NEW YORK, N.Y. — A federal appeals court decision to toss out the $7.25 billion settlement between merchants and major card networks has re-opened old industry wounds — and spells possible trouble ahead for card-issuing financial institutions, including credit unions.
Analysts and industry groups scrambled to make sense of the surprise decision, issued Thursday by the 2nd U.S. Circuit Court of Appeals in New York. The court tossed out the terms of a blockbuster 2012 agreement—one of the largest anti-trust deals in U.S. history—resolving claims that Visa and MasterCard illegally fixed swipe fees on debit and credit card payments.
The decision promises to continue what has already been a long and complicated legal battle. The case was first filed in 2006 and, with the latest development likely sending it back through the court system for re-negotiation, there is no end in sight, observers said.
It also opens the door to a handful of unfavorable—and expensive—outcomes for card-issuing credit unions and banks.
Some financial institutions—who are shareholders in Visa—could see an uptick in legal costs, particularly if negotiations result in a higher monetary settlement for merchants.
But perhaps more worrisome is the possibility that the terms of a new deal could result in lower swipe-fee revenue for credit unions and banks, according to industry experts.
"Merchants would love to have lower interchange rates," said Chris Donat, an analyst with Sandler O'Neill.
Donat was quick to note that the next steps in the case are uncertain. From a financial perspective, "it doesn't mean much" in the short term until the case works its way — once again — though the legal system, he said.
Still, the risks inherent in a do-over raise unsettling questions, analysts said. The settlement did not include new limits on swipe fees, but banks and card companies fear merchants could attempt to add them in a renegotiation.
"The biggest risk in a future settlement is that there is some sort of pricing change made," said John T. Williams, an analyst with Compass Point.
It's still too early to estimate potential costs, Williams added. "It's hard to put a number on what this could mean — it could mean nothing."
Credit card swipe fees average about 2% of each transaction and amounted to about $30 billion a year at the time of the settlement, the National Retail Federation said Thursday.
How the legal battles play out from there is unclear. Several analysts declined to made definitive predictions about the potential timing of a decision, or the outcome.
But many noted that the card issuers — rather than the networks themselves — could bear the brunt of a settlement. That is due, in part, to terms put in place for Visa shareholders at the time of the company's initial public offering in 2008, analysts said. Those terms basically put certain of Visa's bank shareholders on the hook for the network's 67% share of the original settlement payment to the merchants. MasterCard would have paid 12% of the original settlement, and its member banks would have paid 21%.
Some voices from the credit union industry also weighed in on the decision.
Steve Salzer, SVP, legal and general counsel for PSCU, a credit union service organization (CUSO) that provides payments processing and other services, told Credit Union Journal that the court decision is a blow to the credit card industry, which hoped the settlement would end a decade of litigation brought on behalf of about 12 million retailers against Visa, MasterCard and the institutions that issue their cards.
"The end result that will likely play out over the coming years may be lower interchange rates, particularly among credit cards," Salzer added.
Meanwhile, to Todd Clark, president and CEO of CO-OP Financial Services, another payments CUSO, the court's decision was "not a surprise."
"It is an indication of not only the acrimony between MasterCard/Visa and merchants but between merchants as well," Clark told CU Journal. "We don't expect there to be any material impact to the operations of credit unions. Unfortunately, more time and more money will be spent before a resolution is reached."
