Retailers versus big banks

July 29, 2012
| By Pete Daly |
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Barb Stein, the Rockford merchant who is board chair of the Michigan Retailers Association, isn’t sure exactly how much she has to pay the big banks each time a customer uses a Visa or MasterCard. But she is sure of one thing: Those credit cards and the banks that control them have all merchants over a barrel because they have no choice but to accept Visa and MasterCard.

“So many people travel without cash anymore,” said Stein, owner of Great Northern Trading Co. Twenty years ago, she said, “you would not go out without any cash, but it’s amazing how many people can’t come up with $2.98.”

So they charge it. And Stein pays a “swipe fee” (also known as an interchange fee).

“People would be shocked if they knew how much we paid to process their credit card (purchase),” said Stein.

While she could not offer a dollar and/or cents estimate of what the swipe fees really are, she said the fee charged to the merchants is “about the same” whether the person is buying a $2.98 greeting card or a $25 candle.

Jeff Shinder says it amounts to about $40 billion a year being collected by the major U.S. banks that control Visa and MasterCard. Those banks include JP Morgan Chase, Bank of America, Citibank, Wells Fargo, Capital One and others. Shinder, a New York attorney, represented the National Association of Convenience Stores in a class action antitrust law suit against Visa and MasterCard in 2004 that resulted in a negotiated $3 billion settlement — at the time, the largest antitrust settlement in U.S. history, according to a report in Forbes last week.

In 2005, another class action antitrust suit was filed against Visa and MasterCard on behalf of about 7 million U.S. retailers, but one of the retailers’ law firms — Robins, Kaplan, Miller & Ciresi — announced July 13 it has reached a settlement agreement: a one-time cash payment of $6 billion to retailers and $1.25 billion in reduced interchange or “swipe” fees charged by the Visa/MasterCard network.

The law firm said “the settlement that has resolved the case is believed to be the largest-ever settlement of a private antitrust case under the Sherman Act.”

Shinder, who wasn’t involved in the latest litigation, told a Forbes writer that he believes the proposed settlement is “fundamentally flawed” and probably will be challenged when it goes before a federal judge for approval.

Although the Michigan Retailers Association hasn’t taken a position on the proposed settlement with Visa and MasterCard, senior vice president Tom Scott noted that Wal-Mart announced July 24 it is “disappointed in the proposed credit card interchange fee settlement.”

Wal-Mart stated that “the proposed settlement would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees, which already cost consumers tens of billions of dollars each year” in costs passed on to them by retailers.

“Some of the criticism I’ve seen of it is that it’s really only a short-term solution, and that retailers would be prevented in the future from opposing any of the moves that Visa and MasterCard make,” said Scott.

Scott added he thinks the retailers may see “some short-term gain but a lot of long-term pain.”

Stein said many retailers have wanted to limit credit card transactions to a minimum of $5, but that was illegal until passage in 2010 of the Durbin Amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment also reduced debit card interchange fees charged by Visa and MasterCard.

Fifth Third Bank issues MasterCard credit cards, but a corporate spokesperson in Columbus, Ohio, said Fifth Third would not comment on the proposed settlement “because it’s in litigation.”

However, Frank Keating, the president and CEO of the American Bankers Association, had plenty to say about it — and about retailers, whom he alleges show little regard for consumers.

“We are hopeful that today’s settlement marks the final chapter in what has always been nothing more than a legal battle between two industries over who should pay to support our nation’s incredibly efficient payment system,” he said in a statement July 13. “It is a highly complex issue that has been settled in the proper venue — our nation’s court system — through a voluntary agreement.

“Let’s be clear — retailers, not consumers, benefit from today’s resolution. This settlement even provides merchants with the ability to impose ‘checkout fees’ on customers just for using credit cards. This type of behavior is nothing new for retailers. Even after receiving an $8 billion annual windfall from the Durbin Amendment, they refused to pass along promised savings to customers and sued the Fed for even more profits. Big-box retailers will likely seize this opportunity to ask Congress for even more handouts. If retailers use this settlement to justify more government price controls, they will just be trying to profit at their own customers’ expense.

“These types of issues are best resolved by market participants. Recent history illustrates the negative consequences for consumers when policymakers choose winners and losers and distort the marketplace. An excellent example is the ill-conceived passage of the Durbin Amendment, which led to increased profits for big-box retailers and no savings for consumers.

“Only time will tell if this history will repeat itself, as retailers continue to show little regard for consumers. While the banking industry may not like all the results in this case, our industry is ready to put this matter behind us and continue playing a critical role in our nation’s economic growth and job creation,” concluded Keating.

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