On March 15, 2023, the United States Court of Appeals for the Second Circuit unanimously confirmed the district court’s final approval of a historic $5.5 billion payment card interchange fee settlement under the Sherman Act, the largest private antitrust settlement in its 130-year history. This settlement resolves claims in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, alleging that Visa, Mastercard, and their member banks charged excessively high fees on credit and debit card transactions, violating antitrust laws.
In December 2023, claim forms were sent to millions of business owners eligible under the class action who accepted Visa and/or Mastercard from January 1, 2004, to January 25, 2019. The period to SUBMIT A CLAIM will end on August 30, 2024.
Background: Payment Card Interchange Fee Settlement Legal Case
Visa and Mastercard operate payment card systems that enable consumers to use credit cards to purchase at various retailers. These systems involve four primary parties: card issuers, cardholders, merchants, and merchant acquirers (often the merchants’ banks). Card issuers distribute payment cards to consumers, who then use these cards to buy goods or services from merchants. Merchants rely on acquirers, typically banks, to process these card payments.
The transaction process includes several steps: a customer uses a payment card at a merchant’s store, which sends the card details to their acquiring bank. This bank forwards the information to the Visa or MasterCard network, which then relays it to the customer’s issuing bank. The issuing bank verifies if the customer has sufficient credit or funds to complete the purchase. Once verified, the issuing bank approves the transaction and communicates this back through the network to the acquiring bank, which then informs the merchant.
Subsequently, the issuing bank transfers the payment to the acquiring bank, deducting an “interchange fee” (central to this issue). Although the issuing and acquiring banks can negotiate this fee, Visa and MasterCard establish a default fee if no specific agreement exists. The acquiring bank then pays the merchant, subtracting a “merchant discount fee” that includes the interchange fee and an additional payment processing charge. This fee varies based on several factors, such as the type of payment card used. Merchants accepting Visa and MasterCard must comply with network rules, which are typically uniform.
The acquiring bank pays the merchant, deducting a “merchant discount fee” that includes the interchange fee and an extra charge for processing the transaction. This fee varies depending on factors like the type of payment card used. Merchants accepting Visa and MasterCard must follow uniform network rules. For instance, the “honor-all-cards” rule mandates merchants to accept all cards of a brand, regardless of different interchange fees.
Additionally, rules prevent merchants from directing customers towards using specific payment methods over others, such as preferring cash or cards with lower fees. These include “no-surcharge” and “no-discount” rules that stop merchants from adjusting prices based on the payment method.
While historically portrayed as a service fee from the issuing bank to the acquiring bank or indirectly to merchants, the interchange fee mainly serves as a mechanism within the payment system to transfer costs from one group (card issuers and their customers) to another (acquirers and their merchant clients).
Antitrust Lawsuit Settlement: History Overview and Implications
Approximately 18.6 million merchants filed an antitrust lawsuit under the Sherman Act against Visa, MasterCard, and several banks that issued payment cards on these networks. The merchants accused Visa and MasterCard of implementing rules and practices for payment cards that collectively harmed merchants by enabling the networks to impose excessively high interchange fees on each transaction.
Credit card companies have been entangled in disputes with merchants regarding swipe fees since 2005. Over the years, these settlements have generally decreased. In 2012, Visa and Mastercard agreed to a $7.25 billion settlement with retailers over allegations of improperly fixed credit card fees. However, this settlement was overturned in 2014 by an appeals court for not adequately addressing some retailers’ concerns. Further attempts to revive the settlement were rejected by a federal appeals court in 2016 and the U.S. Supreme Court in the following year. In 2018, Visa and Mastercard agreed to a revised settlement of $6.2 billion related to card fees.
Judge Margo K. Brodie of the U.S. District Court authorized a $5.54 billion settlement in February 2019. Following four more years of litigation, the District Court’s final approval ruling was upheld by the Second Circuit Court of Appeals in March 2023, but with a reduction in service awards and permission to move forward with the claims procedure.
