Credit Card Fee Controversy

Visa and MasterCard — two of the world’s largest payment-card networks — experienced a litigation setback recently when a federal court judge denied a proposed $30 billion settlement that would have ended the long-standing legal battle (referred to in this post as the “swipe fee litigation”) over the “interchange fees” (also known as “swipe fees”) that Visa and MasterCard charge merchants. The controversy of credit card fees, and the swipe fee litigation, has been going on for almost 19 years.  

As part of the most recent proposed settlement of the swipe fee litigation, Visa and MasterCard agreed to reduce swipe fees by at least 4 basis points for at least three years and cap their fees at 2023 levels for the next five years. They also agreed to allow merchants to steer customers to cheaper payment options. 

Despite these concessions, the federal judge refused to approve the settlement. As of the writing of this post, the judge’s reasoning underlying her decision is not yet known because the decision is sealed. 

What we do know, however, is that the decades-long credit card fees controversy rages on.

Swipe Fees 

Before we discuss the swipe fee litigation, it is best to understand what a “swipe fee” is and what the credit card fees controversy is about.

Every time a consumer uses a debit card or credit card to pay for a purchase, the merchant is charged an “interchange fee” — or, as it is more commonly known — a “swipe fee.” 

Because they control 80% of the market and have no competition, Visa and MasterCard set the price of the swipe fee that the banks charge when issuing a credit card. 

Since Visa and MasterCard tell the banks what to charge — instead of leaving that to the banks to determine — the banks do not compete among themselves to charge the lowest credit card fee. Whatever price Visa and MasterCard set is the price the banks charge and the price the credit card behemoths get. As a result, retailers are currently paying “an average of 2.24 percent fee each time they swipe a credit card, although those fees can be as high as 4 percent.” 

According to the National Retail Federation, aside from labor, swipe fees are the biggest operating costs for retailers. Together, credit card and debit card swipe fees are costing retailers and consumers (who, of course, ultimately foot the bill for the swipe fees) an astounding $170 billion a year.  

The National Retail Federation also notes that most customers pay the swipe fee as part of the credit card price — even if they don’t ever use the credit card. Not only that but now that more people order goods online, Visa and MasterCard have stepped in to charge fees for online use as well — and the swipe fee for online purchases is even higher than the fee for in-store purchases. 

According to reports, debit and credit card swipe fees drive prices up by $1,000 a year for the average family. 

The “Honor All Cards,” Rule 

In addition to paying a swipe fee, Visa and MasterCard impose what it called an “honor all cards” rule on merchants. 

According to this rule, if a merchant accepts any Visa or MasterCard, the merchant must accept all Visa/MasterCard credit cards  — without regard to the fact that the interchange fee may be different for different cards. 

In addition, the “honor all cards” rule imposed by Visa and MasterCard prevents merchants from encouraging customers to use other payment methods — including cash or cards that have lower swipe fees. The rules set up by Visa and MasterCard also prevent merchants from offering lower prices for paying by some means other than by credit card.  

The “Honor all Wallets,” Rule 

Nor have the credit card companies been slow to react as new technology has changed how people shop. 

As soon as Google Pay and Apple Pay enabled users to pay for goods and services with credit cards or debit cards in their digital wallets, Visa and MasterCard expanded their “honor all cards” rule to include an “honor all wallets” rule. 

With this rule, merchants accepting any digital wallets have to accept all digital wallets that include a Visa or Mastercard payment card (credit card or debit card) — thereby allowing Visa and MasterCard to dominate the digital wallet arena and restricting — if not eliminating — a merchant’s ability to bargain over which digital wallets the merchant will accept.

The Swipe Fee Litigation 

In 2005, twelve (12) million merchants filed a class action antitrust lawsuit against Visa and MasterCard and various banks that served as payment card issuers for Visa and MasterCard (collectively referred to as “defendants”), alleging that the defendants had violated the antitrust laws by adopting interchange rules and rates that constitute price fixing and by imposing supracompetitive fees — in other words, excessive interchange fees or swipe fees. 

