An enormous amount of commerce is conducted through credit card transactions. In 2011, combined spending on all major branded credit, debit, and prepaid cards was more than $3.5 trillion.1 Revenues from swipe fees (charges paid by merchants to credit card companies and issuing banks for each transaction) have increased as well in recent years as the volume of credit card transactions and the amount of swipe fees themselves have increased.2 Moreover, in the United States the swipe fees are among the highest in the world - for example swipe fees charged to U.S. merchants are more than five times higher than such fees charged in most European countries.3

Those fees have attracted antitrust scrutiny that is bringing major changes to the industry. The Antitrust Division of the Department of Justice (the "DOJ"), private plaintiffs, Congress, and regulators are all examining swipe fees and the practices credit card companies require merchants to follow. In several lawsuits, plaintiffs and the DOJ allege that the swipe fees are at supra-competitive levels, and that the credit card companies impose rules that insulate themselves from competition that could drive those fees down. While some lawsuits are proceeding, settlements in other lawsuits are already bringing changes to the industry. In addition, Congress has enacted the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which reduces the swipe fees for debit (but not credit) cards and imposes other rules designed to encourage competition. These cases demonstrate the degree to which antitrust cases can alter significant industry-wide practices.

Visa and MasterCard Class Action Settlement

On November 27, U.S. District Court Judge Gleeson in the Eastern District of New York preliminarily approved a $7.25 billion settlement that would end the seven year multidistrict antitrust litigation against Visa and MasterCard and the major banks that issue these credit cards.4 If given final approval, this will be the largest antitrust class action settlement in U.S. history.

In this lawsuit, plaintiffs alleged that Visa and MasterCard charged merchants supra-competitive fees and imposed rules that limited merchants' ability to encourage customers to use lower cost forms of payment.

Under the proposed settlement, the defendants agreed to pay approximately $6 billion to a class of about 7 million merchants. In addition, Visa and MasterCard agreed to reduce their interchange fees for eight months (worth about $1.2 billion). Significantly, the settlement also allows merchants to charge customers an extra fee for credit card transactions, which until this point has been prohibited by Visa's and MasterCard's contracts. Visa and MasterCard are required to make the rule changes set out in the settlement by January 27, 2013, according to the current schedule. The proposed settlement sets out two separate settlement classes. One settlement class is composed of merchants that would receive monetary damages based on the interchange fees they have been charged from January 1, 2004 until November 27, 2012. This settlement class would be certified pursuant to Federal Rule of Civil Procedure 23(b)(3). Merchants would be able to opt out of this class and, if they do so, can bring individual actions against Visa and MasterCard for monetary damages based on the harm they allegedly suffered. The other settlement class is one for injunctive relief under Federal Rule of Civil Procedure 23(b)(2). This class would require Visa and MasterCard to alter their credit card rules (e.g. allowing merchants to charge customers for the use of specific credit cards). The settlement would also bar merchants from suing Visa and MasterCard based on the level of the swipe fees, swipe fee rules, or related fees or rules charged by the credit card company or implemented in the future. All merchants, past or future, that accept Visa and MasterCard, are bound by this injunctive class; merchants cannot opt out.

Since the proposed settlement was first announced last July, many retail groups and large retailers have aligned against the agreement, including 10 of the 19 named plaintiffs. A group of plaintiffs opposing the settlement have appealed the court's preliminary approval decision and have requested a stay of the settlement provisions pending the appeal. Those opposing the settlement include national associations of convenience stores, restaurants, community pharmacists, and truck stop operators, as well as a number of major retailers such as Wal-Mart, Target, Expedia, Home Depot, and American Eagle. Those objectors argue that because of the ineffective nature of the injunctive relief and the broad nature of the releases granted by the proposed settlement, the settlement entrenches Visa's and MasterCard's anticompetitive practices and immunizes the credit card companies from lawsuits challenging future allegedly anticompetitive conduct. Moreover, those opposing the settlement object that, under the current settlement structure, plaintiffs cannot opt out of these key releases that cement the current credit card rules. For example, objectors complain that under the settlement they will no longer be able to challenge other rules they consider anticompetitive, such as the "honor all card" rules that require merchants to accept all types of a branded card (e.g. Visa Traditional Rewards and Visa Classic) regardless of whether those types of cards have different levels of swipe fees.

