Visa and Mastercard sign $30 billion US retailer agreement

Visa and MasterCard's $30 billion settlement is expected to lead to lower prices for consumers as merchants pass on the savings from reduced card fees.

If court approval is granted, the settlement announced on Tuesday, one of the largest in U.S history, would resolve most claims in a nationwide lawsuit that commenced in 2005.

Certain critics contend that the proposed measure might need to be sufficiently comprehensive, asserting that the cost reductions would be transitory and that charges would persist at elevated levels.

Merchants have consistently lodged allegations against Visa and MasterCard, contending that the two issuers imposed exorbitant swipe fees or interchange fees on debit and credit card transactions, preventing them from guiding consumers towards more affordable payment methods via "anti-steering" regulations.

According to Bankrate.com, swipe fees generally consist of nominal fixed fees and a percentage of the total sale amounts. These fees range from 1.5 percent to 3.5 percent per transaction.

Visa and MasterCard would each achieve a minimum reduction of four basis points (0.04 percentage points) in transaction rates over three years and a seven-basis-point average rate reduction over the subsequent five years, per the settlement terms.

In addition, both card networks reached a five-year rate limit and elimination of anti-steering provisions.

Merchants will be granted greater discretion regarding implementing surcharges or offering discounts on cards with higher interchange fees.

Many already inform consumers at the register that card payments incur a surcharge over cash transactions.

According to court documents, the comprehensive value of fee rollbacks and limits amounts to $29.79 billion. In its estimation, Visa has determined that small businesses constitute over 90 percent of the settling merchants.

Both Visa and MasterCard issued denials of malfeasance in their settlement agreement.

Kim Lawrence, the North American president of Visa, stated that the accord addressed "true pain points" identified by small businesses. Rob Baird, general counsel of MasterCard, stated that it provided "substantial certainty" to businesses.

MasterCard experienced a 0.2 percent increase, whereas Visa shares closed down 0.2 percent.

A year before the settlement, a Manhattan federal appeals court sustained a class action settlement worth $5.6 billion involving Visa and MasterCard and approximately 12 million merchants.

Some merchants chose not to participate in the settlement and are now pursuing damages in separate litigation.

Professor of Law and Finance Adam Levitin of Georgetown University stated in an email that those merchants might object to the enforceable nature of the settlement reached on Tuesday.

According to Levitin, the average transaction fee charged by U.S. merchants remains at 219 basis points, the highest in the developed world.

"If that is the result of nearly two decades of litigation, then the settlement is a huge loss for U.S. merchants," said the representative.

Appeals are conceivable, and U.S. District Judge Margo Brodie, in the borough of Brooklyn, New York City, will most likely approve the settlement reached on Tuesday, in late 2024 or early 2025.

"It is a bad deal for merchants," said National Association of Convenience Stores general counsel Doug Kantor in an interview. "It provides minimal, temporary relief, but afterwards, MasterCard and Visa will be free to raise rates, and the agreement does not provide a mechanism to slow an increase."

More than 42 million Americans are employed by the Retail Industry Leaders Association, which stated that the settlement necessitated a more thorough examination but was "a mere drop in the bucket."

According to TD Cowen analyst Jaret Seiberg, small banks and credit unions may object because large retailers like Walmart (WMT.N) may be able to negotiate agreements with larger banks for cards that provide discounts at the register.

However, he claimed that the accord reflects "extraordinary concessions" by Visa, MasterCard, and banks because merchants can charge surcharges on airline and cash-back credit cards. However, only a minority do so to maximize sales volume rather than fee savings.

In an affidavit, Joseph Stiglitz, an expert retained by the settling merchants and a Nobel Prize-winning economist, stated that the settlement could yield "extremely substantial" savings.

"Competition among merchants results in these cost savings being passed on to customers in the form of lower prices," according to Stiglitz.

According to the plaintiffs' attorneys, Visa and MasterCard have consented to reimburse one hundred percent of their legal fees and expenses.

A bill known as the Credit Card Competition Act, which would permit merchants to process Visa and MasterCard credit cards via alternative payment networks, has been advocated for by several U.S. senators.

Analyst at Wolfe Research, Darrin Peller, wrote that the settlement reached on Tuesday "probably takes some wind out of the sails" of that endeavour.

U.S. District Court, Eastern District of New York, In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case No. 05-md-0