Small and Medium Sized Merchants Sue Card Associations, Big Issuers, Over Interchange

MINNEAPOLIS – A coalition of smaller and medium sized businesses has filed suit against Visa and MasterCard seeking relief from what they claim are too high interchange fees as well as a method for letting smaller businesses have more of a say in setting interchange rates. MasterCard and Visa generally use a schedule of fees that offers the lowest rates to merchants with the highest volumes and some, like Wal-Mart, negotiate their rates. Other merchants have to accept the rates that Visa and MasterCard set if they want to be able to accept payments with the cards. “Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a `hidden tax’ that raise prices paid by consumers for almost every product they buy,” says K. Craig Wildfang, a partner at Robins, Kaplan, Miller & Ciresi L.L.P., who represents the plaintiffs. “Visa and MasterCard have previously been found to have `market power’ in the relevant markets, so Visa, MasterCard and the banks now have the burden of proving that they have set the interchange fees at the correct competitive level,” he added. Wildfang acknowledged that he was one of the attorneys in the previous Visa and MasterCard interchange cases but denied Visa and MasterCard’s charges that the firm was creating the suit in an attempt to get business. What Are The Stakes? As with the previous debit card interchange suit, there are tens of millions of dollars at stake for Visa and MasterCard as well as the banks and credit unions which issue the cards. But Wildfang made it clear that monetary damages are not as important to the plaintiffs as a definite change to the way interchange is handled. “It’s really not appropriate to comment on what the end of the legal process might be in the very first step,” Wildfang said, but he went on to explain some different approaches that the plaintiffs might accept. For example, he pointed out, there is no reason that interchange has to necessarily be the same across the industry or that different issuers might not be able to offer merchants different rates of interchange in a manner similar to ATM networks around the country. Competing credit card networks that accepted both Visa and MasterCard could offer different platforms of services at different prices to merchants. Or, conversely, merchants could band together into organizations that could negotiate their best interchange deals with different interchange networks. “Clearly, the system as it’s currently structured is broken,” Wildfang said. “And we need to come up with another approach that is more equitable.” Not surprisingly, neither Visa nor MasterCard quite see it that way: “This current effort to undermine the interchange system must be understood for what it is: a clear attempt by merchants to receive all the value of electronic payments, while shifting their normal costs of doing business onto consumers,” said Paul Cohen, a vice president with the number one card brand. “We will fight to protect the value our cardholders receive from their Visa cards, and oppose merchant efforts to shift costs onto consumers.” Cohen pointed out that merchants have even sought to be able to impose fees on consumers who use plastic, even though use of cards lowers costs for all by eliminating the trouble and costs of cash and checks. “Visa operates in a highly competitive marketplace, which drives enormous benefits to consumers,” Cohen added. “Our rates are determined in the open marketplace, and we believe that the marketplace is the best arbitrator of price – not a courthouse. Court-mandated price controls open the door to higher prices, merchant surcharging, and fewer benefits for consumers.” MasterCard recognizes that merchants want lower costs for all aspects of their business, and has been working closely with the merchant community to find solutions that satisfy them while maintaining the benefits consumers receive from having the enormous choice of payment options available today, MasterCard’s general counsel Noah Hanft explained. “The lawsuit filed on behalf of a number of small merchants is misguided, and MasterCard looks forward to defending interchange, which is necessary for the operation of a four-party system and has been found lawful, efficient, and pro-competitive,” he added. Resolution Still Far Off In any case, it seems unlikely that the case will be resolved any time soon. Since some of the card issuers that the merchants have sued are overseas, and since there is usually a long process for letting plaintiffs respond to the suit, Wildfang estimated that it would be 60 days before anything in the case went before a judge. Neither Visa nor MasterCard commented on the timeline for the suit. -