Visa (NYSE: V), MasterCard (MA) and the largest banks have announced a proposed multi-billion dollar settlement with U.S. retailers in a longstanding lawsuit over swipe fees charged by the networks.
Described as the "largest antitrust settlement in history" by plaintiffs' attorneys, the agreement would require Visa, MasterCard and several major banks, including JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (NYSE:C) and Wells Fargo (WFC), to establish a fund for $6.05 billion for roughly seven million merchants, who plaintiffs' attorneys say have been adversely affected by the interchange fees the networks set. The case was due to go to trial in September.
"These are truly historic reforms that will help shift the competitive balance from what in the past has been dominated by the card companies and the banks over to the merchants and the consumers, by giving consumers both transparency and a choice for cheaper forms of payment," says Martin Lueck, a partner and chairman of the executive board at Robins, Kaplan, Miller & Ciresi, a plaintiffs' firm involved in the lawsuit.
The settlement is in line with analysts' previously estimates, which pegged a potential agreement at between $5 billion and $15 billion.
In addition to the fund, the networks have agreed to temporarily reduce for eight months the level of interchange fees by 10 basis points, a benefit estimated by plaintiffs' attorneys to be worth $1.2 billion.
Visa and MasterCard will also drop so-called "no surcharge" rules, which previously prohibited retailers from tacking on additional fees to the consumer for using a credit card.
"Now merchants are no longer prohibited on disclosing to customers what acceptance of the cards is," says Lueck. "The fee has always been there. This allows some transparency, and it allows some discounting by the merchants for cheaper forms of payment."
In addition, the companies have agreed to negotiate with groups of merchants collectively over interchange rates going forward.
Visa says it will record a litigation charge of $4.1 billion for the quarter ended June 30, 2012, increasing its reserves from $285 million to approximately $4.4 billion, which it will fund through a preexisting litigation escrow account. The card network had previously put more than $4 billion in that account.
"We believe settling this case is in the best interests of all parties," said Joseph W. Saunders, Chairman and Chief Executive Officer of Visa Inc., in a press release Friday. "We are comfortable with the terms, which we do not anticipate will impact our current guidance. Visa is well positioned to help drive the migration to electronic payments in the U.S. and globally."
MasterCard had previously agreed to pay 12% of any potential settlement involving Visa and the banks. The card network said on Friday that its share of the cash portion of the settlements will total $790 million before taxes. It plans to add an extra $20 million pre-tax charge in its second quarter 2012 financial statements, as it had previously recorded a $770 million charge in its fourth quarter 2011 financial statements, the company said in a press release.
"Our decision to settle is based on our belief that MasterCard and our stakeholders are best served by an amicable resolution," said Noah Hanft, MasterCard's General Counsel and Chief Franchise Integrity Officer, in a press release Friday. "Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases. We believe that today's settlements should resolve all issues with the merchant community."
The settlement is pending before Judge John Gleeson and Magistrate Judge James Orenstein in the United States District Court for the Eastern District of New York.