Bloomberg News

Durbin Calls $6.6 Billion Visa Swipe-Fee Accord Bad Deal

August 07, 2012

Durbin Calls $6.6 Billion Visa Swipe-Fee Settlement a ‘Bad Deal’

Visa and MasterCard, the world’s biggest payment networks, and some of the largest banks agreed to the settlement last month after a seven-year legal battle. Photographer: David Paul Morris/Bloomberg

U.S. Senator Richard Durbin, who won federal limits on debit-card swipe fees, said merchants should “think hard” before signing a $6.6 billion settlement with Visa Inc. (V:US), MasterCard Inc. (MA:US) and banks over credit-card fees.

“This is a stunning giveaway to Visa and MasterCard,” Durbin, the Senate’s second-ranking Democrat, said in remarks last week, according to the Congressional Record. “This is a bad deal, but it is not a done deal. The merchant plaintiffs still have to decide if they will support it.”

Visa and MasterCard, the world’s biggest payment networks, and some of the largest banks agreed to the settlement last month after a seven-year legal battle. The accord, which requires a judge’s consent, also includes a temporary reduction in so-called credit-card swipe fees, or interchange, and allows retailers to impose surcharges on such transactions. The fees average about 2 percent of the purchase price and generate more than $40 billion a year for U.S. banks.

“It gives Visa and MasterCard free rein to carry on their anti-competitive swipe-fee system with no real constraints and no legal accountability,” said Durbin, of Illinois. “This is not a settlement I would agree to. I hope that the remaining merchant plaintiffs will review the proposed settlement carefully and think hard about whether it will be good for the future of our credit- and debit-card systems.”

Antitrust Law

The settlement may be nullified if enough merchants refuse to join. Visa, MasterCard and the banks can terminate the accord if the retailers who opt out account for more than 25 percent of the U.S. credit-card spending processed by the two networks from Jan. 1, 2004, through the month the accord is approved by the court, according to a memorandum of understanding.

MasterCard fell 0.8 percent to $416.40 in New York trading, the worst performance today in the 71-company Standard & Poor’s 500 Information Technology Index. Visa was third-worst, sliding 0.5 percent.

Durbin pushed to include debit-card limits in the 2010 Dodd-Frank Act, and the Federal Reserve last year capped those fees at about half the average that retailers had paid previously, costing banks about $8 billion in annual revenue.

U.S. Representative Barney Frank, the Massachusetts Democrat and co-author of the legislation who sought to undo the debit limits, said he supported the settlement.

“A free-market approach in this area will be better for the economy and all concerned parties,” he said in a July 19 statement.

‘Very Challenging’

Supporters of additional interchange legislation may struggle to win enough backing in Congress, which approved Dodd- Frank when Democrats controlled both chambers. Republicans, most of whom opposed the price caps, seized control of the House after the 2010 election and 54 senators led by Jon Tester, a Montana Democrat, voted last year to delay the implementation of Durbin’s debit rules. The measure required 60 votes for passage.

“It’s highly possible Senator Durbin will introduce credit interchange legislation in next year’s Congress, though it will be very challenging to gain broad-based support,” Jason Kupferberg, a Jefferies & Co. analyst who covers Visa and MasterCard, said in a July 20 research note. “Some of the class plaintiffs could opt out of the settlement and initiate new lawsuits.”

Peter Larkin, chief executive officer of the National Grocers Association, which opposes the settlement, said his group plans to push for more legislation.

‘Complex Dispute’

“It’s hard to predict what Congress will do and won’t do,” Larkin said in a July 27 interview. “It would be our intention to continue to talk to Congress because we think we need to achieve further reforms.”

Erica Harvill, a spokeswoman for San Francisco-based Visa, declined to comment, as did James Issokson at Purchase, New York-based MasterCard.

“The long business-to-business conflict over these fees is finally over and settled by the legal process,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a trade group that represents payment networks and banks. “The legal system was and is the appropriate system to resolve a large and complex dispute between companies, not Washington.”

Visa’s share of the settlement filed in federal court in Brooklyn, New York, is about $4.4 billion and MasterCard is responsible for $790 million, the firms have said. Bank of America Corp. (BAC:US), the second-biggest U.S. credit-card lender, said last week that it will contribute $738 million, most of which already had been deposited into Visa’s litigation escrow fund.

‘Very Confident’

The dispute began in 2005, a year before MasterCard’s initial public offering (MA:US) and three years ahead of Visa’s. Merchants alleged the companies violated antitrust law by fixing the swipe fees. The case had been set for trial in September before U.S. District Judge John Gleeson in Brooklyn. The parties have until Sept. 21 to agree on the details of the settlement and merchants will have 180 days after the accord is approved to decide whether to opt out.

“We are very confident that the court is going to approve this settlement,” Josh Floum, Visa’s legal chief, said in a July 25 conference call after the company reported fiscal third- quarter results. “This case has been pending for seven years, and during a great deal of that time, there has been a court- ordered mediation process with two mediators and the involvement of the court.”

The settlement includes cash payments of $6.05 billion and $525 million. The larger amount would be reduced if some plaintiffs don’t agree to participate. The accord also provides for a 10-basis-point reduction in interchange fees for eight months, valued at about $1.2 billion if all merchants in the proposed class approve, according to plaintiffs’ law firms including Robins Kaplan Miller & Ciresi LLP.

‘Detrimental Conduct’

Wal-Mart Stores Inc. (WMT:US), the world’s largest retailer, and Minneapolis-based Target Corp. (TGT:US), the second-biggest U.S. discount chain, criticized the settlement last month. Wal-Mart urged all merchants to reject it.

“The proposed settlement would require merchants to broadly waive their rights to take action against the credit- card networks for detrimental conduct or acts,” Bentonville, Arkansas-based Wal-Mart said in a July 24 statement.

Target said the accord would “perpetuate a broken system,” according to a July 20 statement on its website.

Merchant groups including the National Association of Convenience Stores have said they won’t participate in the settlement, saying the agreement offers too much to Visa and MasterCard and is unfair to retailers. The National Community Pharmacists Association also said it will reject the accord.

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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Companies Mentioned

  • V
    (Visa Inc)
    • $209.97 USD
    • 0.84
    • 0.4%
  • MA
    (MasterCard Inc)
    • $74.53 USD
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