The Interchange Settlement: Cards Won

The major interchange fee settlement deal between Visa, MasterCard and various retailers and other industry players was huge, in that it was the result of the big showdown retailers have awaited for years. Winner: card brands. It's not hard to judge the winner of such an event, simply look at the statements both sides issued afterwards.

Moments after the settlement was announced on on July 13—by the way, the deal being announced on Friday The 13th was just the first of many bad omens—all of the players had their say. (Here's a full copy of the settlement.) MasterCard: Everyone involved is "best served by an amicable resolution," and "We believe that today's settlements should resolve all issues with the merchant community." (Note: MasterCard apparently also believes in the Easter Bunny.)

Visa: "We are comfortable with the terms, which we do not anticipate will impact our current guidance." (From a merchant's perspective, when Visa is comfortable with a retail settlement, that's another not especially good sign.)

Now let's hear from the retail groups and one major chain. Target on Friday (July 20) became the first major chain to react to the settlement and it wasn't happy: "Target believes the proposed interchange fee settlement is bad for both retailers and consumers. The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards in order to allow VISA and MasterCard to continue charging unfair fees. We will continue to explore our options while working toward a solution that represents true reform."

The National Retail Federation (NRF): "The money is significant, but money is only temporary—it's here today and spent tomorrow. What we need are changes in the rules that bring about transparency and competition that would be here for years to come. The test will be whether the injunctive relief is meaningful. Unless it is, the card market will stay broken, and neither merchants nor their customers will achieve a long-term benefit. In that case, it would be a missed opportunity."

The Retail Industry Leaders Association (RILA): "Some merchants have raised concerns with the proposed settlement, including surrendering their right to future legal action against the networks. Additionally, retailers are concerned by the expansion of onerous network rules into emerging mobile technologies that could otherwise revolutionize the point of sale and create meaningful competition in the payments market," and "the U.S. electronic payments market is broken and it is in desperate need of reform."

The most intense response came from the National Association of Convenience Stores (NACS): "Not only does the proposed settlement fail to introduce competition and transparency into a clearly broken market, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces. This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market, including for emerging payment methods, particularly mobile payments. Consumers and merchants ultimately will pay more as a result of this agreement—without any relief in sight. Even the monetary agreement in this proposal is a mirage. Merchants won't get these funds for years and will have paid more than that through increased swipe fees long before they see those funds."

It's hard to read those types of statements—and there were many more—from both sides and not have a pretty good sense of which side was high-fiving when the deal was tentatively done. (Note: The judge has yet to sign off, so it's not fully done yet.)

But in reviewing the full decision, it's difficult to get a clear sense of what the Plaintiffs thought they had at this point.The judge had already killed any claims dating from before January 2004. Visa and MasterCard will both kick in billions for the slush fun— er, for the Class Settlement Cash Escrow Account(s). There's an eight-month period during which merchants get 10 basis points off their interchange rates. The price-fixing claims showed no signs of having legs.

The agreement allowed for groups of retailers to try and work out better arrangements with the card brands, but here's what it said: "With respect to any proposals that Visa believes provides reasonable commercial benefits to the parties, Visa will negotiate with such buying groups in an effort to reach a commercially reasonable agreement, and Visa agrees to exercise its discretion and business judgment in good faith."

That "good faith" phrasing effectively neuters any requirement for Visa and MasterCard to cut rates. But that's what that $6.05 billion is buying for them—basically, business as usual.

If there's a conclusion to draw here, it's that the retailers decided the best they could do was get a cut of $6 billion and an eight-month rate cut instead of fixing the "broken" system. Which means, in practice, the retailers had figured they couldn't change the system even if they won. That, in turn, means there's no court-based change that's going to break Visa—that would require either a change in the law or a change in the market.

The closest we'll see to a change in the law is something we've already seen: the debit interchange cap. That's it—there won't be anything more.

And a change in the market? All the hope for that has evaporated in the past few years, as every major alternative payments effort has come back to Visa/MasterCard. PayPal comes closest to being able to shuck them, and Apple is still a wildcard.

It's the old Microsoft problem: Microsoft didn't actually have to break the law once it owned the channel (which is why its anticompetitive behavior was so stupid). People assumed they needed Microsoft Windows or Office to do what they wanted to do on a PC. Likewise, customers and retailers assume they need Visa/MasterCard to do what they want to do at the POS. And when customers believe they can't do without you, you own them.

That's why, in practical terms, Visa and MasterCard don't have to change anything with this settlement. And that's what the retailers are complaining about. It's also the reason some chains have gotten together to come up with their own alternative payments scheme. That last seems to have gone nowhere—just as every challenge to Microsoft in desktop OSes and office suites on PCs have gone nowhere. No one can conceive of a business model in which challenging Microsoft (or Visa and MasterCard) will actually work.