Merchants Suing on Interchange Seek Major Reform of Fee System

The merchants that last week filed a class-action antitrust suit against major banks and the bank card associations seek more than to collect damages for what they regard as anticompetitive behavior. Indeed, according to the lead attorney representing them, they hope their case will lead to sweeping reform of the bank card interchange system. “What we have in mind is shifting to a system like other four-party systems where there's an absence of uniform, systemwide interchange,” says K. Craig Wildfang, a partner with Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis. Wildfang says that if the court should agree with the plaintiffs that current bank card interchange practices are anticompetitive, it will be in a position to impose major changes in the way interchange is arrived at. “The court has broad discretion to try to remedy that,” he says. He adds the merchants have not yet worked out a detailed proposal for a substitute pricing system, but says it would likely allow all four parties to a card transaction?consumer, merchant, issuing bank, and acquiring bank?to negotiate interchange rates in multilateral discussions. Such a system, he says, has worked well for years in the checking system, where checks are traded at par. “It's a four-party system, there is no interchange, and the banks have figured out how to market checking account services [profitably],” Wildfang argues. Interchange pricing in the Visa U.S.A. and MasterCard International networks is set by the two bank card associations. Acquirers pay it to issuers and then pass it on to their merchant clients along with a markup. This price-setting by a central authority, Wildfang argues, may have been necessary at one time because of the impracticality of multilateral negotiation. But now, he says, advances in technology have made it possible to decentralize interchange, citing electronic stock exchanges as examples. “The Nasdaq handles hundreds of millions of transactions a day, with interchange bargained for, and it works just fine,” he says, though he concedes the exchange also relies on middlemen who function as market-makers. All this isn't to say the merchants Wildfang represents?five are named in the complaint filed last week in the U.S. District Court for the District of Connecticut, representing a class of all merchants that accept Visa and MasterCard?aren't also interested in establishing damages from what they perceive as overcharges from interchange. “We think damages are in the tens of billions of dollars,” he says, adding that the merchants plan to pin down a number by hiring economists to calculate the difference between what merchants have actually paid in interchange and what they would have paid in what they regard as a competitive market. The way interchange is structured, he says, “has the perverse effect of causing prices to go up,” since issuing banks can levy ever-increasing levels of interchange without fear of being undercut by other banks. The class action names Visa, MasterCard, and a number of major banks, including Bank of America, Citibank, J.P. Morgan Chase, and Capital One, as defendants. It alleges the banks and their card associations have colluded to charge, “by horizontal agreement, credit card interchange fees at supra-competitive levels,” and asks the court for damages as well as an injunction to stop the alleged collusion (Digital Transactions News, June 20). The named merchants include Photos Etc. Corp. (doing business as 30 Minute Photos Etc.,), Irvine, Calif.; St Paul, Minn.-based Traditions Classic Home Furnishings; CHS Inc., also based in St. Paul; A Dash of Salt LLC, Bridgeport, Conn.; and KSARRA LLC, Newtown, Conn.