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'We Won' vs. 'You Lost': Reactions to Credit Card Settlement

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The credit card industry's proposed deal to settle long-pending retailer lawsuits set interchange watchers chattering over the weekend, divided over how much each side won and lost in the deal.

Conventional wisdom held that the long-pending lawsuits were destined to be settled before their September trial date. Conventional wisdom also held that Visa (NYSE: V), MasterCard and the big banks would pay billions of dollars and possibly lift their "no surcharging" rules to settle the lawsuits – but that the merchants would have to pry lasting changes to the interchange system out of the card networks' cold, dead fingers.

And so it was. The proposed deal, announced late Friday, would transfer almost $7.5 billion from the card networks to their merchant frenemies. In exchange for that payoff, Visa and MasterCard will get a wide-ranging release from future litigation.

But the deal leaves intact the underlying system of how Visa and MasterCard set the prices retailers must pay for accepting credit cards. By allowing surcharges on credit card purchases, the deal also gives the card industry a potentially powerful PR weapon, since banks and retailers like to blame each other for how consumers are affected by interchange fees.

Last year, after debit card regulations went into effect, banks struggled to convince customers that their increased checking account fees were all the merchants' fault, but this time around, blaming retailers might be an easier sell. Customers blame banks when banks raise prices, and will likely blame retailers when retailers try to charge them more for using credit cards, a privilege people aren't used to paying for.

One of the main plaintiffs, the National Association of Convenience Stores, has already rejected the proposed settlement, and more merchants may raise objections before the deal is approved.  

"The best outcome for this settlement is for it to fail," said one senior executive at a large retailer, which was not involved in the lawsuits. "There are some areas in which it takes us backwards. It still supports the status quo in terms of Visa and MasterCard being able to do what they do in terms of rule-setting and price-setting."

But regardless of those objections, the proposal is one more step in the fraught, co-dependent relationship between the banks and retailers, and a step that many in both industries are watching closely.

We at American Banker spent the weekend and Monday polling several expert observers and industry members, looking for official reactions as well as informed and more impartial opinion on what the deal means for all of the parties. Their replies are below, and readers are invited to add their comments.

Duncan MacDonald, former general counsel of Citigroup's Europe and North America card businesses, independent consultant:

I think the defendants agreed to pay $7.5 billion mostly to get the release, which balances/justifies the cost of the surcharge. ... It is that valuable!  Peace, as you know, can be just as expensive as war. … The "release" is a breathtaking success for the bankcard industry. It is about as comprehensive as any I've ever seen.  It should end the industry's antitrust wars for years to come.

As crafted, the settlement seems to favor the defendants, despite its hefty price.  Most of the objections I've envisioned are problems for the plaintiffs. 

Mark Horwedel, chief executive of Merchant Advisory Group, which represents retailers on payments issues:

In the event surcharging were to be permitted by the settlement and it is clear, straightforward and not cluttered with a lot of extraneous rules that inhibit execution, it could eventually be a significant step forward for merchants. Even if it is straightforward, there remain a number of individual states with statutes that deny merchants the right to surcharge, so the impact will be delayed at best until and unless these state statutes are successfully challenged.

If, however, the surcharge provisions are unclear and difficult to execute, than the merchant victory will be a hollow one and the controversy will continue.

John Gerspach, Citigroup's chief financial officer, during Monday's second-quarter earnings conference call:

We were fully accrued as of the end of the second quarter for our expected share of the settlement and as far as future impacts of the proposed network-rule changes, it's far too early to try to guess what those may be. … It's a little hard to sit there right now and come to some sort of judgment as to what the impact could be on Citi cards businesses. And whatever impact it will be, it will be based upon factors really outside of our control, including merchant behavior in response to the new rules.

Jeffrey Shinder, managing partner at the law firm of Constantine Cannon, representing the National Association of Convenience Stores:

What you would need to provide meaningful relief to the merchant community is something well beyond the anemic set of relief around surcharging. It's a mirage and it's a trap for the merchant community. … After decades of [the payments industry] raising prices to consumers in a way that's hidden to them, the solution is, "Merchants, you can surcharge," and then they'll bloody them in the press and in PR by saying that merchants are raising prices to consumers.

A senior executive at a large retailer, which was not involved in the lawsuits:

It's kind of nothing in all honesty … the "gives" are significantly larger than the "gets" [for retailers].

In general it's going to be very difficult for merchants, especially large ones, to surcharge. …  Maybe this will help out some mom and pops, because people are a lot more forgiving when they walk into some mom and pops.

Eric Grover, principal at payments consulting firm Intrepid Ventures:

Net, the merchants got a lot of what they wanted, but didn't destroy MasterCard's and Visa's business models. While merchants give up their right to sue the networks and credit-card issuers over similar issues, I expect they will continue their vigorous lobbying efforts in Washington and state capitals to win interchange reductions and bolster their ability to surcharge. Ten states including California, New York and Texas ban credit-card surcharging to protect consumers.

Joshua Gans, Australian economist, professor of strategic management and holder of the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship at the Rotman School of Management, University of Toronto:

The most significant thing is that merchants can now surcharge credit cards that are more expensive to them. This was something partly done by government but it seems to go much further here. This mirrors the reforms in Australia. There we saw some surcharging especially amongst merchants who were reluctant to offer credit cards. Taxi drivers are a great example of this. The risk is that merchants with market power may use it as an instrument for price discrimination an[d] charge some card users more than the costs they face. 

