Four Retailer Associations Sue Visa, MasterCard Over Interchange

WASHINGTON – In what has become a regular feature on the credit card industry landscape, four large retail associations have filed suit against Visa and MasterCard, alleging collusion and unfair trade practices in the setting of interchange rates on credit and debit card transactions. The four associations are the National Association of Convenience Stores, the National Association of Chain Drug Stores, the National Community Pharmacists Association and the National Cooperative Grocers Association. The lawsuit alleges that Visa and MasterCard and their largest bank issuers engaged in “collusive practices” in setting card interchange fees. “The credit card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products regardless of the form of tender,” said Hank Armour, CEO of the NACS. “And these credit card interchange fees have rapidly increased over the past several years, despite efforts by individual convenience stores to control these costs or make the competitive market work.” Interchange fees are meant to cover the cost of processing a credit card transaction and the risk taken by the issuing bank that the credit will not be repaid. But the plaintiffs charged that both fraud costs and the cost of processing are steadily decreasing, while U.S. interchange rates continue to increase. They also pointed out that interchange fees are substantially higher in the United States than almost any other industrialized country. Other countries have taken action to address the market problem created by these monopolies. Recent changes in Australia and countries in Europe, for example, have decreased rates from about 0.95% to about 0.5%. “Credit card interchange fees are the third-largest expense for many chain drug stores after rent and the cost of labor,” said Craig Fuller, CEO of the National Association of Chain Drug Stores. “These costs have skyrocketed over the past years even though the costs of credit card transactions for the banks have fallen. NACDS weighed many options in dealing with this issue and decided to seek litigation only after careful deliberations, with the ultimate recognition that it was necessary for the long-term reform of the system,” added Fuller. The suit’s plaintiffs added they would seek damages and injunctive relief to stop the alleged anticompetitive practices of banks and credit card companies. “We are not seeking some form of temporary relief; we are looking for long-term reform of the credit card interchange fee system,” said John Rector, General Counsel of the National Community Pharmacists Association. “The current system discriminates against small, independent businesspersons, and there is no basis for that discrimination. We ultimately seek a competitive and fair interchange fee system. Interchange is much higher in the United States than any other country, and there is no legitimate basis for that.” Neither Visa nor MasterCard had any comment about the suit. Similar suits from retailers making similar allegations have been made ever since Visa and MasterCard settled a merchants’ suit over debit card interchange by paying negotiated damages and agreeing to change the system by which debit interchange rates are set. This suit differed somewhat, however, in that it appeared to challenge the notion that interchange was really necessary at all. “Interchange Fees were devised in the early days of the Visa and MasterCard networks purportedly to pay for the costs of transferring transactional paper between Acquiring and Issuing banks and purportedly to balance network costs between Issuers and Acquirers,” the associations’ court papers said. “These early Interchange Fees were cost based, set with the help of independent auditing firms..Those initial proffered justifications for collectively-set Interchange Fees are no longer valid, if they ever were. The Associations are no longer required to transfer large numbers of paper receipts between member banks, and Interchange Fees are no longer cost-based.” In the past, Visa and MasterCard have defended interchange as a way for issuers to be able to pay for the fraud risk they take as well as the risk of default and other consumer friendly policy they must put into place to make the cards as popular with consumers as they have become. But the plaintiff associations countered that the way the associations bundled many of these services with their basic issuing and acquiring agreements is part of the uncompetitive problem the associations represent. “If Visa, MasterCard and the Bank Defendents did not tie and bundle together these separate and distinct services, many merchants could and would choose to purchase the Payment Guarantee Services included in the Interchange Fee from the other vendors or chose to self-insure against fraud,” the associations said. Even if they chose to purchase them from Visa and MasterCard, the associations said individual merchants could get better prices if there were more competition. It’s unclear what the prospects of the suit might be. No lawyer familiar with anti-trust work would comment for the record about the case since it had just been filed and no card source was willing to speculate on its eventual outcome. Several mentioned privately however that there were signs that these suits, even if the merchants lost them, had the capacity to change the way the card industry works and that in a few years credit unions might face a significantly different card payments structure. -