A federal judge rejected a $30B swipe fee settlement between Visa, Mastercard, and retailers. This decision suggests that the credit card companies must offer more significant concessions to settle the ongoing dispute with merchants. In March, MasterCard and Visa, among the largest global credit card networks, reached this tentative antitrust agreement with US retailers. The terms of the deal, pending judicial approval, required the companies to reduce swipe fees by at least four basis points for a minimum of three years and to fix their fees at 2023 rates for the following five years.
Key Takeaways
- Judge Dismisses $30 Billion Settlement: A US judge has rejected a proposed $30 billion antitrust settlement between Visa, MasterCard, and various retailers over swipe fees, citing the need for more significant concessions from the credit card companies.
- Settlement Aimed at Reducing Swipe Fees: The proposed settlement, announced in March, included a reduction in swipe fees by at least four basis points for three years and fixed fees at 2023 rates for five years, along with increased flexibility for merchants to offer discounts or surcharges.
- Merchant Criticism and Legal Claims: Merchants and trade groups criticized the settlement as inadequate, arguing that it allowed Visa and MasterCard to maintain control over swipe fees and limited competition. They claimed that the card companies conspired to impose excessive fees.
- The judge’s decision, with its potential to push Visa and MasterCard to seek a more favorable agreement or face a trial, could significantly influence future mergers and financial transactions in the sector. The settlement’s outcome could reshape market dynamics in the coming months.
Judge Rejected a $30B Swipe Fee Settlement
Federal Judge Rejects $30 Billion Antitrust Settlement with Visa and MasterCard.
On Tuesday, a US judge dismissed a proposed $30 billion antitrust agreement where Visa and MasterCard would reduce the fees charged to merchants for accepting their credit and debit cards. Judge Margo Brodie of the US District Court in Brooklyn indicated that she was unlikely to approve the settlement definitively, leading her to deny the preliminary approval sought by the plaintiffs. This decision could push Visa and MasterCard to seek a more favorable agreement with merchants or face a trial.
The settlement, announced in March, aimed to settle ongoing litigation from 2005 concerning the interchange or swipe fees that merchants incur to process payments through Visa and MasterCard’s networks.
The specifics of Judge Margo Brodie’s ruling from the US District Court for the Eastern District of New York on Tuesday have yet to be disclosed. A court memo stated she was “not likely to grant final approval” to the preliminary settlement without modifications.
Retailers are usually charged 2% of each transaction as swipe fees, which can rise 4% for transactions made with certain premium rewards cards based on industry data. The proposed agreement aimed to reduce these fees by at least 0.04 percentage points for at least three years and consented to maintain rates at least 0.07 percentage points under the current five-year average. Additionally, they agreed to a five-year rate cap and eliminated clauses preventing customers from being steered to other payment methods. In return, merchants gained increased flexibility to apply discounts or add surcharges.
In the lawsuit, merchants claimed that the card companies and their partnering banks conspired to impose excessive swipe fees, blocking them from steering customers towards less expensive payment methods.
As part of the initial settlement, the card companies did not admit wrongdoing and agreed to keep swipe fees at the levels set on December 31, 2023, for five years. Furthermore, Visa and MasterCard consented to scrap any restrictions that prevented merchants from promoting alternative card options to customers.
Additionally, the agreement allowed merchants to apply surcharges for using specific types of Visa or MasterCard cards, particularly affecting customers with cards that offer rewards like cash back and airline miles, which generally have higher swipe fees.
Visa reported that over 90% of the merchants supporting the initial agreement with Visa and MasterCard were small businesses. However, the National Federation of Independent Business described this agreement as only a “temporary relief” for small businesses, not a permanent fix. Large trade groups representing major retailers were even more critical.
The Merchants Payments Coalition, representing various businesses, from supermarkets to online merchants, criticized the initial settlement as inadequate. Some industry experts argued it would allow credit card companies to continue controlling swipe fees and limiting competition. Fortunately, the judge recognized this agreement’s negative impact on small merchants and their customers.
The Retail Industry Leaders Association, which includes large retailers like CVS and Target, also praised the recent court decision. A MasterCard spokesperson expressed disappointment in the decision, claiming the settlement was a fair resolution that would have provided business owners more control over card acceptance practices. MasterCard intends to explore further options to resolve the issue.
Brodie will explain her decision once merchants and the card networks submit proposed redactions by Friday. This recent ruling by the judge does not alter a previous settlement where Visa and MasterCard agreed to a $5.6 billion class-action lawsuit with approximately 12 million merchants regarding swipe fees.
In March 2023, a federal appeals court in Manhattan confirmed this agreement seven years after rejecting a $7.25 billion settlement that did not adequately compensate some retailers.
The settlement might influence upcoming mergers, such as the proposed union between Capital One and Discover, and other financial transactions. This settlement is anticipated to significantly affect the financial sector in the upcoming months, a notion supported by the slight rise in Visa and MasterCard’s share prices following the announcement.
Conclusion
A federal judge’s rejection of the $30 billion swipe fee settlement underscores the need for Visa and MasterCard to propose more substantial concessions to resolve the ongoing antitrust litigation with merchants. This decision reflects the strong dissatisfaction among retailers and trade groups, who argue that the initial agreement was insufficient to address the high costs imposed by swipe fees.
Moving forward, Visa and MasterCard may have to negotiate a more favorable settlement or face the possibility of a trial. The outcome of this case is likely to have significant implications for the financial sector, influencing future mergers and market dynamics. Judge Brodie’s written explanation will provide further insights into the rationale behind the dismissal and potential directions for resolution.