Joseph Rosenbaum, a partner at the law firm Reed Smith and a former in-house senior counsel at American Express:

The removal of prohibitions against surcharging may result in further downward pressure on discount rates, but more significantly it may ultimately create a more market-driven economic environment where surcharging may make sense for some merchants, with some types of purchases and in certain amounts, while different or no surcharges may apply in others. … Most folks won't want to carry large amounts of cash and may resign themselves to a surcharge at our current pricing level because no one wants to carry that amount of cash.

Andrew Kahr, a principal in Credit Builders LLC and formerly the founding chief executive of First Deposit, later known as Providian:

This is far from exciting. ... This settlement will have no substantial effect on the future of the business.

Customers are habituated since birth to using the cards, rebates don't turn them on.  Merchants will not impose surcharges. …None of the announced terms of the settlement will materially alter the long-term upward course of interchange.

Janet R. Langenderfer, a managing director at consultancy Vision Partners & Associates and former senior director of credit cards at Amtrak:

In the short run, the merchants get big benefits – a cash payout, a reduction in interchange, the right to surcharge — but maybe the real benefit to merchants is that they have time to work on more legislation in Congress.

Maybe some people wanted a long-term reduction in interchange rates – but I agree with others that a more simplified, transparent structure would have been a better goal. In the end, I don't either was likely to be the direct result of this lawsuit – at least not unless they were willing to take it all the way to trial (and that's always questionable). That would have cost much more money and many more years.

Philip Philliou, payments industry consultant and former executive at MasterCard and American Express:

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Comments (4)
Very interesting collection of reactions to a settlement that has been widely viewed as bringing to a definitive end the sometimes bitter debate over interchange. Clearly, some merchants would like to pretend this matter is anything but closed. It's distressing, but perhaps not surprising, to see some in the merchant community --within hours of the settlement's announcement -- decry the very settlement they demanded as somehow "insufficient" to meet their needs. Perhaps such a response is driven by fear of a perceived reduction in incentive for regulatory or Congressional action to address ongoing merchant complaints about interchange rates and the merchant demand for government intervention into this market. If so, we can all agree that, because of this settlement, there is no need for Congress to continue to legislate in a way that simply bolsters merchants' bottom line at the expense of their customers. As we see in this settlement, merchants received the largest cash antitrust settlement in history (none of which merchants must return to consumers), obtained a reduction in interchange rates (none of which merchants must pass along to consumers), and got the right to expressly charge their customers a fee for using a credit card -- and they still demand government intervention to transfer more money from financial institutions and consumers to merchants. Am I going to a fee tacked on to my next retailer purchase to make the merchant "whole" for rent, electricity, labor, janitorial services, sewer, accounting, and other costs incurred my merchants? Some might call such fees greed -- but whatever you call it, consumers should be concerned about how price increases for the privilege of using a credit card at local retailers might make everything they buy more expensive.

Jason Oxman
CEO
Electronic Transactions Association
Posted by Joxman | Monday, July 16 2012 at 6:11PM ET
Very interesting collection of reactions to a settlement that has been widely viewed as bringing to a definitive end the sometimes bitter debate over interchange. Clearly, some merchants would like to pretend this matter is anything but closed. It's distressing, but perhaps not surprising, to see some in the merchant community --within hours of the settlement's announcement -- decry the very settlement they demanded as somehow "insufficient" to meet their needs. Perhaps such a response is driven by fear of a perceived reduction in incentive for regulatory or Congressional action to address ongoing merchant complaints about interchange rates and the merchant demand for government intervention into this market. If so, we can all agree that, because of this settlement, there is no need for Congress to continue to legislate in a way that simply bolsters merchants' bottom line at the expense of their customers. As we see in this settlement, merchants received the largest cash antitrust settlement in history (none of which merchants must return to consumers), obtained a reduction in interchange rates (none of which merchants must pass along to consumers), and got the right to expressly charge their customers a fee for using a credit card -- and they still demand government intervention to transfer more money from financial institutions and consumers to merchants. Am I going to a fee tacked on to my next retailer purchase to make the merchant "whole" for rent, electricity, labor, janitorial services, sewer, accounting, and other costs incurred my merchants? Some might call such fees greed -- but whatever you call it, consumers should be concerned about how price increases for the privilege of using a credit card at local retailers might make everything they buy more expensive.

Jason Oxman

CEO

Electronic Transactions Associatio
Posted by Joxman | Monday, July 16 2012 at 6:13PM ET
Much of this discussion would be moot-- indeed, would not have occurred-- if the merchants could shop for payment products like customer shop for most products: by comparing and choosing products that offer the best value for the money.

Payments are a different market, one with limited choice of supply and where end consumers do not fully pay for what they receive.

Without a wide array of products and ability to easily switch products, addressing imbalance shifts from the market to the legislature or the courts. And in the US we general choose the courts over the legislature.

That is what this agreement has done; but the agreement also contains the stipulation that, if plaintiffs agree, they forgo the right to seek any further judicial redress-- that is to give up the right to ever again challenge imbalances in the courts. That seems a high price to pay, and some merchants groups have already said they won't agree.

Given that, does anyone know the process required to make this proposed agreement final? Can it languish a only a proposal if enough merchants don't agree to it? What are the chances that this proposal doesn't become final?
Posted by Herr Wahr | Monday, July 16 2012 at 11:31PM ET
Interesting to hear from industry experts, but it seems to me that all are out of touch with the consumer, especially the change in habits since the great recession. As a consumer, I haven't seen a time before when consumer goods have been at such a great price, while at the same time banking fees have been raised. So it begs the question, who are banks trying to fool into thinking the merchants are the ones not passing on savings to the consumer? I don't think the facts bear that out.
Posted by EFB | Tuesday, July 17 2012 at 12:52PM ET
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