Mastercard, Visa offer to settle merchant lawsuit

Could the 20-year legal fracas pitting Visa and Mastercard against the merchant community over the cost of card acceptance finally be headed for resolution? The card brands and card-issuing banks certainly hope so.

Some merchants may have a different outlook, however. It's all going to come down to what U.S. District Court Judge Margot Brodie decides, as a proposed settlement agreement hammered out by the card brands and a group of merchants now sits before her.

Brodie, a justice in U.S. District Court for the Eastern District of New York who has been overseeing the case, rejected a proposed settlement that was put before her last year. An earlier settlement was overturned in 2016 by the U.S. Court of Appeals for the Second Circuit, which encompasses New York, Connecticut and Vermont.

The Wall Street Journal reported over the weekend that a settlement agreement was in the works. Mastercard, in an October 10 filing with the Securities and Exchange Commission, outlined the agreement and said Visa was also on board.

The filing also stated that the card brands had worked with an independent mediator this go around to address Judge Brodie's concerns with the last proposed settlement.

Honor-all-cards rule, interchange, surcharging all addressed

"We believe that this is the best resolution for all parties, delivering the clarity, flexibility and consumer protections that were sought in this effort," a Mastercard spokesman stated in an email. "Smaller merchants will gain in this settlement – more acceptance choices, reduced costs and simplified rules."

Visa's statement characterized the proposed agreement as offering "meaningful relief, more flexibility and options to control how merchants accept payments from their customers."

Here's a high-level look at the proposed agreement, as outlined for the SEC.

• Both Visa and Mastercard will reduce the average effective interchange on consumer and commercial credit cards issued by U.S. financial institutions by 10-basis points. The reduction would effectively serve as an interchange rate cap lasting five years.

• The honor-all-cards rule would be scrapped, as merchants would be able "to make decisions on accepting consumer credit and commercial credit cards." Within the consumer card category, for example, they could decide whether they want to accept both "standard" and "premium" cards. However, merchants would not be allowed to discriminate between the same level of cards issued by different financial institutions.

• The card brands also have agreed to activate a "simplified approach" to credit card surcharging, "providing merchants more optionality."

Merchant groups balk

Organizations representing merchants complained the proposed settlement doesn't go far enough. The National Retail Federation described it as "all window dressing and no substance."

"This is the third attempt to settle this case, and the card industry either just doesn't get it or just doesn't care," Stephanie Martz, NRF chief administrative officer and general counsel, said in a statement responding to the Wall Street Journal's weekend reporting. "The reduction in swipe fees [interchange] doesn't begin to go far enough, and the change in the honor-all-cards rule would accomplish nothing."

The Merchants Payments Coalition also issued a statement responding to that reporting, and when contacted after the agreement was made public, a spokesman said the organization's objections still stand.

Jennifer Hatcher, chief public policy officer at the Food Industry Association and a member of the MPC executive committee, accused the card brands of trying to "get legal protection while offering little in return to merchants." Martz went on to assert that "Under this proposal, Visa and Mastercard would get to keep fixing swipe fees while Main Steet businesses and customers would pay the price."

Both organizations said they would continue to lobby for Credit Card Competition Act. That legislation, proposed by Senator Dick Durbin, would require card-issuing banks to program cards to support merchant processing choice. Cards would need to be programed to be processed over at least two unaffiliated card networks, only one of which could be a Visa or Mastercard network.

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