Objectors also take issue with perhaps the most significant rule change imposed by the settlement, i.e., allowing merchants to charge consumers for the use of specific credit cards. First, the objectors argue that this change would not increase competition or lower swipe fees. Second, charging consumers for using Visa and/or MasterCard is not a realistic competitive option for many merchants, because they rely heavily on consumers using the cards and the risk of losing this business would deter merchants from charging consumers for using their credit card. In 2011, Visa and MasterCard accounted for 68 percent of credit card spending.5 In addition, charging consumers for credit card use is not an option for merchants in the ten U.S. states that prohibit such surcharges, including California, Florida, New York, and Texas. Finally, those opposing the settlement argue that imposing the surcharge by brand, as the settlement allows, is not an option for those who also accept American Express because of the interplay between the settlement agreement provisions and standard provisions of the American Express contracts. The objectors contend that the settlement requires merchants who implement a surcharge by brand (e.g. on all Visa cards) impose the same surcharge on all other branded cards that have equal or greater average swipe fees. That requirement would make surcharging impossible for merchants that accept American Express cards, because American Express typically has higher interchange fees but does not generally permit surcharging.

In announcing his decision to grant preliminary approval of the settlement, Judge Gleeson stated that some of the plaintiffs' objections were "overstated."6 Nonetheless, the judge also acknowledged that the effectiveness of allowing consumer surcharges as a measure to increase competition required more scrutiny. The judge added that he would likely appoint an expert to evaluate that portion of the settlement.7 The court scheduled a final approval hearing for September 12, 2013, during which it will assess the fairness, reasonableness, and adequacy of the settlement and address any objections to it.

DOJ (and Private) Anti-Steering Litigation

Other DOJ and private litigation are also impacting the industry. In October 2010, the U.S. Department of Justice sued Visa, MasterCard, and American Express in the Eastern District of New York challenging "anti-steering" provisions in these credit card companies' contracts with merchants.8 Anti-steering provisions are rules in the credit card agreements that prohibit merchants from encouraging (or steering) customers to use one form of payment over others. Because some forms of payment are less expensive for merchants, the DOJ alleged that rules prohibiting merchants from steering customers to lower cost forms of payment were anticompetitive. The DOJ settled its claims with Visa and MasterCard in July 2012. In the settlement, Visa and MasterCard agreed to remove their anti-steering provisions and to refrain from implementing such provisions going forward. (The terms of Visa and MasterCard's settlement with the DOJ were also specifically incorporated into the private class action settlement proposal discussed above.) American Express did not settle and continues to litigate these claims with the DOJ, and discovery is ongoing. In a parallel action, a group of merchants have also challenged American Express's anti-steering provisions in private litigation that is being coordinated with the DOJ action.9 Recently, the Supreme Court granted certiorari to review the Second Circuit's decision that the private plaintiffs could proceed in court notwithstanding the arbitration provisions in their contracts with American Express.10

The DOJ alleged that the credit card companies' anti-steering provisions reduce competition by insulating these card companies from competition with each other as well as other, smaller competitors such as Discover Card. According to the DOJ, anti-steering provisions harmed competition in the general market for credit and charge card services and, separately, in the submarket for travel and entertainment services. The DOJ alleged that travel and entertainment merchants, such as hotels, airlines, and rental car companies, were particularly dependent on credit and charge cards for their revenues and were, therefore, disproportionately harmed. The DOJ pointed out that the credit card companies charged higher swipe fees to travel and entertainment merchants than they did to other merchants, evidencing the market power that the three credit card companies allegedly have over these merchants.

Visa's and MasterCard's settlement with the DOJ required the companies to amend their agreements with merchants to remove the anti-steering provisions. In addition, the settlement required Visa and MasterCard to explicitly provide examples of permissible steering, including:

  • Offering consumer discounts, incentives, or rebates for the use of specific cards
  • Expressing a preference to consumers for the use of specific cards
  • Promoting a specific card to consumers using posted information through its size, prominence, sequencing of payment choices, or other information
  • Informing customers of the actual or relative costs of each card to the merchant

The DOJ emphasized that American Express generally had the highest swipe fees among all the credit and charge cards and by far the highest fees to travel and entertainment merchants. American Express was used by many corporate travelers and American Express had the highest market share in the travel and entertainment segment (37 percent). In contrast, across credit card purchases from all merchants, American Express allegedly had only a 24 percent market share whereas Visa and MasterCard allegedly held 43 percent and 27 percent, respectively. The DOJ also stressed that American Express had even more stringent anti-steering provisions than Visa and MasterCard. For example, the DOJ alleged that, pursuant to agreements with American Express, merchants that accept American Express:

  • "must not indicate or imply that they prefer, directly or indirectly" that the merchant prefers another card
  • "must not try to dissuade" American Express cardholders from using their card
  • "must not criticize" the American Express card or any American Express services
  • "must not try to persuade or prompt" customers to use any other method of payment (including payment by check)
  • "must not" impose any restrictions, conditions, or disadvantages when using the American Express card that are not imposed on other cards
  • "must not" promote any other card more actively than American Express (other than a private label card which can only be used at that merchant's establishment)
  • "must" prominently display that they take American Express and include American Express if a customer asks what payments are accepted

American Express, in its public statements about the case, underscored its relatively small market share among all credit card transactions, arguing that it is not a "must-carry" card. In addition, American Express emphasized its large investments in attracting desirable American Express cardholders and the importance of its anti-steering provisions in preventing other card companies from "free riding" on these investments.

