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:
When all is said and done this settlement is not very satisfying or meaningful. Hopefully retailers learn that litigation is not the vehicle to affect change. To date, litigation has produced spectacular transfers of cash and has enriched lawyers on both sides. If retailers truly want to change the payment landscape they need to play a role in building or acquiring a payment network.
Tony Hayes, a partner at consultancy Oliver Wyman:
If history is any guide, the financial components of the settlement – damages and a temporary reduction in interchange rates – will soon be forgotten. … The networks achieved their most important goal: the right to set interchange rates going forward without further litigation or regulation. And the merchants achieved their primary goal: structural rule changes that will allow the largest retailers to negotiate lower interchange rates with payment networks.
However, some key issues remain unresolved. This settlement stems from complaints originally filed in 2005. The payments market is materially different now than it was seven years ago. In particular, the settlement does not address the current dynamics associated with network pricing and routing agreements, deferring instead to the ongoing Department of Justice investigation.
David True, a managing director at Broadly Curious Advisors and former MasterCard executive:
Consumers will be gradual winners. They won't get reduced prices in any meaningful way despite what some merchant representatives have argued. But they will see a wider array of products from financial institutions and rewards from merchants, all of which should make for a better market, one in which products are priced more accurately, merchants have more of a say how they are paid, and consumer[s] can chose how they wish to pay base on cost versus benefit.
FROM ANALYST NOTES
Bill Carcache and Tulu Yunus of Nomura Securities:
The elimination of the no-surcharging rule for credit cards will have a nominal effect on purchase behavior (and by extension, on the financial results for constituents in the payments ecosystem). Although there is likely to be some experimentation with the rules by certain types of merchants, broadly, we think good sense will prevail and financially sound retailers will choose not to impose psychological barriers for consumers that may risk sales volumes.
John T. Williams and Neil Fonseca of UBS:
We think Visa and MasterCard likely accepted the changes because they think merchants will have a difficult time implementing the surcharges. Despite that, a modest mix shift away from credit and to debit as surcharges roll out would not surprise us.
Madeline Aufseeser, senior analyst at Aite Group:
Overall, surcharging is a bad idea for merchants. Surcharging can cause consumers to think twice about their purchase at the checkout counter, but there's more to it than that. … Forcing consumers to use a given payment type makes them consider how much money is on-hand in cash, in a [checking] account, and available to pay for the purchase, a mindset that can reduce the amount of goods and services consumers will buy and lower the average ticket price of sales for merchants.
Electronic Payments Coalition:
The long political conflict over interchange fees is finally over, settled by a well-established legal process, which brought together retailers and the card industry for a negotiated resolution. After years of mediation, dozens of meetings, and millions of pages of evidence, the parties involved have willingly agreed to settle their dispute. …. All parties have endorsed this agreement. The legal process worked and should send a signal to Congress that it is wrong to pick winners and losers in a complex dispute between two industries.
Mallory Duncan, senior vice president and general counsel of the National Retail Federation:
The money is significant but money is only temporary – it's here today and spent tomorrow. What we need are changes in the rules that bring about transparency and competition that would be here for years to come. The test will be whether the injunctive relief is meaningful. Unless it is, the card market will stay broken and neither merchants nor their customers will achieve a long-term benefit. In that case, it would be a missed opportunity.
Frank Keating, president and chief executive of the American Bankers Association:
Let's be clear – retailers, not consumers, benefit from today's resolution. This settlement even provides merchants with the ability to impose "checkout fees" on customers just for using credit cards. This type of behavior is nothing new for retailers. Even after receiving an $8 billion annual windfall from the Durbin Amendment, they refused to pass along promised savings to customers and sued the Fed for even more profits. Big-box retailers will likely seize this opportunity to ask Congress for even more handouts. If retailers use this settlement to justify more government price controls, they will just be trying to profit at their own customers' expense.
Richard Hunt, president and chief executive of the Consumer Bankers Association:
This settlement proves the legal system, not Congress, is the proper channel to settle complex market disputes. Congress never should have intervened in legislating price controls in the free market.
Joseph W. Saunders, chairman and chief executive of Visa:
We believe settling this case is in the best interests of all parties. 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.
Noah Hanft, MasterCard's General Counsel and Chief Franchise Integrity Officer:
Our decision to settle is based on our belief that MasterCard and our stakeholders are best served by an amicable resolution. 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.
K. Craig Wildfang, who led the case for the class plaintiffs as co-lead counsel and partner at Robins, Kaplan, Miller & Ciresi:
The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers. Over time, the reforms induced by this case and in this settlement should help reduce card-acceptance costs to merchants, which in turn, will result in lower prices for all consumers.
Charles Doyle, chairman of Texas Independent Bancshares and a former board member of Visa:
We feel that it's been a long seven years of question marks around this issue. To resolve it will be to the betterment of all of us, so we can go about doing what we normally do.
Bonny E. Sweeney, a senior antitrust partner at Robbins Geller Rudman & Dowd and a principal litigator in the case:
This is an historic settlement. In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers.
Ancel Martinez, spokesman for Wells Fargo:
We are pleased that the parties have reached a settlement and look forward to getting this matter behind us so we can continue focusing on our top priority – helping our customers succeed financially.
Betty Reiss, spokeswoman for Bank of America:
We believe the terms outlined in the proposed agreement are fair.
DECLINED TO COMMENT:
JPMorgan Chase, Fifth Third, PNC (which now owns National City), Barclays, HSBC and First National Bank of Omaha and SunTrust.
Capital One, Citigroup.