Two Cities Object To Interchange Settlement Because Under It They're Merchants, Too

The $7.25 billion interchange settlement between retailers and Visa (NYSE:V) and MasterCard (NYSE:MA) just keeps getting messier. Two cities—Little Rock, Ark., and Oakland, Calif.—filed objections to the settlement last week, according to Reuters. The objections weren't because of public policy considerations—they came because, technically, both cities are merchants under the settlement's very broad umbrella.

Oakland's objection, filed on May 15 with the U.S. District Court in Brooklyn, said because the city "is not permitted to charge convenience fees, this hidden and regressive tax has fallen equally on those who make so little money that they cannot qualify for a credit card." In Little Rock's case, because the city takes American Express (NYSE:AXP) for payments and AmEx doesn't allow surcharging, that city said it can't benefit from the settlement's terms either.

The cities aren't alone. Although the settlement specifies that it applies to merchants and retailers, in practice that means anyone who accepts Visa and MasterCard: government agencies, utilities, professional practices, publishers, theaters, not-for-profit charities and a wide variety of other organizations that accept payments—many of which don't realize they're "merchants."

This wasn't originally expected to be a problem because the settlement wasn't expected to be so controversial. Under the settlement's terms, notices were originally supposed to be sent to merchants responsible for "more than 90 percent of merchant transaction volume and 90 percent of merchant outlets" as reported by an industry newsletter, the Nilson Report. In practice, that means customers of the 25 largest acquirers and processors.

But there's a very long tail on the payment-card curve. The smaller the transaction volume, the larger the number of merchants who fall in that category. And although those "merchants" don't drive large payment volumes, they represent a huge category of people affected by the settlement—which also includes whole new categories of Visa- and MasterCard-accepting "merchants" in the future who use Square or other card-accepting systems. That last 10 percent of transaction volume could represent 99 percent of "merchants" affected by the settlement.

That creates a major political problem for any settlement that includes potentially millions of people who were never notified that they were part of a settlement. And in turn, it means the likelihood of the settlement generating a political backlash in Congress increasingly approaches 99 percent, too.

For more:

- See this PaymentsSource story

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