When $7.25 Billion Is not Enough

Sometimes you just wonder. Only a week ago attorneys from the three law firms representing the various merchant groups involved in the latest antitrust case against Visa, MasterCard and their biggest card issuers were declaring glorious victory in the form of an “historic settlement” worth an estimated $7.25 billion that would “create real price competition, leading to reduced card-acceptance fees for retailers.” It was always clear that it would do no such thing and now their own clients, having evidently figured it all out, are turning sour on the deal. And no wonder.

My first take on the settlement was that the merchants would treat it as just an intermediate stage, not really a victory, in their long-running interchange war against Visa, MasterCard and the issuers. They would take the cash and the eight-month interchange break and would keep pushing for lower credit card rates, which were left largely untouched by the terms of the settlement. But now the Wal-Marts of the world are having second thoughts and are opposing it altogether. I would’ve thought that the merchants would have done a better job at communicating their objectives to their lawyers. Now they look like they don’t know what they want and the judge presiding over the case may well approve the settlement anyway.

Defining Victory

Here is what Bonny E. Sweeney, one of the lawyers representing the merchants in the case, had to say about the settlement when it was first announced:

This is an historic settlement. In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers.

So that was an unequivocal victory, no “ifs” and “buts.” And now here is how K. Craig Wildfang, a lawyer from another firm representing the merchants in the case, described the deal:

The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers… Over time, the reforms induced by this case and in this settlement should help reduce card-acceptance costs to merchants, which in turn, will result in lower prices for all consumers.

How was this shift of the “competitive balance” to take place and lead to “reduced card-acceptance fees for retailers” when the issuers were under no obligation to lower credit interchange fees was not explained. Perhaps because it was to lead to no such thing.

What Actually Took Place

Here is what our initial assessment of the agreement was:

Coming on the heels of the debit interchange victory won last year, this settlement is another big win for U.S. retailers in their ongoing war against the card issuers. But not quite as big. To begin with, Visa and MasterCard were not forced to lower the credit interchange rates and they will not do it on their own. What’s more, taking advantage of the hard-won right to place surcharges on credit card payments runs the risk of alienating loyal customers. Just imagine doing your grocery shopping at your local supermarket and pulling up your credit card at the checkout, as you customarily do, only to discover that there is now a two- or three-percent surcharge for credit card payments.

For those of you who are not industry insiders, the interchange fees are set by Visa and MasterCard and are collected by their card issuers every time a merchant accepts a bank card for payment. Last year the retailers won the debit war, which reduced their collective cost of accepting debit cards by about $7 billion per year, give or take, and could then focus all of their attention on the much costlier credit interchange fees. So once I read the terms of the settlement, two things were immediately clear to me: the settlement amount — a total of $7.25 billion or so — was very low, but more importantly, even as the merchants’ lawyers were claiming otherwise, it was quite obvious that the credit interchange rates were safe, at least for the time being.

Moreover, the only real concession the merchants managed to secure — the ability to place surcharges on credit card transactions — was unlikely to be utilized in practice; at least not on a mass scale. So it looked very much like a victory for the credit card companies and now the Wal-Marts of the world are agreeing with me.

The Takeaway

So what are we to make of this whole thing? Well, to say that the merchants have made a huge mess of it would be an understatement of some magnitude. My initial reaction when I read the news this morning was that the plaintiffs’ lawyers should be fired immediately, although it’s now too late for that to make any difference, but when I thought about it I realized that the merchants themselves must have dug the hole they are in. After all, the lawyers would not have set the terms of the agreement on their own, without consulting their clients. So if Wal-Mart feels “disappointed in the proposed credit card interchange fee settlement,” they have no one else to blame but themselves.

Image credit: Prognosis.com.