Just Too Early: Surcharging Is Bound to Be a Hot Topic in 2014, but the B2B World Isn't Consumer Retail, and the Sector Just Might Not Be Ready Yet
Barron, Jacob, Business Credit
The decision of U.S. District Court Judge John Gleeson to preliminarily approve a record-breaking antitrust settlement between merchants and a group comprised of Visa, MasterCard and several financial institutions in November 2011 set retailers' hearts ablaze. Opposition to the settlement, which would give merchants a $6 billion lump payment, an additional $1.2 billion in temporary interchange rate cuts and the right to surcharge card-using customers, reached a fever pitch that's been sustained in the ensuing months as Gleeson pores over the settlement and debates whether the agreement meets the threshold for full approval.
Objections to the settlement have remained the same throughout the now six-year court battle over interchange, or "swipe," fees. Primarily, merchants believe that the settlement amount is too low as Visa and MasterCard have turned an average $30 billion annual profit on interchange fees in the years since the case was initially brought. Despite the fact that $7.2 billion would be the largest antitrust settlement in the history of the United States, it's still a drop in the bucket for many retailers. Secondly, the terms of the settlement release Visa, MasterCard and the involved financial institutions from future suits on the same subject, meaning that merchants can't bring further cases against the opaque, secretive way in which Visa and MasterCard set their interchange rates. Furthermore, this aspect of the settlement that exonerates Visa and MasterCard from future liability is the only portion of the settlement merchants can't opt out of. They can opt out of the free money, sure, but the agreement is worded in such a fashion that makes the release binding, regardless of whether or not a particular merchant finds the settlement just.
It's been a complicated, righteous and possibly sanctimonious reaction on the part of retailers, depending on who you ask. United TranzAction's Rudet Fountain, a payment solutions firm with exclusive offerings for NACM members, made a good point about how noble retailers are really being in their objections to the settlement as proposed. "The retailers, the big box stores, they've passed along the cost of interchange anyway," he said. "They know that 90% of their transactions are going to be paid with a credit card, so they account for the cost because they know they're going to incur it."
If Gleeson were to reject the settlement and demand that Visa and MasterCard make changes to how they set their interchange rates, the resulting world of retail pricing would probably look ... the same as it does now, according to Fountain. "If they win the lawsuit and interchange goes down, I don't think they'll turn around and give consumers any break," he said.
Case in point, when the Federal Reserve issued limits on the fees that Visa, MasterCard and financial institutions could charge merchants when accepting debit cards, as required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, consumers didn't feel any difference in their wallets. "We didn't see a reduction in pricing," Fountain said. "Even if they win, they're not going to reduce prices; they're going to keep the margin."
In an article printed in the November/December 2013 issue of Business Credit, it was observed that the retail industry, for whose benefit the settlement seemed exclusively designed, never considered the agreement's surcharging provisions to be a viable solution to their processing costs because consumers are fickle and competition would drive them away from any big box retailer that implemented surcharges, which would therefore eat into sales. But another, even simpler explanation for why surcharging was never really a viable option for retailers is because they've already been surcharging by building processing costs into their prices. For all the industry's indignation--ideologically justified or not--the biggest players in the debate swirling around the settlement are in some ways hiding behind a veneer of consumer advocacy in order to disguise their real objection, which is that the Walmarts and Targets of the world want greater control over the fees they have to pay in order to further maximize their profit. …