Credit card settlement is a mixed bag for merchants and consumers


The recent settlement with VISA and MasterCard fell on the side of merchants. We asked our Zintro experts to analyze the settlement and how it will affect small businesses and what consumers need to know how it will affect them.

Mike McCormack, an expert in the payment transaction industry, says that the recently announced settlement between merchant plaintiffs and defendants Visa, MasterCard, and various large US financial institutions, contains provisions and relief steps that will be helpful to small merchants. “First, there is a sizeable cash settlement of $6 billion. While specifics of the claims determination process in this proposed settlement have not yet been made public, merchant’s Visa and MasterCard sales volumes and corresponding interchange fees paid during the class period (2004 through a point to be determined in 2012) will be the likely basis for computations,” says McCormack.

Recent history may be helpful in providing some dimensions to the potential size of cash settlement payments small merchants may receive once the settlement is approved by the Federal Court, McCormack tells. “In the litigation concerning Visa and MasterCard debit card acceptance rules and interchange fees settled in 2003 for $3 billion (one-half of the current litigation’s proposed settlement), payments to small merchants were often in the range of $2,000 to $6,000 dollars per merchant location, and occasionally nearly $10,000 depending on the merchant’s level of sales,” he explains.

This proposed settlement also has other elements that will be helpful to small merchants. “The settlement requires that Visa and MasterCard rescind their no-surcharge rules. The proposed modifications of Visa and MasterCard’s no-surcharge rules will equip small merchants with a negotiating tool they may use with their Acquirer, Visa and/or MasterCard, to negotiate reductions in interchange fees,” says McCormack. “Merchants will now have ability to selectively surcharge Visa, MasterCard, or various product types within each brand, such as using premium cards as a potential tool to recoup Visa and MasterCard acceptance costs. Currently 10 US states have laws in force that prohibit surcharges on credit and or debit cards. I anticipate that over the next several years, the various state laws will be modified and/or rescinded to permit surcharges of credit cards and possibly debit cards as well. These states are California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas.”

McCormack says that the proposed settlement also contains provisions where Visa and MasterCard agree to remove any existing policies or rules that prohibit merchant buying (trade) groups, such as the National Restaurant Association, from engaging in negotiations on behalf of groups of merchants with Visa or MasterCard regarding merchant acceptance rules, network or interchange fees, or other operating policies.

“Assuming the settlement is approved by the Federal Court, small business merchants who have accepted Visa and MasterCard anytime from 2004 to the present will be eligible to file a claim,” he says.

Bill Morgenstein, an expert in finance and funding, says that the settlement will mean that merchants will now be able to give discounts for cash versus credit card payments. “Because of the high credit card fees, gas stations have been doing this quite extensively in recent months. Now this will be expanded to restaurants and other small retailers,” he says. “It is not expected that retail chains and multiple unit operations will go this route. The small merchants who are under cost pressures, especially restaurants, will try to keep some of what they save for themselves.”

Morgenstein predicts that this will be a relatively seamless and easy transition. “After a few months, it will be an acceptable situation for both merchants and consumers. Having said that, the impact on the banks and processors will encourage them to seek new ways of charging fees,” he says. “As with all economic laws and regulations, these things often have the opposite effect and that can mean that those who are affected will find ways to bypass it to protect interests.”

Michelle Dunn, a credit and debt collection expert, says that the recent VISA and MasterCard settlement in favor or merchants will affect small businesses because many of their customers who may have charged products or services because they don’t have the cash may no longer be able to afford them if fees are added. “Ten states prohibit adding the credit card fees to the transaction, so the small businesses in those states won’t be adding these fees, and the small business owner must continue to absorb those fees,” she says. “I see small business owners losing some sales, and maybe running into situations where they don’t always accept every type of credit card any more because of these fees. Consumers who are told about the different fee rate for the different credit cards may use a lower fee card or cash or not buy at all. However, most small business owners are interested in good customer service and keeping customers happy, and this new settlement does not benefit customer or consumer welfare.”

By Maureen Aylward

Zintro, Inc

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