Initially, this deal was the largest all-cash antitrust settlement in U.S. history. However, its value diminished to $5.5 billion after about 8,000 retailers, including major names like Target, Starbucks, Foot Locker, and Crate & Barrel, opted out to pursue their own litigation, reducing the settlement from its original $5.6 billion.
What Is Noted in the Visa/MasterCard Lawsuit Settlement?
The United States District Court for the Eastern District of New York approved a settlement between the parties that amounted to around $5.6 billion after nearly fifteen years of litigation. As part of the settlement, the court granted the lead plaintiffs $900,000 in service awards and over $523 million in legal fees. Several appellants objected to the settlement, arguing that the class certification, settlement approval, service awarding, and attorney fee computation were incorrect.
Key terms of the settlement include:
- Reducing swipe fees by at least 4 basis points for at least three years.
- Freezing swipe fees for five years at levels not exceeding those of December 31, 2023.
- Maintaining the average systemwide swipe fee at least 7 basis points below the current average for five years.
- Eliminating restrictions that prevent merchants from steering customers to less expensive payment options.
- Facilitating competitive pricing practices.
Robins Kaplan serves as the co-lead counselor for a class of retailers who accept credit cards from Visa and Mastercard. The firm filed the initial action in this consolidated case more than 18 years ago, putting forth a novel claim that Visa and Mastercard interchange fee system and associated regulations are anti-competitive.
Along with significant card-issuing institutions like Bank of America, JPMorgan Chase, Wells Fargo, Capital One, and Citibank, Visa and Mastercard are defendants in this lawsuit. In 2012, the legal team obtained a historic settlement, although it was subsequently reversed on appeal.
Submit Your Claim Today!
The deadline to submit a claim for the Visa and Mastercard settlement is 11:59 PM PST on August 30, 2024. We encourage all our merchant partners to take advantage of the convenient online claim submission process available through our collaboration with CCC. Eligible businesses can easily calculate potential payouts and submit their claims using basic business details and SUBMIT A CLAIM with just a signature.
You can access various services directly from the online portal through our partnership with CCC. This includes checking the status of your claim, filing additional claims, and receiving updates on the settlement. Furthermore, this collaboration allows you to bypass traditional waiting periods by selling your future claim to CCC, enabling you to utilize the funds for your business needs immediately.
Conclusion
The Payment Card Interchange Fee Legal Case represents a significant milestone in the ongoing struggle between merchants and credit card companies over swipe fees. The $5.5 billion settlement, confirmed by the United States Court of Appeals for the Second Circuit, marks the largest private antitrust settlement in U.S. history, resolving claims that Visa, Mastercard, and their member banks imposed excessively high fees on credit and debit card transactions.
Despite its long and convoluted legal journey, the settlement aims to address merchant concerns by reducing swipe fees, freezing fees for a specified period, and eliminating restrictions on steering customers to less expensive payment options. While some major retailers opted out to pursue their own litigation, this settlement sets a precedent for fairer practices within the payment card industry, promoting competition and transparency for merchants and consumers alike.
Frequently Asked Questions
What initiated the Legal Case for the Payment Card Interchange Fee?
The case began in 2005 when merchants sued Visa, Mastercard, and banks over alleged price fixing and anti-competitive practices regarding credit card interchange fees.
What are the main allegations in the lawsuit?
Merchants accused Visa and Mastercard of colluding to set high interchange fees, claiming these fees were unfairly inflated due to anti-competitive measures that limited merchants’ options for lower-cost payment methods.
What were some significant developments in the lawsuit?
In 2012, a $7.25 billion settlement was approved but faced opposition, leading to an appeal. The original settlement was overturned in 2016 due to inadequate representation, resulting in a renegotiated $5.5 billion compensation in 2023.
Who opposed the settlement and why?
Large retailers like Target and Home Depot opposed the settlement, opting out and pursuing separate legal actions. They argued that the settlement didn’t adequately address ongoing anti-competitive practices or prevent future high interchange fees.
