Merchants will have a difficult time reaping all the benefits they stand to gain from a pending antitrust settlement between the two largest U.S. credit card networks and the U.S. Department of Justice, according to the Federal Reserve Bank of Boston.
Although the settlement with Visa Inc. and MasterCard Worldwide gives merchants the right to offer discounts and post signs encouraging customers to pay with cheaper credit cards, they likely will be hamstrung in their ability to do so because of a lack of information, researchers with the Boston Fed said in a policy discussion paper released July 8. The settlement also includes 17 states.
“The basic problem is that merchants currently lack sufficient information to disclose fees or differentiate their prices according to the method of payment,” the paper said, noting retailers “may not know the exact merchant fee on each credit card until long after the transaction has taken place.”
In addition, the paper argues that merchants should be allowed to surcharge customers for paying with certain types of credit cards, a practice the payment networks prohibit and that was not included in the Justice Department settlement.
The researchers’ position supports arguments by some retail groups over the effectiveness of the settlement, which stems from a lawsuit the Justice Department filed against Visa, MasterCard and American Express Co. in October.
In filings with the U.S. District Court for the Eastern District of New York last month seeking approval of the settlement, the Justice Department said Visa and MasterCard had agreed to offer inquiry services that will enable merchants to swipe cards on their point of sale devices to request information about the rates the cards carry (
But the Boston Fed’s researchers said they are skeptical the services will make much difference as “merchants may have to re-program” their registers and other point-of-sale technology “to manage the fee information and disclose the merchant fees to their cashiers and customers.” In addition, Visa and MasterCard would provide the data to merchant acquirers, or the merchant’s bank, which would not be required to pass the information along to the retailer, the report said.
The paper noted that the specific changes that would have to be made were unknown, so a more complete assessment of the services would need to be performed before coming to a definitive conclusion.
The Retail Industry Leaders Association last month argued that the inquiry services would not be useful because they would slow down the checkout process.
Brian Dodge, the association’s senior vice president for communications and state affairs, wrote in an email on July 13 that the paper’s findings “are consistent with the reactions of retailers.”
“The settlement fails to provide a workable mechanism to translate the settlement into savings for consumers,” Dodge wrote.
Dodge also argued that merchants should be allowed to surcharge, calling the networks’ prohibition against the practice “one of the many examples of their anticompetitive behavior.”
Mallory Duncan, a senior vice president and general counsel for the National Retail Federation, said the report’s findings echoed his group’s concerns.
“The merchant doesn’t know up front whether a particular brand of card is a high-cost card, medium-cost card or low-cost card, so without that information how do you offer benefits to your customer?” Duncan said.
Representatives for Visa and MasterCard did not immediately respond to requests for comment.
The Justice Department’s lawsuit argued that Visa, MasterCard and Amex unfairly harmed merchants by limiting their ability to offer discounts for certain types of cards to cut costs. Some credit cards, such as those with rewards programs, carry higher merchant fees than do plain “vanilla” cards.
Visa and MasterCard agreed to settle the case the same day the Justice Department filed it. Amex is fighting the suit (
Among the new rights merchants will get from the settlement is the ability to offer a discount or rebate to customers who use a specific brand or type of credit card, explicitly voice their preference for using a certain type of card and communicate the costs associated with accepting a particular brand of card. Merchants are not allowed to offer discounts based on the bank that issues a particular card.
Merchants also won a partial victory under the Durbin amendment to the Dodd-Frank Act, which instructed the Federal Reserve Board to establish “reasonable and proportional” rates for debit card interchange. The caps, which take effect on Oct. 1, limit debit interchange fees to about 24 cents per transaction from a current average of about 44 cents (
In addition, the Fed also issued rules that prohibit networks from limiting merchants’ ability to route debit card transactions over specific networks. It also allowed issuers to set a $10 minimum purchase amount for credit card purchases, which the card networks traditionally have prohibited.
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