A lawsuit filed this month alleges that Visa and MasterCard illegally fix the price of fees that small retailers pay for credit card transactions. The suit further charges that the fees levied on small retailers are much higher than those charged to large chains and that this price discrimination is unjustifiable and a violation of US antitrust laws.
The suit was brought by five retailers, but seeks class-action status to cover the millions of small businesses who accept Visa and MasterCard.
Credit card companies charge merchants a percentage of each credit card transaction. This is known as an “interchange” fee. The rates are set by Visa and MasterCard, and the fees are collected by the banks that issue the cards, along with an additional surcharge for the bank. Several banks that are major credit card issuers, including Bank of America, Citibank, and Bank One, are also named in the lawsuit.
“The fees have been going up dramatically in the last few years,” said Michael Schumann, co-owner of Traditions Classic Home Furnishings in St. Paul, Minnesota, and one of the plaintiffs in the suit. “Five or six years ago, we were paying a base rate of 1.38 percent up to about 1.5 percent. Now, the base rate is 1.67 and the high rate is 2.8 percent.”
On top of that, the card companies have been issuing more “premium” cards, which carry the highest fees. Visa’s “Signature” cards and those that provide rebates or frequent flyer miles are considered premium cards. “That’s what really pushed me over the edge,” said Schumann. “There’s no end in sight. The sky’s the limit in terms of what they can charge.”
Rates have been rising despite the fact that many of the costs of extending credit and processing transactions have actually been declining, due primarily to more efficient technology.
That is a sign of an industry that lacks real competition, according to David Balto, one of the lead attorneys on the case, which is being handled by the firm of Robins, Kaplan, Miller & Ciresi. Visa and MasterCard account for about 80 percent of all credit card transactions. The suit charges the two companies with collusion to set prices.
The companies contend that retailers have the choice of not accepting their cards. They also point out that the number of businesses who take the cards has risen sharply in the last few years, a sign, they say, that the fees are not too high.
But merchants argue they have no choice but to accept Visa and MasterCard, because consumers expect to be able to pay with cards that carry those logos. Nor are most consumers aware that a percentage of the purchase price is flowing to Visa and MasterCard. The card companies prohibit retailers from charging customers a fee for paying by card rather than cash or check.
Not only are small retailers paying more than they use to, but they are paying significantly higher rates than their large chain competitors. “Visa and MasterCard engage in price discrimination,” contends Balto. “Small retailers end up paying much more, because big merchants have the ability to bargain.”
Two years ago, Wal-Mart brought Visa and MasterCard to the table to negotiate interchange fees. (A reluctant MasterCard agreed only after Wal-Mart flexed its muscle by refusing to accept the company’s cards at its 5,000 outlets worldwide). Although the rate Wal-Mart obtained has not been made public, analysts at Morgan Stanley estimate that it is under 1 percent, or less than half what small retailers pay.
Other large retailers, including Home Depot, CVS, Toys R Us, and Best Buy, have also negotiated for better rates with Visa and MasterCard.
Unlike other products where there are legitimate cost savings from dealing in larger volumes, that is not the case with credit card transactions. “It costs exactly the same for Visa to have a link with the merchant processor for a small retailer as for it to have a link with the processor handling Wal-Mart’s transactions,” said Balto.
The federal Robinson-Patman Act makes it illegal for sellers to offer favored buyers more advantageous terms than their competitors in the absence of any reasonable difference in actual costs.
The lawsuit seeks damages, a level playing field for all retailers, and a cap on how much Visa and MasterCard may charge. In Australia and the European Union, regulatory action has forced the two companies to drop their interchange rates to 0.7 percent.
A similar rate cut would slash interchange revenue in the U.S. from about $24 billion to less than half that. Some argue that interchange fees should be eliminated altogether and that the cost of using credit cards should be paid by the card companies and their customers.