Visa/MasterCard Settlement May Foster Misleading Sales Tactics and Merchant Complacency

Here is a brief review of the Visa and MasterCard settlement

On July 12, Visa, MasterCard and 13 of the country’s largest banks have agreed to pay $7.25 billion settlement with retailers in a lawsuit over price-fixing on credit card transaction fees.  The settlement, on behalf of about 7 million retailers, could be the largest antitrust class-action settlement in U.S. history.

The settlement must still be approved by the Eastern District Court of New York.  Also, not all plaintiffs are happy with the settlement.  The National Association of Convenience Stores apparently opposites it.

• The settlement would give merchants new rights to impose a surcharge on credit transactions, subject to a cap and other limitations. The rules governing such surcharges would probably be implemented in early 2013.  However, 10 states currently prohibit credit card surcharges.  Merchants would not be able to surcharge in those states. These include New York, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.
• Merchants also would be allowed to band together to try to negotiate better rates on the interchange fees.
• Visa and MasterCard would temporarily reduce the interchange for a period of eight months for all merchants covered in the suit.

Here are the perceived benefits of the settlement

Settlement Payment: $7.25B to 7 million merchants in cash and temporary rate reduction.  Part of the payment would be through a temporary interchange reduction.  Many merchants would receive a 0.10% rate reduction for eight months of processing starting sometime next year.  A 0.10% reduction is a $1.00 cost reduction for every $1,000 of credit card processing.

Process for reducing rates through combined merchant negotiations – This could be beneficial to many smaller merchants.  However, I’m sure Visa and MasterCard still need to determine how they will control and implement this process.  It would not surprise me if it took until 2013 for everything to be in place.

Merchant Surcharging – Again, the rules for surcharging would not be available until early 2013. I’m guessing the rules would include posted signage and other methods to ensure customers know and agree to be surcharged.

Potential for disappointment, misleading sales tactics, ongoing fees, and complacency

Temporary rate reduction – First, many merchants may have opted out of the class and therefore are not eligible.  Also, hopefully the 0.10% rate reduction will not be applied likes the Durbin Amendment debit card rate reduction.  There are still many merchants who have yet to receive all or even any of the Durbin Amendment debit card rate reduction implemented last year.  Their providers have reaped the profits instead.  It appears Visa and MasterCard will set up an escrow to distribute the funds.

Rate reduction through combined merchant negotiations – I’m not sure how this will be implemented.  What I do know is that this is an industry where many companies and organizations are getting paid for endorsements/recommendations.  The average merchant with a POS system probably doesn’t realize that their POS System vendor may be collecting a percentage of the processing fees paid by the merchant because the POS System vendor directly or indirectly helped the merchant select the provider (perhaps without the merchant realizing it).  The average merchant may not realize that their trade association is probably getting paid by the provider they endorse.

There should definitely be benefits to group negotiations.  However, I’m concerned that this stipulation may produce organizations that ostensibly say they are helping merchants but in reality are a little too interested in their behind-the-scenes payments and not interested enough in the merchants’ bottom line.   We’ll see how this transpires.

I’m also concerned for merchants being misled by salespeople.  For example, late in 2015 there will be some industry rule changes which may benefit merchants with EMV (chip cards) and NFC (Near Field Communication) capable terminals.  Nonetheless, for the past six months I have heard of salespeople telling merchants that the card companies are mandating merchants to have new EMV/NFC capable terminals now.  I have heard of some salespeople putting merchants on 4-year terminal leases for up to $139/mo.  Keep in mind the terminal only costs around $300.

Some salespeople will take information and mislead merchants.  Therefore, it would not surprise me if by next week there are salespeople telling merchants that they can offer them far better rates because the merchant account provider they represent gets better rates from Visa and MasterCard than other providers under the new settlement.  It also would not surprise me if by this time next year there are providers claiming they can offer the lowest rates in specific industries because of the settlement whether they can or cannot.  Merchants will simply need to do their due diligence going forward.

Merchant Surcharging – First of all, it probably won’t surprise any of us if airlines were the first to surcharge because they tend to surcharge for just about anything.  However, it still needs to be determined if or how surcharging can take place for the average merchant.  Will the large retailers surcharge?  If so, surcharging may be more acceptable to customers at buying from smaller merchants.

If surcharging does not become commonplace it may be a double-edged sword for the merchants that do surcharge.  It may not be good to be the first merchant on the block or on the web to surcharge.  Before surcharging, each merchant would need to understand what they are trying to accomplish.  Are they just trying to recover processing costs, trying to drive customers to other forms of payment, or are they trying to drive customers away?  Surcharging may have the possibility of doing all three.

Rates & Fees – While the settlement addressed interchange rates on a temporary basis, group negotiations, and surcharging, it appears that it really did not address the transparency of how rates and fees were levied.  For example, Visa introduced a new Fixed Acquirer Network Fee (FANF) in April.  Because of that, an ecommerce merchant processing $200,000 per month in Visa transactions is now paying a $120.00 per month fee they did not in March.  Even worse, many merchants actually pay more for the FANF than Visa charges the provider because their provider marks-up the fee to the merchant.

The same is true on the provider side with the Visa APF fee.  Many merchants never received Visa’s debit card APF fee reduction earlier this year.  In fact, as I showed a merchant in one of my articles that actually received an increase in the APF fee at the same time the provider was getting a cost reduction from Visa.

From what I can see, there is nothing in the settlement to stop the card companies or providers from creating new fees or increasing old fees.  I believe the average merchant can expect more fees or increases in existing fees in the future either from the card companies or the providers.

Merchant Complacency – One of my concerns for merchants is should surcharging become commonplace and accepted by customers, merchants may become complacent.  They may figure their surcharging is covering the cost of processing credit cards so why pay any attention to it.  Meanwhile, card companies and providers alike could continue to create new fees or increase existing ones.  No matter how surcharging pans out, merchants need to stay on top of these card processing expenses to ensure they are not overpaying.