Retailers Sue Visa, Seek Lower Credit Card Interchange Fees

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Analyst(s):

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Summary

As Gartner predicted, a second lawsuit by retailers takes aim at high credit card processing fees. Retailers should promote consumer use of alternative payment schemes until these interchange rates are lowered.

News Analysis

Event

On 15 July 2005, a group of seven large U.S. retailers sued Visa USA over a component of card acceptance fees known as interchange rates. The suit alleges that Visa engaged in price fixing and adopted rules that prevent merchants from negotiating lower rates. A similar class action lawsuit on behalf of smaller retailers was filed recently against Visa USA and MasterCard International.

Analysis

As we anticipated, this is the second lawsuit filed by retailers against Visa concerning interchange fees. Unlike the initial suit, however, this one doesn't claim class action, and MasterCard is not listed as a defendant. We believe these differences stem from the fact that the large retailers in this suit (grocers and drugstore chains) don't benefit from the lower rates that Visa allegedly granted to other large retailers, such as Wal-Mart Stores. MasterCard reportedly hasn't struck similar merchant-specific deals. In June 2005, we predicted that at least two lawsuits would be launched in the next 12 months on behalf of U.S. retailers suing the card associations over interchange fees (0.7 probability).

Retailers have long criticized interchange fees; they claim the fees fail to reflect the costs that they incur. Moreover, retailers contend that they are forced to fund, via such fees, card issuers' consumer loyalty and marketing programs. The U.S. Federal Reserve Bank of Kansas City documented this issue in May 2005 and offered two findings about market competition in the credit card system:

  • It has resulted in higher prices. Visa and MasterCard compete for card-issuing (bank) business. Banks earn the most fee-based revenue from the card that offers the highest fees.

  • Consumers, to take advantage of card loyalty programs, end up choosing the payment scheme with the highest interchange fee. They do this at the expense of the lowest-fee method (a personal-identification-number-based debit card), for which banks often apply surcharges to boost their card revenue.

Despite these findings, however, the Federal Reserve lacks data from the card associations to determine whether the current system is indeed broken. This has prevented the Fed from recommending that government agencies intervene to lower the interchange rates.

Recommendations:

  • Visa and MasterCard: Provide the Fed with data to analyze whether the system needs reform.

  • Retailers: Adopt alternative payment schemes such as PayPal and Bill Me Later, adapt them for use for in-store payments and promote their use with consumers.

  • U.S. Department of Justice: Permit retailers to collaborate, without fear of antitrust concerns, on their own closed-loop payment card that can bypass the Visa and MasterCard networks

Analytical Source: Avivah Litan, Gartner Research

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© 2005 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartners research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

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