Visa, Mastercard and a few class-action lawyers recently announced a proposed settlement in long-running litigation about the unfair ways that the major credit card companies and banks impose credit card swipe fees on U.S. merchants. The National Association of Convenience Stores (NACS), which I lead, was a named plaintiff in the leading class lawsuit filed in the case starting in 2005. We parted ways with an earlier group of lawyers and filed our own case because a settlement reached in 2012 entrenched the bad acts of the credit card industry rather than reforming them. The same thing is happening again.
Why do I say that? Because the proposed settlement creates a mirage of change that won’t benefit anyone long-term – other than the credit card companies and large banks that caused these problems in the first place.
Even a cursory look at the key provisions of the agreement shows them dissolving into dust. The proposed settlement, for example, calls for an average seven-basis-point reduction in banks’ fees to be maintained over five years. But, U.S. swipe fees, which are the highest in the industrialized world, are two hundred twenty-six basis points. The reduction won’t even get the dollars down to the amount that neighborhood businesses paid in 2021. The fees have tripled since 2010. Is a return to 2021 really a win for a lawsuit filed in 2005 at a time when the fees were a small fraction of what they are today? Of course it isn’t.
Plus, the overall fees that businesses pay are unlikely to go down at all. That’s because the settlement reduces banks’ fees but won’t stop Visa and Mastercard from increasing the fees that they themselves charge merchants (on top of the banks’ fees). The most likely outcome is that Visa and Mastercard will increase what merchants pay them – and then give banks a corresponding discount on the fees that they charge the banks to handle credit card transactions. And with that, voila, nothing changes to help consumers or merchants.
Another key piece of the agreement gives merchants the supposed ability to add the fees as a surcharge on their customers, which most merchants wouldn’t consider. Why? It makes merchants seem like the villains because customers think the merchants are just trying to gouge them. Just to make sure, the credit card companies also buried complicated provisions in the settlement, putting limits on merchants that are difficult to follow without referencing the complex rules of multiple card companies and knowing how much different credit cards cost. Merchants have complained for years that the system is so opaque that they don’t know the real cost, so it’s a bitter irony that the settlement uses that fact to make it very difficult for any merchant to follow its terms.
Not only that, but the settlement touts a provision that would let merchants form buying groups to bargain with the credit card giants. Guess what? The antitrust laws already allow merchants to form buying groups. Why don’t they do it? Because the credit card companies know that merchants can’t possibly say “no” to taking credit cards, inconveniencing customers who want payment options. So, the card companies don’t need to give the buying groups a deal and merchants gave up on that path long ago. Nothing in the settlement will give buying groups any real leverage or make the credit card giants interested in a deal. Giving merchants ineffective rights they already have doesn’t sound like much of a deal.
On top of the mirage of changes, the settlement proposes to bind to its terms every business that has accepted a credit card back to 2005. So, even though NACS and many others filed and pursued our own lawsuits to change credit card practices for years, this settlement would prohibit any of those lawsuits from asking for other changes. Rather than reforming the credit card system, the settlement would etch it into stone and let Visa, Mastercard and the biggest banks do business just as they have for decades – no matter how badly their practices violate U.S. antitrust laws.
The sum total of the terms of this proposed settlement is that in another five years, everything would be business as usual and merchants and their customers would be paying dramatically rising fees along with the increasing fraud and restraints on innovation that are hallmarks of the credit card duopoly.
No one should be fooled by the sleight of hand. Real market reforms are needed to make U.S. swipe fees competitive and end the excess extraction of wealth from Americans, especially low-income Americans. This mirage isn’t it. We hope Congress will take note and finally make the credit card companies compete like everyone else in the economy.
