Here's Why the Visa/MasterCard Swipe Fee Agreement Will Fail

I should have taken it as a sign when the agreement to settle the Visa/MasterCard interchange class action suit (the "Class Agreement Agreement") was announced on Friday the 13^th. Instead I downloaded a copy and began to read, wading through the ponderous legalese, taking my own measure of it and highlighting the bits I thought were key: the give back of interchange, the ability to surcharge. It was only later that I read through the part of the agreement releasing Visa and MasterCard from future legal claims by merchants.

And this is why the agreement will fail.

One need only read what Morgan Stanley Research wrote on July 16: "[The agreement] terms provide the networks and issuers with a very robust release against all future claims, leaving little room for merchants to pursue any fresh litigation for an extended period of time. The forward release applies to all merchants in the class (e.g. all merchants in the U.S. that have accepted a Visa or MasterCard branded card since 2004), irrespective of their support for the class settlement agreement and even if they opt out of the class agreement escrow account and interchange escrow account claims."

Put another way: If the agreement is approved, any merchant who has accepted Visa or MasterCard since 2004 will be unable to sue regarding interchange, network rules, merchant fees and related issues, even if that merchant has elected not to receive funds from the agreement.

Think about it — even if you were a merchant who had no involvement in the lawsuit beyond reading about it, if it is approved, you would no longer be able to legally challenge the defendants on these contentious matters.

This is flabbergasting, which is why I didn’t grasp it on first reading. I couldn't imagine such broad terms. It also helps me understand the sanguine comments Visa and MasterCard representatives made when the deal was announced and leads to my conclusion that, as merchants understand what the agreement means, more and more will object.

Yes, there are some positive elements for merchants beyond the fixed agreement amount and temporary interchange reduction. They now, for example, have the ability to surcharge.

But the right to surcharge is of limited value. First, the agreement makes the ability to surcharge very conditional, limited by a cap (set by Visa and MasterCard) and how the surcharging is done (at a brand or product level). Merchants are also required to notify Visa and MasterCard before surcharging starts. Second, there is the ever-present question of how to surcharge without hurting sales, something that will limit actual surcharging, no matter how simple.

Moreover the agreement changes nothing about how interchange is set or the complexity of interchange rates. One merchant, commenting on a Forbes piece about the agreement, wrote:   "… with Visa/MasterCard, the discount fee changes from card to card and the retailer never knows exactly what he is paying until long after the transaction has been completed … [which] makes it harder to estimate your cost of doing business."  

In contrast, look at Square, which charges 2.75% on all transactions and has been growing rapidly with no sales force. Transparency has a value; the current Visa/MasterCard system is opaque and the agreement does not address this.

And so, the Visa/MasterCard interchange system remains essentially the same. Some merchants get a fixed amount of money and all merchants get some constrained benefits. In return, all merchants give up their right to bring interchange-related suits against Visa, MasterCard and the major U.S. card-issuing banks. The defendants' legal team negotiated well. Too well, really.