Is There a Merchant Revolt Brewing Against the Credit Card Companies? Part 2

If you accept credit/debit cards at your business there is a lawsuit that goes to trial this fall in New York that you should keep on your radar. The suits began as approximately 55 lawsuits filed in various jurisdictions, with all but ten of them seeking class action status. Plaintiffs range from local and regional retailers to national trade associations and chains such as Kroger, Walgreens and CVS. Losing could cost Visa and Mastercard  billions of dollars, and a negative outcome for the credit card companies could change the way you accept credit and debit cards at your business.

A merchant's agreement with the card companies is thick enough to choke a Brahma bull and written by lawyers for lawyers. Most of the items in the rules and regulations section are centered around the Big Three Rules- 1) a merchant can't have a 'minimum amount', but must accept a card as payment for any transaction, no matter how small, 2) a merchant can't add a surcharge onto a transaction to recoup his processing costs, and 3) if you accept a card for any transaction type you must accept them for all transaction types. That means that a business that accepts credit cards can't refuse a certain type of card, a 'rewards' card or a business card for example, because the processing costs for that type of card are higher than other types.

Numbers two and three is the reasons behind the lawsuits.

The suits cite the Sherman and Clayton antitrust acts as well as state law and depict the U.S. credit and debit card interchange process as a price-fixing scheme operated by the card issuers to the detriment of merchants. They are challenging the legality of rules that prohibit surcharges on credit card transactions and prevent the steering of customers to the merchant's preferred transaction types. Merchants are demanding changes in business terms that could potentially include cuts to credit card fees and recognition by the card companies of merchant's rights to surcharge. They also want rights of 'steerage', or the ability to offer an immediate discount, rebate, or free or discounted product or service to cardholders for using a particular low cost card or other form of payment.

In other words a merchant with an average transaction of $200 knows a rewards card costs them four percent of a transaction and a debit card costs them one percent. They are suing for the right to offer a free gift to the cardholder in exchange for using the less costly card, or to refuse to accept the more expensive card at all and ask for nother form of payment.

A jury verdict against the card companies could be catastrophic to them. Mastercard has estimated it's cost to settle the claims individually at $500 million. But that does not reflect the 'class component' of the case- it is considerably more expensive to settle a class action than a series of individual cases. Some observers estimate they card companies could owe billions in damages should they be found liable for the alleged counts, which are subject to trebling under anitrust law.

Visa has not commented on estimated expenses but their financial reports list $2.93 billion held in escrow for litigation expenses.

But monetary damages are only part of the story- a plaintiff's verdict would effectively blow up a business model that has been in place for decades. Indeed, the non-monetary aspects of card acceptance are among the issues most merchants have concerns about.

"One issue that merchants have complained about is the extraordinary restrictive rules we have to operate under," says Mallory Duncan, senior vice president and general counsel at the National Retail Federation.

Both sides point to a antitrust suit over many of the same issues brought by seven states and the Department of Justice in 2010. In a settlement Mastercard and Visa agreed to allow merchants in those states (including Missouri) that process more than a million transactions a year to offer an immediate discount or rebate or  free or discounted product or service for using a particular low cost card or other form of payment. Opponents of the card companies say the settlement effectively establishes precedent; card industry insiders say it will allow the companies to say, "We gave them nearly everything they wanted in the settlement. It would be unfair to add surcharge into the mix now."

As complicated as the facts of the case are, it seems inevitable that once the dust clears merchants will be better off. Any settlement will almost certainly include lower card fees. A plaintiff's verdict could open the doors for each merchant to craft card acceptance guidelines according to what best serves his own business.

And in the event of a verdict for the card companies, they will have little time to catch their breath; other lawsuits are working their way through courtrooms across the country. Merchants are slowly coming to realize that you can demand fair business practices from the card companies. Let's hope it continues.