Visa, MasterCard Settle Dispute For $7.25 Billion
Retailers accused the companies of engaging in price-fixing in regards to credit card transaction fees. They argued "that the collusion resulted in a monopoly, with merchants forced for years to fork over ever higher fees to process the credit cards their customers use, driving up costs for consumers."
Businessweek reports that "the $7.25 billion in cash consists of $6.05 billion to pay for damages and an additional payment estimated to have a value of $1.2 billion that would represent the value to retailers of a temporary reduction in the level of fees they pay on Visa and MasterCard transactions."
Yet, appeals are still expected and one major retail group has rejected the agreement calling it a "mirage" that doesn't go far enough.
K. Craig Wildfang, an antitrust lawyer in Minneapolis with Robins, Kaplan, Miller & Ciresi and lead counsel for the class plaintiffs, said they will likely file for preliminary approval in September and added that the money could take 18 to 24 months before it is distributed.
The settlement, if approved by the court, is expected to change the price structure around credit cards, which Businessweek says is a central feature of U.S. commerce.
Wildfang said the settlement includes a requirement for Visa and MasterCard to negotiate with merchant-organized buying groups. He expects the changes to allow merchants to pressure Visa and MasterCard to limit or reduce fees paid between banks for accepting credit cards, and eventually lower prices for consumers.
However, card companies and banks will allow stores to start charging customers extra for using certain credit cards. The swipe fees, also known as interchange fees, are charges set by the credit card companies and deducted from a transaction by the banks that issue the cards - passing cost to the merchants.
According to Reuters, retailers will be required to disclose information about the card fees to its customers and the surcharges would be subject to a cap. CNN reports that the surcharges would also apply to other cardholders like Discover and American Express. The surcharge rule will not affect the 10 states that currently prohibit the practice like California, New York and Texas.
"The settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers," said Bonny Sweeney, a lawyer for the plaintiffs, to Reuters.
Visa CEO Joseph Saunders said in a statement that "settling the case is in the best interest of all parties" and "we are comfortable with the terms, which we do not anticipate will impact our current guidance."
Noah Hanft, MasterCard general counsel, said the settlement "avoids years of litigation and uncertainties that are inherent in such cases."
Visa said its share of the settlement is $4.4 billion, and MasterCard said its share is $790 million.
In December, Visa announced it set aside an additional $1.57 billion to cover the cost of a potential settlement in the case, bringing its litigation reserve balance to $4.28 billion, according to a regulatory filing. MasterCard in the fourth quarter of 2011 recorded a $770 million pretax charge, as an estimate of its potential liability in the case, a filing with the U.S. Securities and Exchange Commission showed.
MasterCard said in a statement that it expected to incur an additional $20 million pre-tax charge in its 2012 second quarter financial statements to cover its portion of the settlement.
Visa and MasterCard together accounted for more than 80 percent of U.S. credit and debit card purchases by volume in 2011, according to data from the Nilson Report, a California trade publication.
The seven-year legal battle all started in Minnesota, according to Businessweek.
Michael Schumann, co-owner of St. Louis Park-based Traditions Classic Home Furnishings, which operates furniture stores in St. Paul, St. Louis Park and Naples, Fla., said he was the original plaintiff who first contacted Robins, Kaplan, Miller & Ciresi about his struggle with Visa and MasterCard.
"We've paid more in credit card fees than we've made in profits in our entire company in recent years," he said. "Overall we probably pay, depending on how good the business is, between $50,000 and $100,000 a year in credit card payments."
Tom Robinson, president of Robinson Oil Corp. and plaintiff, said U.S. retailers pay $50 billion in swipe-fees each year and the proposed settlement still fails to introduce competition and transparency.
The American Bankers Association, a trade group whose members include the bank defendants, said retailers gain the most from the proposed settlement, not consumers.
Albert Foer, president of the think-tank American Antitrust Institute, said while the settlement may not lead to lower prices for the consumer, it will bring more transparency as merchants often built the swipe fees into retail prices.
"In the longer run, it should help keep retail prices under better control," said Foer to Reuters.
Defendants in the case included: Bank of America Corp., Barclays Financial Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc., First National Bank of Omaha, Fifth Third Bancorp, HSBC Financial Corp., National City Corp., Texas Independent Bancshares Inc., SunTrust Banks Inc. and Wells Fargo & Co.
Following the announcement, after-hours trading on Friday of Visa and MasterCard shares were up roughly 2.5 percent.
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