Ed's Blog

A reported $5 billion settlement (NYTimes and Bloomberg/SF Chronicle) over long-running anti-competitive practices by Visa and Mastercard that raise prices for all consumers at the store and at the pump will allow merchants to surcharge credit card transactions in some circumstances. But the convenience stores oppose the settlement as too weak to protect them. U.S. PIRG has generally taken the side of retailers in their long-running Congressional, state legislative and court battles with the card networks because merchants have been forced to pay non-negotiable fees to accept plastic, which means they are forced to raise prices for all consumers, including cash customers.

The current lawsuit is the latest in a series of multi-billion dollar settlements. This case applies to credit cards. In the 2010 Wall Street Reform and Consumer Protection Act, Congress ordered reductions in debit card swipe or interchange fees and enacted other provisions designed to end anti-competitive practices. The history is clear: the powerful duopolists Visa and Mastercard have only begrudgingly given ground when forced to do so, but the record of massive settlements and their massive Congressional defeat show clearly that their price-fixing and other practices have been anti-competitive under the law and unfair enough to cause Congress to act against them, too, despite their political juice.

The 2010 Act's Durbin amendment -- in addition to reducing debit swipe fees -- also made it easier for merchants to advertise lower cost options to consumers. Previously, card network contracts had punitive prohibitions on price signaling, even though discounts for cash had long been legal under the Truth in Lending Act. The current settlement, in addition to providing over $5 billion in compensation to merchants for unfair practices, allows merchants to surcharge customers who use credit cards, except in the ten states that prohibit the practice by law, although the rules for surcharging in the settlement apparently don't make it easy.

In a statement, the National Association of Convenience Stores said the settlement money and the limited expansion of surcharging rights do not solve all the anti-competitive practices that have harmed them:

“Even the monetary agreement in this proposal is a mirage,” said Robinson [of NACS]. “Merchants won’t get these funds for years and will have paid more than that through increased swipe fees long before they see those funds.”  The proposed settlement does allow merchants to show consumers some of the costs of accepting credit cards, but only under very limited circumstances with strict oversight by Visa and MasterCard. That oversight makes the settlement unworkable for virtually all merchants.  “Visa and MasterCard will continue to separately price-fix fees for thousands of their bank members. This means that banks won’t have to set their own prices and compete like other businesses throughout the U.S. economy. And Visa and MasterCard can continue to police how merchants price their products and stop them from showing consumers the cost consequences of using different credit cards — unless merchants drop American Express,” he said.  The proposed settlement also sets a dangerous path for the future of the payments landscape. Visa and MasterCard will be able to use their power in the market to prevent new entrants, like PayPal, from expanding their share of the market. And the proposed settlement allows Visa and MasterCard to continue to require that merchants accept all of their credit cards no matter how expensive they make those cards.

Unfair revenues on too-high swipe fees are generally used to increase rewards to cardholders -- meaning cash customers at the store pay for cardholder miles through increased prices. This is a market failure caused by unfair market power. The promise of rewards, of course, also means that cardholders use their cards more, to get those miles.  Technological advances should lower prices for everyone and increase choices. In this case, the opposite occurs.

Despite concerns of some columnists and consumer advocates, I believe that giving stores the right to surcharge in limited circumstances may not result in a lot of surcharging. It may result in V/MC lowering swipe fees merchants pay, and perhaps reducing rewards on credit cards. Card companies and banks will need to weigh high swipe fees against the threat that surcharging will reduce the use of credit cards themselves, which the networks don't want to happen. On the other side, stores will also need to weigh the risk of angering consumers if they surcharge -- either through complicated multiple prices, longer lines where surcharging must be explained or more generally, "price surprises."

However, I am also not too concerned that surcharging will create problems for consumers, because in future cases where surcharging does occur, consumers will have choices and will be able to think about their payment options. Transparency is always good. Right now, consumers don't know how much the different types of payments cost.  Sometimes merchants actually lose money on a sale when a credit card is used, especially for a small purchase. Consumers can make better choices with more information about cost. Cash customers will also benefit if merchants have lower overall costs.

For those seeking further independent information, three Boston Fed economists analyze the impacts of discounts, surcharges and swipe fees generally in a recent paper discussing a proposed government settlement with the networks.

We'll keep you informed of the future of this settlement and the next battles in the payments wars.

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