Several small merchants are leading the charge against Visa, MasterCard and several large U.S.-based bank issuers with a lawsuit filed last month alleging the payment vendors for years have engaged in collusive pricing of merchant fees. If the plaintiffs win, the ongoing backlash against merchant fees could unravel the fabric of the card associations' operations and result in regulation on how much the associations charge merchants for payment services.
Minneapolis-based law firm Robins, Kaplan, Miller & Ciresi LLP filed the class-action lawsuit in a Connecticut U.S. District Court. In addition to Visa and MasterCard, the suit named bank issuers Bank of America, Citibank, Bank One, Chase Manhattan Bank and JPMorgan Chase, among others, "alleging collusive practices of their setting, by horizontal agreement, credit card interchange fees at supra-competitive levels," the firm said.
Such merchant fees—which comprise the dominant source of income for commercial charge card providers and feed into corporate card rebates
(BTN, March 15, 2004)—for years have been growing and have helped yield higher rebates for corporate clients. Although lower interchange fees would translate to a decrease in costs when corporate cardholders pay at the point of sale, it also would result in less willingness among corporate card issuers to negotiate for rebates.
"Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a hidden tax that raises prices paid by consumers for almost every product they buy," said K. Craig Wildfang, a partner at Robins, Kaplan, Miller & Ciresi. "Due to Visa and MasterCard's market power, the United States has the highest credit card interchange fees among industrialized countries.Regulatory authorities in many other countries, from the European Union to Australia, recently have adopted measures to reduce interchange fees, but in the United States it will take action by the courts to accomplish this."
Prior to the filing of the suit, payment vendors, merchants and regulators convened in May for an international payment policy conference sponsored by the Federal Reserve Bank of Kansas City, Mo. The subject was interchange fees and whether public authorities should play a role in regulating them.
Visa U.S.A. executive vice president William Sheedy during the conference shared numbers showing the Visa network consistently raised interchange levels since the early 1990s. Commercial interchange—which is the highest, perhaps since commercial issuers don't rely on revenue through interest payments—on average comprises between 2 percent and 2.5 percent of transaction costs, up roughly one percentage point since the early 1990s. Payment industry watchers contend MasterCard's interchange rates have grown at a similar trajectory.
The June edition of the Nilson Report—a newsletter focusing on the payment business—said $2.23 trillion worth of goods and services in 2004 were paid for by credit and debit cards. "The fees they paid to issuers and acquirers of those cards average 1.74 percent and totaled $39.21 billion," the newsletter said. "Approximately 70 percent of all fees paid by merchants, or $27.59 billion, went to issuers and acquirers of Visa and MasterCard cards."
The class-action filers claims that, as Visa and MasterCard compete and boost revenue by colluding on interchange rates, merchants who accept credit cards are at the mercy of escalating fees. Noah Hanft, MasterCard general counsel, delivered the keynote address, adamantly defending the interchange structure in the United States and attacked the "money-lust" of class action lawyers attempting to cash in on the interchange debate.
"Merchants have been accepting our cards in growing numbers for more than 35 years for a very simple reason—because they know they can increase sales by doing so," Hanft said. "They also know that it would be much more expensive for them to do it themselves—whether through a proprietary card, some other form of loan. No straight talking merchant will argue the point."
No travel industry plaintiffs joined the class-action case, but backlash against merchant fees in the travel business, particularly among air carriers, is nothing new.
Yet, spats between card companies and airlines have been more prevalent outside of the U.S.: Ryanair in 2003 stopped accepting American Express citing "excessive charges;" Qantas earlier that year began levying a 1 percent surcharge for all card transactions in Australia
(BTN, March 10, 2003); and British Airways in June 2002 stopped absorbing credit card merchant fees on U.K. corporate net fares, a position it will soon reverse
(see story).American Express charges higher merchant fees than Visa or MasterCard, but isn't named in the suit since it operates primarily on a closed-loop network.