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 13th. 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.

The National Association of Convenience Stores, Wal-Mart and Target have criticized the agreement. Now the National Grocers Association, one of the plaintiffs, says it will oppose the agreement as well. More will come.

And any resolution to this fraught topic will have to wait for another day.

David True is the president of NYPAY, managing director at Broadly Curious Advisors and a former MasterCard executive.

Comments (3)
With the big box retailers getting in line to oppose the agreement this won't be over for a long time. pdf4390931 you say what is the rationale for charging a % based fee,it's merely about the type of transaction/risk (card present/card not present), type of card used (what card enhancements are attached to the card), size of transaction/avg. ticket, type of merchant (was it online porn or daily staples like groceries). All carry different statistical risk factors for fraud and chargeback developed over the last 50 years since the first Bank Americard was issued. The issuing Financial Institution is providing this revolving line of credit and should have a percentage per transaction for offering the service and convenience of the product and to maintain and improve their systems, keep them current and make a profit, unless you don't believe in free enterprise.

You talk of Square's transparency, Square is an aggregator, where is the transparency in that? Have you seen any numbers at all from square with respect to their avg. ticket, what the percentage of card present transactions is, merchant SIC codes they derive the largest % of transactions from. Small merchants in the US with an average ticket of $50 and a vast majority of credit card present transactions and are somewhere around 2% to 2.3% depending on volume, some are appreciably lower. You want one size fits all at 2.75% good luck with that, maybe you'll finally get your dongle for Christmas.
Posted by PaymentsLogic | Saturday, July 28 2012 at 12:16AM ET
David, you raise some interesting points and I wanted to offer some reaction. I think it's important to remember it was the plaintiff merchants who asked for -- and were granted -- permission for the court to certify this as a class action suit. That allowed the plaintiffs (or more accurately, their trial lawyers) to seek damages on behalf of millions of merchants -- a technique that also allowed them to seek a multi-billion dollar settlement. To see a small number of those same merchants now claim, only days after agreeing to the settlement, that they want more money AND the opportunity to keep suing for the same thing -- that doesn't sound like fair play. Indeed, this could be why trade associations representing merchants -- and not a significant number of the merchants themselves -- are objecting loudly. Such a technique allows merchants to claim their settlement money while their trade associations claim loudly that Congress must adopt further legislation to mandate reductions in merchant costs of payments services, and that merchants (represented by their trade associations) must be allowed to sue again and again and again.

You also note with approval Square's flat-rate transaction business model -- one that is increasingly popular with many small businesses. As you note, Square offers a new and innovative "on ramp" to the payments networks, including VISA and MasterCard. The great news about Square is that it is one of literally hundreds of companies across the country offering robust, innovative and diverse payments products and services to serve the needs of merchants and consumers.

Jason Oxman
Electronic Transactions Association
Posted by Joxman | Friday, July 27 2012 at 3:41PM ET
Such deserves to fail.The simplicity and transparency of Square has much to recommend. Truthfully what is the rationale for charging a %-based fee for what is essentially a mere facilitating transaction?
Posted by EvH | Friday, July 27 2012 at 1:01PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.