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Card-acceptance costs and network rules weren’t the only subjects covered by the sweeping settlement revealed Tuesday involving Visa Inc., Mastercard Inc. and lawyers for the merchants that sued them. The pending agreement, which needs approval from a federal judge, allows for the creation of so-called merchant buying groups that would argue on behalf of card-accepting businesses for favorable terms from the card networks.
“To the extent necessary, Visa and Mastercard will modify their rules to permit merchants to form Merchant Buying Groups,” a document detailing the settlement says. “Merchants that form buying groups that meet certain criteria may make proposals to Visa and Mastercard, on behalf of the group’s members, concerning interchange rates and rate categories; merchant rules; merchant fees; network practices and procedures; and any other aspect of the operation of Visa or Mastercard that impacts merchants. Visa or Mastercard is obliged to, in good faith: consider the Merchant Buying Group’s proposals; determine if the proposal sets forth commercially reasonable benefits to merchants, consumers, the network, and all other stakeholders; and, conduct reasonable, bona fide negotiations with the Merchant Buying Group concerning the proposal.”
But just how the buying groups would work and who would be in them isn’t specified. A source close to the negotiations for the settlement who asked not to be identified says the intent is to increase the negotiating power of smaller merchants regarding card-acceptance costs and rules.
In addition to price caps and a small reduction in interchange, the settlement requires Visa and Mastercard to change or simplify rules governing credit card surcharges, discounts for cash, and which cards merchants must accept. “Today, only a handful of large merchants are able to negotiate credit card interchange rates substantially lower than the posted rates,” the source tells Digital Transactions News by e-mail. “This settlement increases small merchants’ ability to negotiate lower interchange fees from Visa and Mastercard by forming merchant buying groups and using the expanded power to surcharge and discount.”
More information about the MBGs will be forthcoming in the $15-million merchant-education program to be created under the terms of the settlement, according to the source. The source says that while MBGs “aren’t currently prohibited, in practice, merchants did not form or use any buying groups. The merchant-education program will inform merchants of the importance and value of forming buying groups to negotiate interchange rates from Visa and Mastercard and will assist merchants in forming buying groups.”
Spokespersons for Visa and Mastercard did not respond to requests for comment from Digital Transactions News.
Some merchant trade groups already are questioning some terms of the settlement, including the MBGs. “Merchants can form buying groups, they’ve always been able to form buying groups,” Doug Kantor, general counsel of Alexandria, Va.-based NACS, better known as the National Association of Convenience Stores, tells Digital Transactions News. “The settlement doesn’t change that. Giving someone permission to do what they already can do doesn’t change the outcome.”
NACS and some other merchant groups regard the Credit Card Competition Act, pending in Congress, as the better alternative. That bill, sponsored by U.S. Sen. Richard Durbin, D-Ill., and Roger Marshall, R-Kan., would force Visa and Mastercard to enable network choice in credit card transactions, with the intent to promote price competition benefitting merchants.
“That at least requires the credit card companies to compete with each other,” says Kantor. “Somewhere you’ve got to have a competitive market dynamic. The settlement doesn’t do that. The legislation would.”
The Merchants Payments Coalition, a group representing retailers, supermarkets, convenience stores, gas stations, online merchants, and others in card-related matters, issued a statement saying the proposed settlement would provide “very small relief” and “does not end the need for Congress to pass legislation.”
But the Electronic Payments Coalition, a lobbying group of networks and financial institutions, supports the settlement. The EPC has been a fierce opponent of the CCCA. “The agreement helps small businesses more than a haphazard, experimental piece of legislation that only benefits the largest corporate mega-stores ever would,” the EPC said in a statement. “Congress should put an end to the ill-advised Durbin-Marshall mandates and let the agreement merchants reached stand on its own.”
The settlement’s rules changes would make it easier for merchants to surcharge transactions, discount cards by issuer, and effectively eliminate the networks’ honor-all-cards rules applying to digital wallets, notes Steve Mott, principal of payments consultancy BetterBuyDesign. “All these concessions are wins for merchants,” Mott says by e-mail. “The devil may be in the details … But this looks like constructive progress on essential merchant needs.”
The settlement now goes to the U.S. District Court for the Eastern District of New York in Brooklyn for approval. A separate but related settlement providing approximately $5.5 billion in damages to card-accepting merchants that chose to remain in a consolidated class action already has gained court approval.