Nineteen (19) years later, that lawsuit, (In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, E.D.N.Y., No. 1:05-md-01720, 3/26/24), is still not fully resolved. 

As might be expected of a litigation that has lasted so many years and involves millions of plaintiffs and a significant number of defendants, the procedural history of the swipe fee litigation is long and extremely complex. In brief, it is this: after the initial filing in 2005, the litigants reached a historic settlement in 2012. However, this settlement was reversed on appeal. Then in 2018, a $5.5 billion dollar settlement was agreed to. This settlement was finally approved in 2019. In 2022, the $5.5 billion dollar settlement was appealed by a group of merchants and individuals who objected to the settlement. On March 15, 2023, the United States Court of Appeals for the Second Circuit upheld the settlement decision, and the settlement became final. 

However, the $5.5 billion dollar settlement did not fully end the swipe fee litigation. This is because it addressed only class action membership and opt-out issues in the case, and decided only money damages.  

The other part of the case — which the proposed $30 billion settlement addresses — is the injunctive relief sought by the plaintiffs. This is the settlement proposal that the federal judge recently denied.

The Proposed $30 Billion Settlement 

In March of 2024, a number of the plaintiff merchants in the swipe fee litigation and the defendants (i.e., Visa and MasterCard) filed a motion seeking preliminary approval of a settlement. Unlike the money damages aspect of the case, this proposed settlement sought injunctive, or equitable relief. 

Injunctive or equitable relief asks a court to compel a defendant to do or refrain from performing some action. 

In this instance, the proposed $30 billion settlement: 

• Required defendants to drop the average swipe fee to at least 0.04 percentage points for 3 years,

• Required the average swipe fee to stay at 0.07 percentage points below the current average for five years, and 

• Provided merchants with more discretion to offer discounts or impose surcharges, while requiring Visa and Mastercard to cap rates for five years and remove anti-steering provisions.

It did not, however, change the “honor all cards” rule. Nor did it address what would happen once the five years were up. 

Not all merchant plaintiffs agreed with the proposed settlement. 

Many criticized it for not going far enough — arguing that it offered “very small and very temporary” relief. Certain retailers, like Target Corp. and Starbucks Corp., who opted out of the previous class settlement to pursue their own actions, filed objections to the settlement so they could go to trial. 

What’s Next?

Although the judge’s reasons for rejecting the settlement are not yet known, it is expected that the next step for all parties will be trial.

In the meantime, during all these years the credit card controversy has not been completely ignored by Congress. Instead, legislation has been introduced several times to address the problem. Unfortunately, prior legislative proposals have failed. 

The most recent bill, the Credit Card Competition Act of 2023, if passed, would introduce some competition by requiring banks to include a second network on credit cards. This way, Visa and MasterCard would not be the only credit card providers — increasing competition and allowing merchants to choose between networks.  

According to some reports, the Credit Card Competition Act of 2023 would save business owners and consumers 11 billion a year. 

The Future of Payments and Potential Impact on Fintech.

While the credit card fees controversy rages on, some believe that the depth of the controversy and its lack of resolution is paving the way for alternative payment pathways to emerge. 

Some alternative solutions, such as open banking — a financial services model that allows third-party providers to have access to consumers’ bank accounts — are already widely used in the European Union and parts of Asia, and may soon alter the fintech competitive landscape here in the United States as well. 

Electronic payments (like Venmo) are also a ready alternative — but they have their limits.

Blockchain technology, on the other hand, just may be able to give the credit card giants some serious competition in the near future. Boosted by technological innovations and creative thinking, blockchain offers a faster, more secure and less expensive payments system  — and since it uses digital money (Bitcoin or other cryptocurrencies), it has the advantage of not requiring a “swipe fee.” 

We can expect the future of payments to change rapidly in the upcoming years. While it may not end the credit card fees controversy completely, technological advances and financial innovation just may give the Visa/MasterCard “duopoly” a run for their money. 

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