Consumers Are The Winners In The Visa/Mastercard Antitrust Settlement

After seven years of legal wrangling, 50,000 pages of deposition testimony, and millions of dollars in fees for over 200 attorneys from over 90 law firms, the massive class action lawsuit brought by retailers challenging the process by which Visa and MasterCard set interchange fees for credit cards was finally settled this summer. Under the settlement, Visa and MasterCard will pay $6.6 billion in damages to class members and merchants extracted concessions on many of the terms of the contracts between the networks and merchants that they found objectionable.  Merchants will now be permitted to surcharge consumers for transactions made with credit cards, will be permitted to band together to negotiate rates with the card networks, and also receive a temporary decrease in interchange fee rates worth another one billion dollars.  In exchange, Visa and MasterCard gain peace: the settlement prevents future legal challenges and puts the issues to rest.

But the biggest winners from the settlement are ordinary consumers.  Although some of the settlement’s terms are potentially prone to abuse by retailers, most notably their new right to impose surcharges on those who use credit cards, it does affirm the core principle that interchange fees should be set by free markets and consumer choice rather than by judges or politicians, thereby preserving the engine behind one of the marvels of the modern age: the evolution of a 24-hour globally-connected system of instantaneous, secure, and ubiquitous payments system.

Moreover, by the merchants signing onto the agreement consumers can hope that the resolution of the legal case will also foreclose future political meddling.  The disastrous effects of the Durbin Amendment to the Dodd-Frank Financial Reform legislation, which imposed price controls on debit card interchange fees, illustrates the damage that results from interest-group driven interventions into an economic ecosystem as complex as the payment cards industry.  By slashing debit card interchange fees nearly in half the Durbin Amendment has transferred an estimated $8 billion in revenues from banks to retailers.  To recoup those losses banks have reimposed fees on checking accounts that had disappeared over the past decade as debit cards grew in popularity—although the percentage of bank accounts eligible for free checking rose from under 10% in 2001 to 76% 2008, since then that figure has plunged to 45% and is predicted to fall still further this year  In turn, these new fees on bank accounts have driven many low-income and younger consumers out of the mainstream banking system and into the arms of check cashers and payday lenders.

Yet, astonishingly, Senator Durbin is doubling-down on his blunder, blasting the class action settlement as a “stunning giveaway” to Visa and MasterCard—and taking the extraordinary step of intervening in a private legal action to lobby retailers to reject the settlement.  In addition, Dan Swanson, Senator Durbin’s senior Judiciary Committee counsel, has participated in conference calls with retailer groups where he reportedly has tried to persuade them to reject the proposed settlement.

Senator Durbin’s intervention is unlikely to succeed—under its terms, the settlement agreement is binding unless more than 25% of it members opt-out, which is unlikely given the generous terms of the agreement to retailers.  Nevertheless, several big box store chains (including Target and Wal-Mart) have opposed the settlement, as has the National Association of Convenience Stores (which includes 49 of the 50 largest convenience store chains in the country) and the National Retail Foundation (which includes Best Buy, Macy’s, Safeway, and Walgreen, among others).

What explains the opposition of this group?  Most likely, simple self-interest.  Earlier this month a group of large merchants announced that they were banding together to develop the Merchant Customer Exchange mobile-payment network to compete with emerging smartphone payment technologies and traditional credit card issuers.  The group which includes—yep, you guessed it—Wal-Mart, Target, and 7-Eleven among its members, aims to leverage its existing retail relationships with customers to expand into the payments sphere.  By blowing up the litigation settlement, the big box retailers can perpetuate litigation uncertainty and preserve the political option of extending the Durbin Amendment’s punitive price controls to credit cards, giving them a regulatory edge as they roll out their new payment network.

Moreover, the big box retailers probably have the most to lose if the litigation settlement deflates future political efforts to impose punitive regulations on credit card interchange fees.  Although small businesses were promised that they would share in the gains from the Durbin Amendment, in fact many smaller retailers have actually seen increases in the fees they pay while the benefits have been reaped disproportionately by the same players leading the opposition to the settlement. Meanwhile there is no evidence that the big box retailers have passed on any of their windfall to customers.  Moreover, it is smaller retailers that benefit the most from a well-functioning and high-quality credit card system, which enables them to compete on an even footing with their larger rivals by enabling shoppers to make credit purchases without having to bear the risk and cost of running its own proprietary credit operation.

Senator Durbin, of course, has his own interests in keeping alive the threat of legislative intervention, which likely would be thwarted if the settlement is accepted. The retailers have spent millions of dollars lobbying for new regulations on payment cards, much of it flowing to Senator Durbin and his allies in Congress (of course, the financial industry has spent millions in response to try to fend off price controls).  But this is only the tip of the iceberg Senator Durbin’s cozy relationship with the mega-retailers: it was reported that on the eve of the vote on whether to attach the Durbin Amendment to Dodd-Frank, Wal-Mart announced that it would spend $20 million donating to charities and opening new stores in Durbin’s home state of Illinois.

Consumers and businesses, especially small businesses, benefit when competition and consumer choice decides winners and losers in the marketplace, not politicians.  It is time to put the endless interchange litigation and ancillary political efforts to rest.