NEW YORK–Litigation over controversial credit card interchange fees is likely to end in a settlement in favor of merchants, but members of the industry are still debating the size and conditions of the pact, according to a viewpoint consensus from a panel discussion this week.
The panel, convened at the KBW annual Cards, Payments and Financial Technology Symposium, discussed the potential outcomes of the case.
“I would say that the likelihood of a settlement is probably higher because of all of the downside,” says Brian Gardner, a senior vice president at Keefe, Bruyette & Woods. “This has all the feel of a judge who is more interested in a settlement, not wanting to go to trial.
Big-box retailers, whose ranks include Safeway Inc. (the owner of the prepaid distributor Blackhawk Network) and Kroger Co., in 2005 sued MasterCard Inc., Visa Inc. and several issuers alleging they all conspired to fix prices around credit card fees charged to acquirers, which pass the expense on to merchants as part of the discount rate (see story).
Both MasterCard and Visa have in recent months put aside billions of dollars signally that they may be getting ready to settle.
Visa has allocated more than $4 billion to cover potential costs from the lawsuits. In December, the largest payment network in the world added $1.6 billion to a preexisting litigation escrow account, which already had an “uncommitted balance” of $2.7 billion, “primarily with a view toward resolving the interchange litigation” (see story).
Likewise, MasterCard put away $495 million tied to the seven-year old litigation as a part of the company’s fourth quarter balance sheet (see story).
And there is precedent, analysts assert, that could cause the case to elevate to class-action status.
In a eerily similar case, in June 2003 MasterCard and Visa inked a class-action settlement deal on claims that each tied acceptance of debit cards to credit cards. In that case, Wal-Mart, along with several other retailers, in 1996 alleged that the payment networks could not charge higher interchange for what amounted to a “plastic check,” said panelist Mallory Duncan, the National Retail Federation’s senior vice president and general counsel.
The settlement included a $3.05 billion payout to merchants and a clear separation of debit from credit, which is why debit cards now carry the word “debit” on the front of the plastic.
“We were in front of the same judge. We had the same mediator. So I have some sense of the dynamics,” he says. “Even if the class is certified, the power of the judge to force a settlement is still pretty strong.” That judge is John H. Gleeson of the U.S. District Court for the Eastern District of New York.
Still, undoubtedly, that settlement could include more concessions, and more money, if it’s a class-action suit. Those could include a temporary reduction in interchange, said panelist Inderpreet Batra, a principal at Oliver Wyman. “But I don’t think there would be something permanent,” he says.
The payment networks also may allow retailers to add surcharges for consumers that use credit cards.
Small merchants, such as doctor’s offices and convenience stores, are the most likely companies to add on such a credit card tax.
“I’d say 50/50, we have a settlement,’” said panelist Eric Grover, a principal at Intrepid Ventures. “But I’d be surprised if they included something with teeth.”
Congress, too, eventually could take up the fight for decreasing credit card interchange, even if the legal system doesn’t rule against the payment networks.
That legislation, however, is unlikely to come until after the presidential election in November. Beltway politicians were left with a sour after taste in their mouths after the bitter fight around the Durbin legislation, members of the panel said.
“Interchange is one of those unique areas,’ says Duncan. “It’s not a typical conservative issue. It’s not a Republican/Democrat issue. It’s a pure commercial regulatory issue. And you are being asked as a member of Congress to choose among friends. It’s not a very popular position to be in.”
That doesn’t mean that this couldn’t go to a jury trial. Gleeson has a set a September trial date for the cases, which have been consolidated into U.S. District Court for the Eastern District of New York.
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