Ed's Blog

In July, news broke that major merchants and the Visa and Mastercard payment networks had agreed to settle charges that "interchange" fees that the networks charged the merchants to accept credit and debit cards were unfair. Now, as far as I know, all the major merchant associations involved have withdrawn from the proposed settlement deal because it wouldn't change bank and network behavior, wouldn't lower the unfair credit card fees that they pay that harm their customers with higher prices, wouldn't punish banks or card networks for anti-competitive behavior and would bind merchants, including those not yet born, from any future lawsuits for unfair payment network practices. Apparently, some individual merchant plaintiffs may still be in favor of the proposed settlement. The remaining parties are expected to file final papers to a judge by October 19. Objections would be due within 30 days after that. You can review all court papers are here at the bottom of this page at the website of the lead merchant law firm, Robins, Kaplan.

Meanwhile, the banks continue to spin the benefits of the settlement. They should; in July, securities analysts and others called it a big win for banks and credit card companies.

Yesterday, Senator Dick Durbin (IL) replied to a letter to Capitol Hill from the American Bankers Association. Durbin's letter explains the flaws in the settlement (see esp. the first paragraph on page 2).

His letter also responds to numerous allegations from the bankers about the effect of the so-called Durbin amendment to the 2010 Wall Street Reform and Consumer Protection Act, which resulted in reducing interchange fees on debit card transactions involving cards issued by big banks.

U.S. PIRG has long supported interchange fee reform and supported the Durbin amendment. All consumers, whether they pay with cash or plastic, pay more at the store and more at the pump due to the non-negotiable interchange fees set by the Visa-Mastercard oligopoly (or cartel), which average around 2 cents on the dollar for plastic transactions, with debit cards somewhat lower and airline rewards credit cards much higher (3-4%). The vast percentage of interchange goes to the card-using consumer's bank. Much smaller amounts go to the network and the merchant's bank.

At a minimum, a good lawsuit settlement should punish alleged lawbreakers, compensate victims and end unfair behavior. This proposal perpetuates unfair behavior, allows alleged lawbreakers to raise interchange fees in the future and prohibits merchants from bringing future lawsuits, even merchants not yet born, no matter what new tricks the banks come up with and no matter how payment systems change (think of mobile payments with lower cost structures). That's a bad deal for merchants and that's a bad deal for consumers who will continue to pay more at the store and more at the pump. Oh, and did I mention that a large chunk of interchange revenue is used to pay for credit card rewards? Cash customers at the store are buying airline miles for more affluent credit card customers under this system.

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