That Big Interchange Settlement Is Looking Smaller All The Time

Somehow it slipped under the radar of the Wall Street-watching media, but three weeks ago, MasterCard CEO Ajay Banga dropped what, under other conditions, would have been a bombshell during an earnings call: Retailers who do more than 25 percent of U.S. credit- and debit-card transactions have opted out of the $7.25 billion interchange settlement that's now in its final stages in a Brooklyn courtroom.

How big a deal is that? For one thing, it means there's no longer a $7.25 billion settlement. Now it's a $5.75 billion settlement, according to Bloomberg, which finally got around to reporting the news this week. Crossing that 25 percent line also means Visa (NYSE:V), MasterCard (NYSE:MA) and a group of banks had the opportunity to walk away from the settlement if they wanted to. They never wanted to, and they didn't.

But when they set that 25 percent target, it was inconceivable that so many merchants would leave money on the table, just so they wouldn't be stripped of the right to sue the card brands for illegal behavior. Even if all the big retail chains opposed the settlement, they'd have to somehow get a large number of medium-size and smaller merchants on board. Considering that those merchants have no love for the likes of Walmart and Target, it sounded impossible.

Instead, it happened. Not only that, but the card brands are now facing a string of lawsuits of exactly the kind they were hoping their settlement would eliminate forever: antitrust suits that target how banks set the fees merchants have to pay every time a customer swipes a payment card at checkout.

(To be clear, merchants who opt out of the settlement aren't going to get their share of the money—but they are still going to be barred from ever suing the card brands over interchange fees, at least if the settlement gets final approval.)

Visa, MasterCard and the banks say Walmart, Target and the retailers are just being greedy. We are, after all, talking about a lot of money. Even reduced from $7.25 to $5.75 billion, that's a huge settlement—right?

Here's a useful data point on that: The same day MasterCard's CEO was dropping his non-explosive bombshell, a federal judge in Washington, D.C., ruled that the Federal Reserve had to reduce the maximum transaction fees for debit cards. The Fed had originally calculated that debit fee cap at 12 cents, but after howling from the banks the Fed finally decided to settle on a 21-cent cap. That's the recalculation that U.S. District Judge Richard Leon called "utterly indefensible."

But what do those numbers really mean? Ratings agency Moody's said in 2011 that the 12- to 21-cent change would save banks (and cost merchants) $3.5 billion a year. In the time since the Fed's 21-cent rule went into effect, that has been worth more than $6 billion. That's already more than the interchange settlement—and the total value of the higher debit cap will just keep getting bigger if Judge Leon's decision is reversed and the 21-cent cap stays.

So no, in the context of the payment-card business, $5.75 billion isn't huge. It's pretty much middling money when it comes to interchange-fee court cases these days.

On the other hand, 25 percent of U.S. credit- and debit-card transactions does qualify as a lot. And the fact that so many retailers have said no to the settlement should weigh heavily on the scales of justice in that Brooklyn courtroom on Sept. 12, when U.S. District Judge John Gleeson listens to final arguments about whether he should approve the settlement.

When that many merchants walk away from a deal, it's just a bad deal.