Will the Credit Card Settlement Help Merchants?

By ROBB MANDELBAUM

The Agenda

How small-business issues are shaping politics and policy.

The Times has published an article exploring the dissatisfaction brewing among some retailer advocates with a recently proposed settlement to a lawsuit that pitted merchants against Visa, MasterCard and the leading banks. Among the grievances: for the first time, merchants would gain the right to charge customers more for paying with a credit card - unless they accept American Express cards. As the article explains, American Express, which is not party to the settlement, has rules that can make it difficult or impossible for merchants to institute surcharges.

If this sounds familiar, it's because merchants raised the same complaint about the Justice Department's antitrust settlement with MasterCard and Visa in October 2010. That settlement requi red the card networks to rewrite rules that prohibited merchants from offering discounts for using certain cards. There, too, merchants that took American Express were hamstrung by American Express's ban on discounting payment cards. A government antitrust lawsuit against American Express is pending.

For their part, the credit card companies say that few merchants will want to apply a surcharge in any event. Indeed, none of the retailers contacted for The Times story said they planned to institute surcharges on credit card transactions - at least not at the outset. But a couple of them said they would wait to see what their larger competitors do. Robert Benham, who owns Balliets, a women's clothing boutique in Oklahoma City, said he might add a surcharge if other stores do it, but, “I'm not going to blink first.”

If the settlement is ineffective, the obvious question is, what would opponents like to see in its place? Mallory Duncan, senior vice president and general counsel at the National Retail Federation, a trade association, said he would have preferred a settlement that eliminated the rules credit card companies set for merchants and also increases transparency, “so that both retailers and consumers know, up front, how much the specific swipe fee will be for the card they are using.”

“It becomes almost Talmudic to interpret the various MasterCard and Visa rules,” Mr. Duncan added. “What they claim on the surface often has no bearing on how they operate in practice. So the merchant on the street doesn't know what he can or cannot do, without asking the card companies. And you can't have competition when the other guy gets to tell you how to run your business.”

Representatives of the payment industry take issue with that characterization. “Visa and MasterCard both have tried to simplify and streamline their rules for the benefits of merchants,” said Bob Stolebarger, a lawyer for the Electronic Paym ents Coalition, an organization that represents Visa, MasterCard, and the banks that issue their cards. “The rules are available, they're in plain English, and they make perfect sense.”

Henry Polmer, a Washington lawyer who specializes in electronic payment networks, said that the only way to keep credit card fees from rising is either to cap them or to force individual issuing banks to set their own rates, rather than let MasterCard and Visa set the rates for all their issuers. “That would create real and lasting change and open the credit card market to meaningful price competition,” he said.

Andy Charles, who owns Haven's Candies in Portland, Me., seconded several of these remedies. “Interchange fees make up the vast majority of the costs of accepting a credit card, and I have no idea how Visa and MasterCard set them,” he said. And though Mr. Charles insisted he was a believer in free markets, he supported government intervention in this case. In E urope, he said, “the amount of commerce they do is similar, and demographically and financially it's similar, and yet their fees are one-eighth of ours, and that makes you wonder what accounts for the difference. And as far as I can tell, the only difference is that the fees are regulated.” Yet card companies, he said, “still manage to make a profit over there, too.”

But a lawyer for the plaintiffs who negotiated the settlement, H. Laddie Montague, warned merchants against setting expectations too high. “There are a lot of risks if this case were tried, and then went to appeal, whether they would get a result as good as what we've obtained in this settlement,” he said. “Or whether they would get any results at all.”

If you're a merchant, would this settlement affect the way you do business?