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Visa-MasterCard Lawsuit: Judge Gives Preliminary Approval to Settlement

Nov. 11, 2012
Credit Cards
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On Friday, Judge John Gleeson of the US District Court granted his preliminary – not final – approval to the settlement that would end a seven-year lawsuit between merchants on one hand and Visa and MasterCard on the other. The deal is vehemently opposed by over 1,000 merchants including Target and Walmart and trade groups like the National Association of Convenience Stores and the National Retail Federation, though in an interview with NerdWallet, the lead plaintiff reiterated his firm support for the settlement.

The lawsuit alleges that Visa and MasterCard illegally colluded to fix prices on interchange fees, which are paid by the merchant every time a customer uses a credit, debit or prepaid card. The current settlement, assuming it’s approved, would be among the largest in U.S. antitrust history, providing:

  • A one-time, $6 billion payout to about 7 million merchants
  • A 0.1% reduction in swipe fees for 8 months
  • The ability for merchants to add a credit card surcharge to cover the higher interchange fees
    • Void in the 10 states that prohibit credit card surcharges
    • Many merchants have publicly stated that they will not levy a surcharge for fear of upsetting customers

The basis of dissenters’ argument is that the settlement:

  • Does not provide meaningful interchange reform, since it makes no lasting changes in Visa and MasterCard’s pricing structures
  • Ignores the reality that (according to dissenters) credit card surcharges are infeasible due to state-level regulations and consumer backlash
  • Leaves in place the Visa-MasterCard duopoly that allowed price-fixing to begin in the first place
  • Would prohibit merchants who accept the settlement from bringing another lawsuit over the same violation (standard settlement procedure)

Judge Gleeson gave his preliminary approval, calling initial objections “overstated,” but noted that the bar would be higher for final approval. “I don’t mean to suggest there aren’t a number of issues that are going to require significant scrutiny, [but] I’m not persuaded that the deficiencies…ought to derail preliminary approval.”

It seems that a number of factors are in play: the merchants’ desire for structural reform weighed against the possibility of an expensive, drawn-out and ultimately fruitless lawsuit; Visa and MasterCard’s desire to maintain their dominant position despite the threat of regulatory or legislative reform; both sides’ undisguised fatigue; and the entrance of new payment processors from Square to PayPal that could shake up the market regardless of the settlement’s outcome. If technology delivers on all it’s promised, the entire playing field could change.

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