Debit Card Interchange Fee Limits â€" Durbin Amendment to Dodd-Frank Act

Notwithstanding the significance of the DOJ and private litigation in the credit card part of the market, Congress is weighing into the matter on the debit card side of things. In October 2010, the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act came into effect limiting the interchange fees charged on debit cards.11 By statute, these fees were limited to 21 cents per transaction plus .05 percent of the sales amount. As a result, debit card interchange fees are, in all but the smallest transactions, significantly lower than credit card fees which are typically 5 to 10 cents per transaction plus 1 percent to 2.5 percent of the sales amount.12 That is, the percentage of a sale that goes to interchange fees in a credit card transaction is now commonly 20 to 50 times higher than the percentage of the sale that goes to the interchange fee in a debit card transaction.13

As a result of this legislation, most merchants have a significant incentive to steer customers towards debit cards, while, in contrast, banks are discouraging the use of the debit cards. For example, several banks have cancelled rewards programs and, in some cases, started charging consumers for the use of debit cards.14 Banks and credit card companies have also been more reluctant to provide interchange fee discounts for merchants with small transactions such as coffee shops, charging them the full 21 cent fee. This is making it very expensive for these shops to accept debit cards.15

Conclusion

The fees and practices of credit card companies are facing antitrust scrutiny on a number of fronts. Although several different lawsuits are ongoing, the trend of the settlements and legislation to date is to lower fees charged by credit card companies and to eliminate their practices that limit merchants' ability to encourage customers to use lower cost forms of payment.

Footnotes

1 Business Wire, "American Express Moves Ahead of MasterCard; U.S. Credit Card Purchase Volume Marks First Double-Digit Growth Since 2007" February 22, 2012 (citing The Nilson Report, "General Purpose Cards - U.S. 2011" (Feb. 2012)), at http://www.businesswire.com/news/home/20120222006974/en/American-Express-Moves-MasterCard-U.S.-Credit-Card

2 See, e.g., Government Accountability Office, Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges, GAO-10-45 (Washington, D.C.: November 2009), at http://www.gao.gov/assets/300/298664.pdf

3 See, e.g., Government Accountability Office, supra note 2; Chen, Tim, "Credit-card swipe fees: US firms pay too much - and it hurts consumers," April 13, 2011, at http://www.csmonitor.com/Business/new-economy/2011/0413/Credit-card-swipe-fees-US-firms-pay-too-much-and-it-hurts-consumers ; Beckwith, Lyle, "Swipe Fees: The Hidden Tax the Candidates Never Discussed," Real Clear Politics, 11/18/2012 at http://www.realclearpolitics.com/articles/2012/11/18/swipe_fees_the_hidden_tax_the_candidates_never_discussed_116186.html.

4 In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05 md-01720 (E.D.N.Y.).

5 Mandelbaum, Robb, "Visa and MasterCard Settle Lawsuit, but Merchants Aren't Celebrating." New York Times, August 8, 2012, at http://www.nytimes.com/2012/08/09/business/smallbusiness/visa-and-mastercard-settle-lawsuit-but-merchants-arent-happy.html?pagewanted=all&_r=0

6 Dye, Jessica. "Retail Credit Card Fee Settlement Gets Preliminary OK," Chicago Tribune, November 9, 2012, at http://articles.chicagotribune.com/2012-11-09/business/sns-rt-us-creditcard-settlementbre8a81eb-20121109_1_noah-hanft-credit-card-fee-settlement-mastercard-general-counsel .

7 Id.

8 United States v. Visa, MasterCard, and American Express, No. CV-10-4496 (E.D.N.Y.).

9 In re American Express Anti-Steering Rules Antitrust Litigation, No. 1:11 MD 2221 (E.D.N.Y.).

10 American Express Co. v. Italian Colors Restaurant, No. 12-133, 2012 WL 3096737 (U.S. Nov. 9, 2012)

11 Public Law No. 111-203.

12 See, e.g. Visa U.S.A. Interchange Reimbursement Fees, at http://usa.visa.com/download/merchants/visa-usa-interchange-reimbursement-fees-june2012.pdf , 11/29/12 .

13 Id.

14 See, e.g., Mattingly, Phil, "Dodd-Frank Swipe-Fee Cap Already Ending Debit Card Rewards: One Year Later," Bloomberg, July 21, 2011, at http://www.bloomberg.com/news/2011-07-21/dodd-frank-swipe-fee-cap-already-ending-debit-card-rewards-one-year-later.html , 11/29/12.

15 See, Sidel Robin, "Debit-Fee Cap Has Nasty Side Effect," Wall Street Journal, December 8, 2011, at http://online.wsj.com/article/SB10001424052970204319004577084613307585768.html , 11/29/12 . .

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