War of Words Over $7.2B Swipe Fee Settlement Heats Up

By Adam Blair
In this corner: Walmart, Target and several retail industry trade associations, including the National Retail Federation (NRF). In the opposing corner: Visa, MasterCard and the American Bankers Association (ABA). What's at stake: the "swipe fee" payment structure for credit and debit transactions in place at millions of U.S. retailers.

The big-box stores and retail associations claim a recent record-setting $7.2 billion antitrust settlement does nothing to fix a broken system and entrenches the existing "Visa/MasterCard duopoly." The ABA retorts that the retail industry is trying to drag lawmakers into an already-settled dispute by having Congress "impose further price controls."

The heated rhetoric indicates that what had seemed to be a done deal just a few months ago is far from settled. In July, lawyers representing seven million retailers in a 2005 class-action lawsuit that alleged price-fixing by Visa, MasterCard and other large financial institutions announced that a settlement had been reached. The defendants would pay $6 billion and reduce the "swipe fees" retailers pay for eight months, adding $1.2 billion to the deal.

Swipe fees can reach as high as 3% of a transaction's value, but retailers have long grumbled that they have little alternative to paying them. Financial institutions note that retailers' ability to accept card payments makes up for these costs by increasing consumer transaction amounts. New payment options, such as mobile wallets or those offered by new players like PayPal, may increase retailers' bargaining leverage, if they catch on with sufficient numbers of consumers.

A few weeks after the July announcement, first Target and then Walmart expressed their opposition to the $7.2 billion settlement. The retailing giants were joined by the National Association of Convenience Stores, the Society of Independent Gasoline Marketers of America and the National Grocers Association. By September, the association list had expanded to include the NRF, associations representing college stores, c-stores, truck stop operators and pharmacists, and the Retail Industry Leaders Association (RILA).

Price-Fixing Accusation

In a letter sent to leaders of the U.S. Senate and House of Representatives on September 20, the retail groups claim the settlement offer enables "continued centralized price-fixing by Visa and MasterCard" and "limits emerging innovations that can bring meaningful competition to the marketplace, such as mobile payments." The settlement also "allows Visa and MasterCard to continue to handcuff merchants and prevent them from seeking better deals and communicating openly with their customers," and gives the two companies "the ability to keep market forces from working by keeping prices hidden."

In his own September 20 letter to Senate Majority Leader Harry Reid, Minority Leader Mitch McConnell, Speaker of the House John Boehner and House Minority Leader Nancy Pelosi, ABA president and CEO Frank Keating accuses the retail industry of "bombarding Congress with manufactured claims of unfairness over how the U.S. payments system operates, part of an effort to drag lawmakers back into the controversial debate over interchange fees."

Keating defends the settlement, saying it includes several significant structural reforms that will enable merchants to negotiate better terms over credit card interchange fees, and praises it as a market-based solution that was voluntarily entered into by retailers, financial institutions and card networks.

He then accuses "some in the retail community" of seeking Congressional intervention and the imposition of further price controls: "In truth, nothing is ever enough for some in the retail community and their desire to enjoy the benefits of our nation's truly efficient payments system without ever having to pay for it. It is time for the Congress to say enough is enough."

Further Legal Action?

Despite all the name-calling, attorneys for the plaintiffs said they remain on target to file for preliminary approval of the agreement by October 12, according to published reports. However, NRF's Board of Directors has authorized the association to go to court in an attempt to block the settlement, despite the fact that NRF is not a party to the lawsuit.

"The National Retail Federation categorically opposes the proposed settlement," said NRF president and CEO Matthew Shay in a statement. "It does nothing to curb the anticompetitive behavior of Visa and MasterCard, and instead ensures that swipe fees paid by retailers and their customers will continue to rise while barring any future legal challenges. The proposal is a lose-lose-lose for merchants, consumers and competition."

For related content: Retailers Win Major $6B Victory Against Visa, MasterCard Swipe Fees

Walmart, Target Oppose $7.2B Swipe Fee Settlement Offer