As Big Chains Chafe at Settlement, Smaller Retailers Celebrate the Deal

With each passing day, the proposed settlement of the giant antitrust suit over credit card interchange and card network rules appears to unravel even more as big-box merchants increasingly express dissatisfaction with the $7-billion-plus deal. The latest is Wal-Mart Stores Inc., which issued a statement on Tuesday opposing the agreement and saying it left in place a “broken” pricing system. Wal-Mart’s action followed a similar rejection on Friday from Target Corp. Neither retailer sued individually in the 7-year-old case, which includes both class-action and individual suits.

Besides the big-box reactions, the Retail Industry Leaders Association last week issued a statement pointing to flaws in the settlement and apparently calling on Congress to regulate credit card pricing as it did debit card fees with the Durbin Amendment to the 2010 Dodd-Frank Act. “As long as the U.S. payments market remains broken and its swipe fees continue to be the highest in the world, the Congress will have an appropriate legislative and oversight role,” says a letter RILA sent on July 17 to Congressional leaders. The Arlington, Va.-based association represents large retail chains and suppliers.

And the NACS, a trade group representing 3,700 convenience-store operators and suppliers, issued a statement denouncing the settlement the same day it was announced. The NACS, which sees network-set credit card interchange as a form of price fixing, argues the agreement does nothing to change the way interchange is arrived at.

But smaller and lesser-known merchants included in the class appear happier with the proposed settlement, which was agreed to July 13 and includes up to $1.2 billion in credit card interchange relief over eight months for class merchants. The deal also offers $6.6 billion to settle merchants’ damage claims and relaxation of certain network rules, chiefly the networks’ ban on credit card surcharges. A key component of the agreement, which awaits approval from the court, would give the networks broad releases from interchange and rules-related liability based on conditions in place up to 2012.

Structural reform of credit card interchange, especially in the form of regulation, could be a long way off if it ever happens, argue some experts. “I don’t think Congress has any appetite to do this,” notes Eric Grover, a payments-industry consultant based in Minden, Nev., though he adds that “I think [retailers] will continue to make appeals to regulators to intervene.”

While the card networks set interchange rates, the fees are collected by card-issuing banks and paid by acquiring banks, which pass the pricing down the chain to client merchants. A dozen major issuing banks are defendants in the case along with Visa Inc. and MasterCard Inc. Grover argues that only a long, hard-fought trial, the outcome of which would be uncertain, could force the networks to reform interchange.

Mindful of this point, three of the five original plaintiffs in the case, contacted by Digital Transactions News, say they are content with the settlement. “My gut instinct is we got the best deal we could have gotten, as good as we could have gotten if we had gone to trial,” says Michael Schumann, co-owner of St. Paul, Minn.-based Traditions Classic Home Furnishings, a three-store furniture emporium that filed suit along with four other merchants in June 2005.

Despite widespread skepticism that merchants will exercise the settlement’s surcharge rights, Schumann argues they will. The agreement puts limits on surcharging, and about 10 states, including several populous ones, ban the practice by law. But, Schumann argues, surcharging consumers for using expensive cards “gives us a tool as merchants to really put a lid on interchange.”

Mitch Goldstone, president and chief executive of another plaintiff in the June 2005 suit, Irvine, Calif.-based Scanmyphotos.com, hails the settlement and says he has already reduced prices to reflect the agreement’s proposed interchange relief. “I’m pleased it went this route [settlement] as opposed to going to trial, which would have been a huge mess,” he says.

The largest of the five original plaintiffs, CHS Inc., similarly expresses satisfaction with the agreement. “This agreement represents a significant step in the right direction and provides some important relief for our merchants, and CHS supports this settlement agreement,” says Doug Dorfman, vice president of refined fuels marketing for the St. Paul, Minn.-based energy and agricultural conglomerate. CHS operates more than 1,400 gasoline stations under the Cenex banner, about 800 of which include c-stores. Dorfman’s comments came in a statement released to Digital Transactions News.

Still, Dorfman cautions, “It is too early to define how the cash settlement award will translate into monetary relief for CHS and those retailers who process with CHS Payment Solutions.”

Of the other two original plaintiffs, catering concern A Dash of Salt LLC did not return a phone call from Digital Transactions News and KSARRA LLC could not be reached. Both operations are in Connecticut. All five companies ultimately were folded into the class action that went before the U.S. District Court for the Eastern District of New York in Brooklyn.