Federal Judge Rejects $30 Billion Visa, Mastercard Swipe-Fee Settlement

2024

A federal judge on Tuesday rejected a $30 billion settlement designed to cap the fees Visa and Mastercard charge merchants for credit and debit card purchases. This decision disrupts an agreement reached in March aimed at concluding two decades of litigation over swipe fees. U.S. District Judge Margo Brodie of the Eastern District of New York denied preliminary approval of the settlement. Brodie instructed the plaintiffs to confer and respond to the ruling by Friday. Visa and Mastercard must now renegotiate with merchants or prepare for trial.

The rejected settlement intended to reduce the average swipe fee by at least 0.04 percentage points for three years and maintain it at least 0.07 percentage points below the current average for five years. It also proposed preventing any increase in swipe fees until 2030. The fees, typically ranging from 1.5 to 3 percent per transaction, are a significant cost for retailers.

Visa and Mastercard expressed disappointment. Mastercard spokesperson Will O’Connor called the settlement a “fair resolution,” and Visa spokesperson Fletcher Cook described it as an “appropriate resolution” from lengthy discussions with merchants. Retailers, however, felt the settlement fell short. Stephanie Martz, General Counsel for the National Retail Federation, criticized the settlement for not addressing long-term issues, indicating a willingness to go to trial. Doug Kantor, General Counsel at the National Association of Convenience Stores, echoed this sentiment, emphasizing that the settlement did not resolve fundamental problems.

The lawsuit originated in 2005 as an antitrust class action against Visa, Mastercard, and several U.S. banks, alleging excessive fees and price fixing. Retailers argued that the settlement provided only temporary relief and failed to address systemic issues. Credit card companies argue that swipe fees cover the cost of processing payments. Critics, however, believe that the proposed settlement allowed these companies to shift fees or increase them once the settlement period ended.

Christopher Jones of the National Grocers Association praised the judge's decision, noting that it’s rare for a preliminary settlement to be rejected, indicating the proposal's inadequacy. Retailers argue that swipe fees are a significant operating cost, second only to labor. Industry leaders are calling for legislative action. The Retail Industry Leaders Association advocates for the Credit Card Competition Act, which would mandate financial institutions to offer multiple network options for processing transactions, thereby increasing competition and potentially lowering fees.

The Credit Card Competition Act, sponsored by Senators Dick Durbin and Roger Marshall, faces opposition from the credit card industry, which argues it would harm card security and rewards programs. Proponents believe it would introduce necessary competition and break the Visa-Mastercard duopoly. Visa and Mastercard continue to assert that the rejected settlement was the best resolution achieved through extensive negotiations with merchants. As the industry awaits further developments, the focus now shifts to whether a new agreement can be reached or if the case will proceed to trial.

Beyond the immediate legal implications, the judge’s decision has broader ramifications for the financial sector and retail industry. Swipe fees, technically known as interchange fees, are charged by card-issuing banks to merchants for the processing of credit and debit card transactions. These fees are then split between the card networks (Visa and Mastercard) and the banks. They have been a contentious issue for years, with merchants arguing that the costs are excessive and lack transparency.

The ongoing litigation reflects a fundamental clash between two powerful sectors: financial institutions that profit from transaction fees and retail businesses that view these fees as an onerous burden. The rejected settlement was seen by many in the retail sector as a half-measure that did not address the root causes of their grievances. By rejecting the settlement, Judge Brodie has effectively given merchants another opportunity to push for more substantial reforms.

The implications of this decision could also extend to consumers. If Visa and Mastercard decide to pass on the costs of any future settlement or increased legal expenses to cardholders, this could result in higher fees or reduced rewards programs. On the other hand, a successful renegotiation that significantly lowers swipe fees could benefit consumers if retailers pass on the savings through lower prices.

The legal battle over swipe fees is part of a larger debate about the fairness and competitiveness of the payment processing market. Critics of the current system argue that Visa and Mastercard have created a duopoly that stifles competition and innovation. They point to the high barriers to entry for other companies and the lack of alternative networks that can handle the volume and security requirements of modern transactions.

Proponents of the Credit Card Competition Act argue that by requiring financial institutions to offer at least one alternative to Visa or Mastercard for processing transactions, the market would become more competitive, driving down fees and spurring innovation. Opponents, however, caution that such measures could lead to unintended consequences, such as compromised security and reduced incentives for card issuers to offer rewards programs that are popular with consumers.

In the wake of Judge Brodie’s decision, both sides are preparing for the next steps. Visa and Mastercard may seek to negotiate a new settlement that addresses the judge’s concerns, or they could choose to fight the case in court. Meanwhile, retail associations are likely to continue their advocacy for legislative changes that would bring more transparency and competition to the payment processing market.

As this legal saga unfolds, the stakes remain high for all parties involved. For Visa and Mastercard, the outcome could significantly impact their business models and profitability. For retailers, it represents a chance to reduce one of their major operating costs. And for consumers, the ultimate resolution could affect everything from the cost of goods to the availability of credit card rewards programs.

The next few months will be critical as negotiations resume and the case potentially heads to trial. The financial and retail sectors will be watching closely, as will lawmakers and consumer advocacy groups. The resolution of this case could set a precedent for how transaction fees are handled in the future, shaping the landscape of the payment processing industry for years to come.