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The Green Sheet Online Edition

April 10, 2017 • Issue 17:04:01

Insider's report on payments:
Interchange challenges create need for payments experts

By Patti Murphy
ProScribes Inc.

The U.S. Supreme Court decided against weighing in on a multibillion-dollar payout by Mastercard and Visa to settle an anti-trust suit filed by a group of retailers over interchange pricing and anti-steering rules. The High Court's decision leaves intact a 2016 appeals court ruling that scrapped the settlement after hundreds of companies – including some of the biggest names in retailing – opposed the 2013 agreement. It also leaves open the possibility of an ongoing legal fracas over interchange and related issues.

"If this settlement had been approved, the structure of fees that drive up the prices of everything consumers buy would be cemented into place forever," Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation, stated. "Now something can finally be done to bring these fees under control."

Interchange generates a pile of cash, but it's a vulnerable pile. An analysis published in 2016 by S&P Global Market Intelligence found credit and debit card interchange generated $32.25 billion in revenues for U.S. financial institutions in 2015. In 2011, the total was $30.58 billion; however, with implementation of Durbin Amendment caps on debit card interchange, revenues fell to $27.97 billion the following year.

Visa and Mastercard have been taking heat over interchange for decades, but the battle intensified in 2006 when a large group of retailers (led by big-box stores like Wal-Mart Stores Inc., as well as the NRF and other retail trade groups) filed a class-action lawsuit alleging that interchange and rules meant to maximize interchange collections amounted to price-fixing.

Following years of legal maneuvering, the parties reached an out-of-court settlement that included $7.2 billion (later reduced to $5.7 billion) in restitution, which was approved by a U.S. District Court judge. But soon retailers began to balk; many sought to opt out for a variety of reasons, including a provision of the settlement that banned future lawsuits regarding interchange and related rules.

The U.S. Court of Appeals for the Second Circuit in New York agreed with the dissenting retailers, writing in a June 2016 opinion that "the class plaintiffs were inadequately represented" and that "the settlement was inadequate and unreasonable." The Supreme Court's decision not to review the appeals court decision means the case now can be placed back on the docket at the U.S. District Court in New York, where it was originally.

Duncan said retailers are considering whether to negotiate another settlement or to focus on more recently filed lawsuits over interchange and related issues. And there is no dearth of litigation. In 2016, at least four lawsuits were filed against Visa and/or Mastercard over the EMV (Europay, Mastercard and Visa) mandate. Wal-Mart and The Home Depot Inc. alleged in separate filings that to maximize transaction interchange, the card brands require them to accept signatures instead of other, more secure methods of authorization, like PINs.

There is little doubt interchange has become the boogeyman of card payments. And retailers and their powerful trade groups are determined to eradicate or at least severely handicap it. Their strategy reminds me of lingchi, a method of torture and execution practiced in China from the Dark Ages until the early 20th century that translates as death by a thousand cuts. Only in this situation, it's more like death by a thousand lawsuits and regulations.

"The Court's decision ensures that retailers will continue to be able to challenge the card networks' unfair price fixing of credit card fees," NACS, the Association for Convenience and Fuel Retailing, said in a statement. "If the justices had come down in favor of the settlement, the card companies would have been insulated from lawsuits challenging improperly set fees."

It's not just that interchange is under legal attack. New and emerging technologies are being leveraged to provide merchants with lower-cost alternatives to bankcard acceptance, such as decoupled debit cards, bitcoin payments, and person-to-person (bank-to-bank) networks. And the push for real-time payments is creating more and better options. In addition to better certainty of funds and lower transaction fees, real-time payments offer vast improvements in cash flow management while improving customer service and reducing opportunities for fraud.

Selling payments expertise

To compete successfully in this changing environment, ISOs and merchant level salespeople (MLSs) need to remake themselves into payments experts who can provide combinations of payment acceptance options and ancillary services that make sense for individual retailers.

Card acceptance is the go-to option for millions of merchants, but not all. For others, particularly those selling large-ticket items like automobiles, furniture and jewelry, check payments are the preferred option. And the combination of remote check capture and guarantee services can now render checks faster and safer than most any other payment. In fact, many banks and financial technology firms are providing same-day availability on check deposits, for a fee.

As Paul H. Green (founder of The Green Sheet) explained to me many years ago: merchants just want to sell stuff. The method of payment doesn't matter; they'd accept puka shells if there were sufficient value attached. And this brings me to an important consideration: the value of unified, interoperable payment offerings cannot be ignored.

"What was once an industry based on a simple cash register in the store has now grown to encompass multiple channels, alternative payment options, always-on service and inventory availability, and an extremely well-informed consumer," Boston Retail Partners wrote in a 2016 report detailing its 17th annual POS/customer engagement survey. The number one priority for merchants: unified commerce, cited by 85 percent of merchants surveyed, BRP said. This far outstripped payment and data security, which was cited as a priority by just 38 percent of respondents.

Payments is just one piece of the retail ecosystem, albeit an important piece. No merchant wants to turn away customers, but by not offering a mix of payment options that meets customer preferences, that's what merchants may be doing. ISOs and MLSs can and should help merchants implement the right mix of payment options for their customers. Traditional credit and debit cards likely always will be in that mix, but the days of building a book of business by undercutting competitors on interchange pricing, or handing out free terminals, are over. So put on your consultant's hat and help your customers make the most of the changing payments landscape. The Green Sheet, Inc.

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

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