Payment networks Visa and MasterCard, as well as a number of large retailers, have agreed to a $7.25 billion settlement that may allow merchants to impose a "checkout fee" on consumers for credit card transactions and end a seven-year battle over credit card swipe fees.
Under the current system, merchants pay interchange, or swipe, fees to Visa or MasterCard that go to banks. The settlement may give merchants the right to recover the cost of the swipe fees from consumers with a "checkout fee."
Merchants like Kroger, Safeway and Payless Shoe Source settled with Visa, MasterCard and more than a dozen large banks after U.S. retailers filed a class-action lawsuit in 2005. The settlement must be approved by the Eastern District Court of New York.
The settlement will allow greater transparency to consumers, attorneys for the merchants said, because merchants are now permitted to tell them that there are fees associated with credit card use and they are recouping a portion of it. Or, they could tell the customers that it is cheaper to pay cash.
"Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases," said Noah Hanft, MasterCard's general counsel and chief franchise integrity officer. "We believe that today's settlements should resolve all issues with the merchant community."
Joseph W. Saunders, Visa Inc. chairman and CEO, said the company believes "settling this case is in the best interests of all parties."
Patrick J. Coughlin, senior trial counsel at Robbins Geller and one of the lawyers for the plaintiffs, said the new rules will allow merchants to "put pressure on the credit card networks to lower interchange or 'swipe' fees, which are the second- or third-highest cost of doing business for many retailers."
Bonny E. Sweeney, the firm's senior antitrust partner and its principal litigator in the case, said the settlement refunds billions of dollars to retailers that paid "artificially inflated interchange fees."
Frank Keating, president and CEO of the American Banking Association, said retailers were showing "little regard for consumers."
"Let's be clear: Retailers, not consumers, benefit from today's resolution," he said in a statement. "This settlement even provides merchants with the ability to impose 'checkout fees' on customers just for using credit cards. This type of behavior is nothing new for retailers."
Michael Kon, Morningstar senior analyst, said the settlement wasn't a surprise.
He said the right to allow a consumer surcharge for credit card transactions, the core of the legal battle, will affect smaller merchants or "mom-and-pop shops" mostly.
"Businesses like small grocery stores might be more flexible in surcharging for credit card transactions, though they risk losing clients," Kon said.
Kon doesn't expect the settlement to make a significant difference to consumers because large merchants, like Target and Walmart, may be hesitant to impose a surcharge on consumer transactions.
"Paying with credit cards is much more convenient for merchants and shoppers," Kon said. "It might be a bad strategy to penalize someone using the most convenient way to pay."
Many analysts note that merchants already take into account credit card swipe fees when they set their prices, whether you pay by credit card, cash or check.
"I don't see them rushing to give this surcharge to a group of shoppers who choose to pay with credit cards," Kon said.