Posted: Oct 3, 2018
Comments: 0
Author: Lou Grilli

The stakes are high - $90 billion in fees paid collectively by merchants each year, according to Bloomberg. The proposed class action settlement amount is record-breaking - $6.2 billion, the most significant dollar amount ever, to be paid to 12 million merchants who do not opt-out of the settlement.

What does this mean for the future of interchange fees? It’s still murky, at best.

A lawsuit that was being argued since 2005 was finally settled on September 18, 2018, some 13 years later. The class action was initially filed by the National Retail Federation, the Retail Industry Leaders Association, and the National Association of Convenience Stores, collectively representing about 12 million merchants in the U.S. It named Visa, Mastercard, and several large issuers, including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. as Defendants. The suit accuses the defendants of conspiring to fix interchange fees that businesses pay to process credit and debit cards. A previous settlement had been reached in 2012 but was thrown out by the courts. This time around, the settlement, which still needs to be approved by the courts, leaves open several unanswered issues.

Damages Versus Injunctive

The initial 2012 settlement agreed to by the parties included an amount for damages, that is monetary compensation for losses occurring in the past, as well as injunctive relief, that is, an agreement between the parties regarding conduct moving forward. The injunctive relief provided for rules changes, including the ability for merchants to form buying groups to negotiate interchange rates, and the ability for merchants to impose surcharges for accepting credit cards, in exchange for giving up the ability to sue over the same claim in the future. However, that settlement that was reached in 2012 was overturned by a three-judge panel, specifically citing that the class receiving damages, and the class that is only receiving injunctive relief, should be represented separately as their interests are divergent. The current eye-popping 2018 settlement amount only represents the class suing for damages, while the class representing injunctive relief and associated rules is separate and not part of the settlement agreement.

Who’s In and Who’s Out?

It seems that this settlement would resolve the 13-year old battle between merchants and issuers. Unfortunately, there are still plenty of hold-outs. First, the National Retail Federation has stated that “The monetary settlement doesn’t solve the problem. Swipe fees cost retailers and their customers tens of billions of dollars a year and have been skyrocketing for nearly two decades.” Since the merchant association did accept the settlement amount, it seems as if they were satisfied that the damages awarded cover the past charges, but it is signaling that it will continue the fight in court. More importantly, some of the nation’s largest retailers, including Walmart, Lowe’s, Starbucks, Target, Kroger, and others, have indicated their desire to opt-out of the current settlement. Finally, the current settlement still needs to be agreed to by the courts – this could take the process into 2019 and potentially beyond.

Honor All Cards

A highly sensitive issue, known as the “Honor All Cards” clause, was not addressed in this settlement. The requirement states that a merchant taking any bank issuer’s Visa card, for example, must take all Visa cards; Mastercard has a similar arrangement. But not all interchange rates are the same. A basic card used at a supermarket fetches 1.15% + $0.05, whereas a Signature Preferred card for the same basket of goods provides the issuer with 2.10% + $0.10. According to the Wall Street Journal, Amazon, Target and Home Depot are pushing for the flexibility to accept the former and not the later.

On June 25, 2018, the Supreme Court ruled in favor of American Express over a clause in merchant contracts that forced merchants to agree not to try to steer customers to other payment types. This ruling seems like it would set the precedent that Visa and Mastercard can continue to enforce the “honor all cards” requirement. However, one of the deciding factors in the AmEx case was that the Court found AmEx not to have market power; indeed, some locations that accept Visa and Mastercard don’t accept American Express. Also, there is a marked difference between AmEx’s “no steering” clause and the “honor all cards” clause found in the Visa and Mastercard merchant agreements. Thus, this is a battle still to be fought, with an unknown outcome.

It Ain’t Over ‘Til It’s Over

The need for card acceptance is firmly engrained in consumer purchasing; Visa and Mastercard provide the many-to-many connectivity, which enables the complex system of card acceptance, and there’s no turning back to a cash and check era. Many consumers love their credit card rewards, which are funded in part by interchange. The rewards, in turn, drive additional spend, which benefits merchants. It is also recognized that high volume low margin merchants, Walmart being the largest, are materially impacted by even a tenth of a percent in the cost of purchases made with cards. Changes in the make-up of the presiding judges will certainly affect future Supreme Court decisions. There are many unknowns when it comes to the future of the highly complex and generally misunderstood four-party interchange model in the U.S. The one certainty is that as long as there is a card acceptance model, it will be a contentious one.

If you are an issuer and want to learn more about interchange, assess your current merchant adoption or want an analysis of your members’ current usage, contact the experts at Trellance at

Lou Grilli

Lou GrilliLou Grilli

Lou is the AVP of Product Development & Thought Leadership at Trellance. In this role, he is responsible for managing the organization’s product portfolio, as well as providing leadership on industry trends related to data analytics and payments.

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