The sheer time and dollars spent bringing card networks' interchange fees and other practices to light in years-long legal battles sends the message that many merchants and some government entities basically believe the card brands run their businesses illegally.
At the same time, the whirlwind of new technology such as mobile wallets has been impaired by the aggressive push to wrest control — and thus, fee revenue — away from the likes of Visa and Mastercard. Just as often, these battles are fought in the courts.
This week's ruling from a U.K. appeals court favors retailers, supporting the argument that "unlawful" fees fixed by Visa and Mastercard restrict competition in the industry. The court agreed that the interchange fees charged for each use of a payment card represented an "unlawful infringement of competition law."
As with most of the courtroom drama surrounding card brand fees in the past, it should be noted that an appeals court ruling in favor of the merchants doesn't put an end to this dispute. Another judge experienced in competition cases is expected to study the case and weigh in on the ruling as it relates to the interchange level in the U.K. — and possibly mandate a different level of pricing.
For their part, Mastercard and Visa have long insisted that the complexities of operating secure payment rails justify their pricing. It should be noted that the card brands have said they do not earn revenue from interchange, and that the flexible rates, while sometimes making it difficult for merchants to understand exactly what they are paying and why, make it possible to deliver top value at lower costs and support related efforts like financial inclusion.
In the U.S., the card brands have already offered settlements to merchants over the past six years in hopes of ending a lawsuit in which merchants have filed generally the same complaint as those in the U.K. — that the fees are not only too high, but they stifle competition; while the merchants are also hamstrung by the Honor All Cards rule and, unlike the banks, have no negotiating power with the card brands.
This is particularly ironic in the eyes of merchants who, years ago, had banks in their corner when dealing with the card brands. But as those banks sold their portfolios to major payment processors, they lost much of their interest in being in the merchants' corner as the fight wore on.
Though no official offer has been announced yet, reports last week indicated that Visa and Mastercard plan to introduce a new $6.5 billion settlement offer to merchants to end a legal fight that began in 2005.
The new offer comes after a $5.7 billion settlement in 2013 was overturned by an appeals court. That $5.7 billion offer represented a lower settlement than a $7.25 billion offer in 2012, mainly because more than 25% of the merchants in the lawsuit opted out of the initial deal.
Merchants were never comfortable with the settlement offer's trade off that prohibited them from suing over the same issue in the future. It is believed that a new agreement drops that no-future-litigation provision.
It's not likely that a recent victory for American Express in the Supreme Court over its own terms gives Visa or Mastercard any support in their own cases. The ruling in favor of American Express in its eight-year legal tussle with the U.S. government over alleged antitrust violations bars merchants from steering consumers to use cards with lower fees.
This development goes a long way toward assuring the card issuers' model of offering cards with significant rewards — funded by fee revenue — is likely to stay in place.
Still, merchants say that they are forced to pass along any higher fees to the consumer. So those consumers not initiating transactions with a high-end credit card don't benefit from that ruling.
Interchange remains one of the more mysterious fee applications in any industry, confounding merchants for years. Those rates average between 179 and 200 basis points in the U.S., or between 1.79% and 2% of each transaction. The U.K. interchange rate is lower, at around 1.3% on average. The card brands' assessments on those fees, or what comes back to them directly, are fixed, generally at between 11 and 13 basis points. Factors such as the card type or routing option can vastly affect the rates merchants pay.
It's difficult to predict where the legal fights are heading and even to track the paths they have taken over the years, said Zil Bareisis, a London-based senior analyst for research firm Celent.
"Clearly, the interchange fees are on a downward trajectory globally, and are already pretty low in Europe, especially compared to the U.S.," Bareisis said. "And these court cases contribute to the overall pressure. I don’t think we’ve seen the end of this yet."
In a response to PaymentsSource after Amex won its Supreme Court ruling, Merchant Advisory Group CEO Mark Horwedel summed up how many merchants view the card brands, regardless of the case being ruled upon. "By maintaining the status quo, the lack of transparency and competition in the U.S. will lead to higher prices at point of sale," he said.