The Proposed Credit Card Interchange Settlement

The Bleak House of Cards Litigation over credit card interchange fees still isn't ending, but it's hit an interesting inflection point. We're nearly two decades into the case and over a decade from the original proposed settlement. Now there's a proposed injunctive relief class settlement. The settlement's headline figure is $30 billion in savings, but on closer inspection, it's a farcically weak settlement. Credit card interchange fees after the settlement will be 25% higher than when the litigation began. That sort of result is what's called litigation failure.

To review the background, on every credit card transaction in the MasterCard and Visa systems, the merchant pays a swipe fee, also known as the merchant discount fee. That fee is paid to the merchant's bank. The merchant's bank then pays a "network fee" to MC or V and also pays an "interchange" fee to the bank that issued the card. The interchange fee is not one-size-fits-all. Instead, it varies by merchant type (and sometimes volume) and by the level of rewards/service on the card. So merchants are not directly charged the interchange fee, but it is passed through to them, sometimes explicitly. The problem that merchants face is that they cannot exert any pressure on the interchange fee—nominally an interbank fee—even though it is set based on their line of business.  Nor can merchants discriminate among types of credit cards by charging more for rewards cards, etc. 

Merchants sued over this situation in 2005, alleging violations of the antitrust laws. That litigation has been running on and on and on as part of a multi-district litigation consolidated in the Eastern District of New York (MDL 1720). In 2012 a settlement was proposed and approved by the district court. That settlement was a $7.25 billion settlement that included both a FRCP 23(b)(3) opt-out monetary damages class and a FRCP 23(b)(2) injunctive relief class with no opt-out. (Here's my analysis of that older settlement.) It was overturned by the 2nd Circuit in 2016 on the grounds that a single group of lawyers could not adequately represent the sometimes competing interests of both the (b)(2) and (b)(3) classes. Well, the parties went back to the table and (with new some changes in lead counsel) came up with a new settlement only for a FRCP 23(b)(3) monetary damages class with opt-outs. That new settlement was for $5.6 billion, and it was upheld in 2023. But there are a substantial number of opt-outs from that settlement, and what's more, it did not provide for any injunctive relief to ensure that interchange fees will be lower going forward. Additionally, the Rule 23(b)(3) class settlement did not directly affect the non-class litigation pending as part of the MDL. That brings up to the current settlement.

The current settlement has two moving parts. First, it imposes an average interchange fee reduction of 7bp for five years and a reduction of all fees by 4 bp for three years. In other words, the overall average interchange rate should fall from 2.26% to 2.19%.  Those should be guaranteed cost savings for merchants. They are worth about $3 billion per year. 

Second, the settlement loosens some of MC and V's anti-steering rules, most notably by permitting merchants to surcharge either by brand or by product type within brand (but not both). But the surcharges permitted are capped at either 1% or the lesser of 3% or the merchant's costs.  So if the merchant's costs are greater than 3%, surcharging doesn't relieve it of all marginal costs for a more expensive card. It's hard to know what these rule changes are really worth; the settlement proponents value them at approximately another $3 billion per year, but how many merchants are really going to surcharge? (I know I've advocated for surcharging in the past, but I've come to be skeptical about whether it is capable of moving the needle all that much on interchange pricing, especially for small businesses.)

I'm happy to see some willingness from MC and V to budge on their anti-steering rules. But let's not pretend that this settlement is some great victory for merchants. The $30 billion headline figure actually translates to very, very little as it is the savings over five years, only half of which are guarantied. The purported savings of $6 billion per year are bupkes when compared with the over $100 billion in interchange fees charged last year.

But here's the easy way to evaluate the settlement:  are merchants better off than before the litigation? It's hard to conclude that they are.

• When the litigation began in 2005, American merchants paid the highest interchange fees in the developed world. After the settlement, American merchants will still pay the highest interchange fees in the developed world.
  
  
• When the litigation began in 2005, average interchange fees were 1.75%.  After the settlement, they will be at 2.19% and only held at that level for five years.

In other words, what do American merchants have to show for nearly 20 years of litigation? A nearly 25% (44 bp) increase in interchange fees. If that's where things end up, then merchants' litigation strategy has been a complete failure.

It's not clear, however, that this is the end of the line on interchange litigation. The district court still has to approve the settlement, which I anticipate it will, but the approval will assuredly be appealed to the Second Circuit, where there will be an interesting question about whether the injunctive relief class is able to bind individual plaintiffs in the same MDL who are pursuing their own injunctive relief actions and who could be readily carved out of the settlement's loosening of anti-steering restrictions. All of which is to say, this ain't a done deal yet. And that's probably just fine for MC and V, which can keep charging higher fees while the appeal is pending. The Jarndyce v. Jarndyce of our time continues.