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The Interchange Settlement

posted by Adam Levitin

Moved to top from 8/15.  

I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720).  I'm weighing in on it now.  I've written up an analysis of the proposed settlement.  It's available here.  [N.B.:  this is substantially expanded 8/21 revision of the original 8/15 analysis.]  It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court, and it appears that at least several of the named plaintiffs will reject the proposed settlement.   

The short version of my analysis is that the settlement is an exceedingly bad deal for merchants and not in the public interest.

The dollars involved amount to around three months of interchange fees, the settlement does not prevent future increases in interchange fees, the injunctive relief offered, including the ability to surcharge, is largely illusory, the release is unbelievably broad (purporting to bind future merchants who do not yet exist as part of a mandatory class), and it lumps into a single class merchants who are receiving different types of relief and may thus have divergent interests. Perhaps the most troubling aspect of the settlement is that the centerpiece of injunctive relief—removing the no-surcharge rule—is of no value to most US merchants—both the 40% based in the 10 populous states with state no-surcharge laws and those merchants who accept Amex as well as MasterCard and Visa (somewhere upwards of 60%, but near 100% for larger merchants).  

From a public interest perspective, the settlement is also awful. It will lock in the existing interchange fee system that has smothered innovation in the payments space.  The US lags the rest of the developed world in payment system technology and efficiency in no small part because the locked in profits of the current credit card interchange fee system remove the competitive pressure to innovate from banks, and network effects combined with credit card pricing rules that reference other products make it exceedingly difficult for new systems to break into the market.

If the settlement is approved as is, it is a huge win for the card networks and banks, a payday for class counsel, and a major loss for US merchants and consumers who will be permanently locked into an outdated, inefficient payment system. 


Does the no-surcharge state laws also affect Web-based merchants not located in those 10 states?

Also, the link to the paper on SSRN is broken.

Not sure why you believe so adam, why would any merchant want to accept credit cards if it does not give them a boost in sales, gas stations give cash discounts, your local tax collector does the same by surcharging credit cards, many restaurants will charge extra for using a credit card, and many do not take amex.

As for payment technology I agree but I am not sure what you mean by payment technology, on the one hand a credit card is not justified by their interchange rates, I mean its just a credit card
in comparison to debit or other electronic methods and of course the signature v. pin debate
but it may not be an efficiency question, how broad should a payment system be,should it involve mobile preferences, link customer interests, then even if its cheap to run should interchange then be allowed to be higher and who
and what if government bureaucrats will allow it.

One thing that I didn't discover and what is really talked about is internet merchants, visa and mastercard have a more monopoly as merchants are unlikely to go cash only and unlikely to discount for checks,wire,etf,debit,etc

In the former transactions will take time, there are a few merchants who do discount 2-3% like gas stations but generally no they don't although I do see a few merchants using "pin-less" debit as its called.

Also with all the talk on visa and mastercard don't the pin debit networks have jacked up rates
of course its natural to assume they would do it.

Kirs--the issue isn't credit vs. cash. If it were that simple, the answer would be don't take credit cards if the costs aren't worth the benefits. Instead, the problem is really price differences between credit cards. The merchant receives no marginal benefit from taking a Visa Signature card over a Visa Classic card, yet pays a lot more for accepting the Signature card. Acceptance is bundled, the merchant can't differentiate between the cards, and the merchant can't price discriminate between them.

To address other points:
Discounting is not equivalent to surcharging in terms of real economic effect, even if mathematically equal. Tax collectors surcharge as a "convenience fee," which is allowed, but under very specific conditions. Amex acceptance is pretty broad now--it's rare to find a merchant that doesn't take Amex any more.

Didn't follow you on the other comments.


I constantly come across merchants that do not take AMEX (my preferred card). I would guess the number is 20 percent or so (if you count all of stoes beloinging to a given chain as 1 entity, the percentage might be higher).

Also, I have come across a number of on-line sites that charge $2 to put money into an account. I am not sure it is a surcharge, but it sure looks and feels like one.

this whole thing is a complicated issue. What we really need is a not-for-profit banking institution to take care of all of the transactions. In Finland, I believe, that function is taken care of by the post office (with the added benefit of the post office being relevant in the world of e-mail).

I tend to believe with the Internet and electronic payments , visa and MasterCard have an advantage because checks and cash are out, likewise if cash handling costs are high for a business. "Underground" family businesses will often charge sales tax if you pay a credit card but not cash.

There was a recent settlement allowing discounts for visa platinum v. signature cards. Many small businesses do face the dilemma and not only decide to take all cards, but view the whole settlement process with less view.

However, gas stations, colleges, tax collectors,
restaurants that are family owned, and utility companies and gun shops do give discounts for using not just cash but in many cases, also warehouses clubs such as sam's and costco only accept credit cards they negotiate a low rate on.

A though I had is this, in other countries that have higher interchange rates,a surcharge is often allowed, isn't there then a limit to interchange, after all visa and mastercard don't seem to want to negotiate with costco, and until recently sam's , so they feel its worthwhile to not have to lower the rate so much to gain business, of course as you point out interchange can vary although its usually 1.5-2.0%.

Lastly, I just noted, high risk merchants often had interchange rates of up to 15%, I wonder whats happening now with debit and durbin?

The government could also ban "reward cards", I wonder what effect that could have, its an easier solution and will it work since its the consumer
and not the card companies that actually uses it.

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