Visa and MasterCard entered a sharing agreement last year that makes Visa responsible for about 67% of any settlement and MasterCard responsible for 33%.
The proceeds go to card issuing banks,generating more than $40 billion a year for US lenders.
“Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases,” said Noah Hanft, MasterCard’s general counsel, in a statement.
Craig Wildfang, a partner at the Robins Kaplan plaintiff firm in Minneapolis, said, “The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers.”.
Unless it is, the card market will stay broken and neither merchants nor their customers will achieve a long term benefit.
In a peculiar twist, the rules permit merchants to offer discounts to customers who pay with cash.
Merchants may soon begin to impose a surcharge each time a customer pays with a credit card, a practice Visa Inc.
The pact doesn’t apply to debit cards, which have grown in popularity for small value transactions.
Besides the large retailers’ litigation, other merchants filed their own suits, including small business owners such as doctors and bakeries.
That means merchants who also accept Visa andMasterCard cards have been limited in their ability to surcharge because of their rules.
“we are hoping surcharging becomes commonplace, but small firms will not lead the charge,” says Mike Schumann, owner of Traditions Classic Home Furnishings in Minneapolis, which was a plaintiff in the case.
The settlement calls for merchants to advise consumers of the surcharges, potentially at the cash register.
Merchants have complained bitterly about Visa and MasterCard’s rising costs of accepting plastic, particularly as a growing number of US consumers use credit cards and debit cards for purchases.
It isunclear whether merchants in those states would be able to engage in the practice if Visa and MasterCard allow it.
Americans have been making more purchases with plastic than cash and checks since 2003.
Merchants pay roughly $25 billion each year to card issuing banks in so called interchange fees, which are levied on each transaction made with plastic.
The amount of the fees, which are set by Visa and MasterCard, varies greatly depending on the type of merchant and the type of card used.
Card companies defend those fees, saying merchants receive a big benefit from accepting plastic.
It cited concerns that some merchants may beusing surcharging to pad their bottom line instead of simply recouping the cost of card acceptance.
Among other things, people typically spend more when they pay with plastic instead of cash and checks.
The lawsuit settlement says that merchants can’t discriminate among card brands if they decide to add surcharges.
The settlement represents the second recent big interchange victory for merchants.
The Dodd Frank financial overhaul law that was adopted two year ago included a measure that cut in half the interchange fees on debit cards.
The deal may include payments to retailers and atemporary cut in interchange rates or “swipe fees” tacked onto each card purchase, said the people, who asked for anonymitybecause they weren’t authorized to speak publicly.
The National Association of Convenience Stores, which was one of the plaintiffs in the case, rejected the proposed settlement.
The trade group said that the settlement failed “to introduce competition and transparency into a clearly broken market.”.
Naomi Harris is a business journalist based in Darwin, Australia. Naomi has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Naomi spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.