Merchants Wring More Than $7 Billion out of Networks, Banks in Credit Card Settlement

The card networks, major U.S. banks, and U.S. merchants reached a $7-billion-plus settlement late on Friday, capping a seven-year battle over credit card interchange and network acceptance rules. If approved by the court, the settlement will be the largest such agreement ever in an antitrust case.

Under the terms of the settlement, Visa Inc., MasterCard Inc., and more than a dozen banks will pay nearly $6.6 billion into a fund to settle claims from both class and so-called individual merchants. Of this amount, some $6.05 billion is earmarked for the class merchants. The two networks will also cut credit card interchange rates by 10 basis points over an eight-month period, handing over to merchants accumulated savings estimated at up to $1.2 billion.

In addition, the agreement calls for the networks to relax rules that restrict merchants from levying surcharges on credit card transactions and from steering customers to less expensive cards. Merchants would be allowed to impose surcharges up to an unspecified cap but could not surcharge one card brand more than another. Another rule modification will allow retailers to decide on card acceptance by store brand. The current network rule requires merchants with multiple store brands, or banners, to accept a network’s cards at all banners if they accept it at one. Finally, the networks agreed to meet with so-called merchant buying groups to negotiate interchange.

A statement from Visa indicates that, if the agreement is approved, the 8-month interchange reduction will likely start in the middle of next year. The surcharge-rule change is expected to take effect early next year.

The settlement agreements cover a class representing about 7 million U.S. merchants as well as a number of major retailers suing individually, including grocers Kroger Co. and Safeway Inc. Besides the two big networks, defendants include money-center institutions such as JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.

In statements released immediately after the settlement was announced, network officials expressed relief the long court battle, which has been fought in U.S. District Court in Brooklyn, N.Y., appears to be over. “We are comfortable with the terms, which we do not anticipate will impact our current guidance,” said Joseph W. Saunders, Visa’s chairman and chief executive.

“Our decision to settle is based on our belief that MasterCard and our stakeholders are best served by an amicable resolution,” said Noah Hanft, general counsel and chief franchise integrity officer at MasterCard. “Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases. We believe that today’s settlements should resolve all issues with the merchant community.”

Lawyers for the merchants expressed the hope that the agreement will lead to a more competitive market for credit card acceptance and lower costs overall. “This is an historic settlement,” said Bonny E. Sweeney, senior antitrust partner and principal litigator in the case for co-lead counsel Robbins Geller Rudman & Dowd LLP. “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.”

But some parties felt more combative. In a statement from the American Bankers Association, president and chief executive Frank Keating said: “Let’s be clear–retailers, not consumers, benefit from today’s resolution.” Referring to the Durbin Amendment to the 2010 Dodd-Frank Act, which restricted interchange on debit cards, Keating feared the credit card settlement might embolden “big-box retailers” to approach Congress “for even more handouts.”

And long-time interchange critic Mallory Duncan, senior vice president and general counsel for the National Retail Federation, which was not a party to the litigation, said the settlement won’t solve retailers’ issues with credit card interchange if the relief it offers proves temporary. “The test will be whether the injunctive relief is meaningful,” he said in a statement. “Unless it is, the card market will stay broken and neither merchants nor their customers will achieve a long-term benefit. In that case, it would be a missed opportunity.”

The antitrust case, technically MDL 1720, consolidated approximately 55 lawsuits that merchants and merchant trade groups started filing in 2005 against the two network giants and the banks, alleging credit card interchange and network rules were anticompetitive.