurately differentiate prices across payment instruments."
The Boston Reserve researchers believe the ideas behind the settlement - full information and transparency - are good ones "likely to encourage reductions in interchange fees and give merchants incentives to steer consumers toward lower-fee cards."
Transparency, they added, will encourage competition among merchants by giving them the ability to offer lower retail prices."
However, the researchers also stated "[R]elying exclusively on market forces without resorting to directly regulating the level of those fees has not been tried before, so the extent to which market forces can and will bring about the benefits of enhanced competition in payments markets remains to be seen.
"Because card issuers compete for cardholders by offering cards that generate higher rewards, competition in the current market structure generates fee increases rather than decreases, unlike the typical case in competitive markets." The settlement does not require acquiring banks to disclose fees to merchants, the paper's authors also noted.
"It will be difficult to give consumers the information the settlement allows because there are so many kinds of cards out there and so many different interchange rates," said Nashville Attorney Kevin Kidd, a member of the eta Electronic Transactions Association's Government Relations Committee.
Kidd feels it would be difficult, if not impossible, for the United States to have just one interchange rate, and he doesn't believe consumers would like losing the benefit of their rewards cards and other programs.
"This settlement is not about protecting consumers," he said. "This settlement is about protecting merchants and allotting better terms to merchants. Consumers are not going to see gas prices down by 5 percent because of this settlement. It's not going to happen."
Jay Reeve, a payment attorney in Gun Barrel, Texas, who also works with the ETA, agreed. "I think this settlement is worthless," he said. "Most merchants don't have the technology or sophistication to handle distinctions in pricing. Merchants can get and could get the information, but only the biggest of the big merchants can run through to completion.
"The bulk of the merchants trying to do it will blow the opportunity. Processors and data consultants are going to have to do the technology involved. I do think there is an opportunity here for somebody to implement a solution. Just because you have access to the information it doesn't mean you can implement anything that will allow you to take advantage of it."
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