Merchants Expand Credit-Card Fight --- Lawsuits That Claim
Visa, MasterCard Collude on Fees Could Hit Issuers' Profits
The nation's largest banks face a growing legal and regulatory threat to one of their richest sources of profit: the more-than-$20 billion in transaction fees they charge merchants each year on every credit-card purchase made through MasterCard International Inc. or Visa USA Inc.
More merchants are challenging these fees, alleging that banks -- acting collectively through Visa and MasterCard -- are illegally fixing prices. Some recently have won large, undisclosed settlements with Visa and MasterCard that slash the charges, known as interchange fees. Wal-Mart Stores Inc., the nation's largest retailer, won concessions valued at more than $1 billion, while others, including Best Buy Co., Toys "R" Us Inc., Home Depot Inc. and CVS Corp. are negotiating or have already won fee cuts, lawyers close to these cases said.
Now other merchants are preparing lawsuits against Visa, MasterCard and banks, suits that some analysts say could prove more costly than the $3 billion settlement merchants won in a court fight last year over debit-card fees. One of the first was filed in federal court in Connecticut yesterday, alleging price-fixing, collusion and conspiracy in the setting of interchange fees.
The suit names card associations Visa and MasterCard and their largest member banks, including Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., MBNA Corp. and Wachovia Corp. It was filed by a few small and midsize businesses and seeks to represent all of the nation's retailers as a class-action lawsuit, claiming unspecified billions of dollars in damages.
A Wachovia spokeswoman declined to comment. Representatives of MasterCard, J.P. Morgan and Bank of America said they couldn't comment because they hadn't seen the lawsuit. Representatives of the other banks named as co-defendants either couldn't be reached for comment or didn't have any immediate comment on the lawsuit.
Interchange fees are complex, with Visa and MasterCard charging different rates for merchants based on their size and sales. The nation's largest retailers have negotiated lower rates from the card associations. Overall, fees average an estimated 1.7% of a transaction, and cost an average U.S. household an estimated $232 a year. The fees are among the largest costs of doing business for most retailers and are on the rise.
Merchants' outcry over credit-card fees comes as Americans are using plastic more than ever. In 2003, the number of electronic payments -- which includes credit cards, debit cards and online payments -- topped the number of cash and check payments for the first time.
"These fees amount to at least a $20 billion annual tax on merchants and the economy, raising prices for consumers on almost any product they buy," says Craig Wildfang, a lawyer with Robbins, Kaplan in Minneapolis, which is backing the Connecticut lawsuit. A former senior antitrust enforcer at the Justice Department, Mr. Wildfang called credit-card interchange fees "price-fixing in the classic sense." Like any other business, he said, "banks are expected to compete on price, and the fact they've formed a joint venture -- Visa and MasterCard -- doesn't shield them from antitrust law."
Although merchants have long complained about high interchange fees, the issue has become more heated in recent months following a round of fee increases by Visa and MasterCard. Many of the merchants' complaints have focused on a new group of so-called premium MasterCard and Visa cards geared to affluent consumers and aimed at competing with American Express Co.
The cards typically carry higher fees and offer more cardholder benefits, such as concierge services and special privileges that help them, for instance, buy tickets to popular events. The premium-card strategy is fueling a perverse competition in which new cards compete for banks by offering ever-higher interchange fees -- with merchants and consumers paying the price.
Visa and MasterCard have defended the recent fee increases by saying that consumers who use the premium cards tend to spend more, which benefits the merchants. They say that interchange fees are an essential component of a global system that has provided benefits to consumers and merchants, while covering the risk of fraud and the cost of float, or the cost of providing funds while waiting for payment.
"Interchange is highly beneficial, efficient and procompetitive," Noah Hanft, MasterCard's general counsel, said in recent comments at a Federal Reserve forum on the issue. He lashed out at class-action lawyers and foreign regulators who have begun to force reductions in the fees in the U.K., continental Europe and Australia.
Josh Floum, Visa's general counsel, declined to comment on private antitrust settlements with retailers, but said the card association is "always happy to work with merchants to lower their acceptance costs in any way that benefits the economy and cardholders." As for the latest lawsuit, he said that "there are better ways for merchants to reduce their costs than through litigation or seeking price controls through Congress. We also think there is no free lunch -- Visa drives tremendous value to merchants and they ought to pay their fair share."
Merchants say rising interchange fees are unfair and bear no relationship to risks, costs or the level of fraud, which has fallen sharply. "Consumers . . . don't need to have money taken out of their pockets just so the banks can have higher profits," said Tracy Mullin, president of the National Retail Federation.
The stakes are especially high for large banks with big credit-card operations such as Chase, Bank of America and Citi. For many card businesses, interchange fees represent as much 15% of their annual revenue, according to an estimate by UBS Securities. At MBNA, one of the largest credit-card issuers, interchange fees last year amounted to more than $500 million, a big chunk of the bank's net income of $2.68 billion.
The card associations "have immense market power . . . and most merchants have no bargaining power" because they have no choice but to accept Visa and MasterCard, said Kenneth Posner, an analyst at Morgan Stanley. But the aggressiveness of regulators overseas and the threat of lawsuits could give merchants new leverage.
Overseas, Visa and MasterCard in the past year have been forced to accept huge cuts in interchange fees after antitrust enforcers or central banks in Europe, the U.K., Australia and elsewhere have found the fees to be anticompetitive and have ordered cuts in most cases.
In the U.S., which has the highest interchange fees, regulators are taking notice but there are few signs they plan to intervene. Federal Reserve officials are reluctant to get involved in pricing.
In a written reply to a congressional inquiry on the issue, Fed Chairman Alan Greenspan said recently that the Federal Reserve Board's authority "does not currently encompass regulating interchange fees." But he added that the Fed "closely monitors the evolution of the nation's existing payments system to assess whether changes are needed" in regulations or laws. "This monitoring would include legal and market developments related to interchange fees," he said.
The Justice Department is monitoring competitive conditions in the industry, officials said. It successfully sued the credit-card industry for blocking banks from issuing American Express and Discover cards. In that suit, federal courts found Visa and MasterCard have monopoly power and could be held liable for misconduct, making it easier for private plaintiffs to sue successfully. That suit brought intense scrutiny to Visa and MasterCard practices.
Mike Schumann, co-owner of three furniture stores in Minnesota and Florida and a plaintiff in the lawsuit filed in Connecticut, says he now pays between 1.67% and 2.33% in interchange fees, including processing costs, up from 1.5% to 1.5983% in 1996. "In the last two years, the fees have started skyrocketing. It's ominous," says Mr. Schumann.
Another plaintiff, Mitch Goldstone, president of 30 Minute Photo etc., an online photo service in Irvine, Calif., calls Visa and MasterCard "a giant cartel working against merchants and imposing a hidden charge on consumers."
_______________________________________________ Futurework mailing list Futurework@fes.uwaterloo.ca http://fes.uwaterloo.ca/mailman/listinfo/futurework
