Retailers Mulling Ramifications of Huge Card Case Settlement
07/17/2012| 01:42pm US/Eastern
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By Andrew Johnson and Karen Talley
Large retailers are absorbing the ramifications of the settlement in which Visa Inc. (V) and MasterCard Inc. (>> Mastercard Inc) have agreed to allow retailers to charge more when customers pay with plastic.
The $6.6 billion settlement stems from long running litigation taking aim at the fees on each card swipe as well as rules Visa and MasterCard require merchants to abide by to accept their cards.
Merchants have long pushed for the right to surcharge, or tack on a fee to customers who pay with a credit card. They say the practice would help them defray the cost of accepting plastic and exert pressure on Visa and MasterCard to lower interchange, or "swipe fees," that merchants pay each time a customer swipes a card.
"Interchange fees represent one of Target's largest expenses each year and we have long advocated for increased transparency and fairness," said Target Corp. (>> Target Corporation) spokeswoman Jenna Reck. "As we evaluate the details of the proposed settlement and its impact on Target, we will continue to work toward a solution that represents true reform for the industry."
The ability to surcharge would add to existing tools merchants have to steer customers to lower-cost forms of payment.
Visa and MasterCard have long allowed merchants to offer customers a discount for paying with cash, a practice most common at gas stations but seldom used by other retailers.
An antitrust settlement last year between the two card networks and the U.S. Justice Department also resulted in Visa and MasterCard allowing discounts to customers who pay with different kinds of cards. For example, a merchant can offer a lower price to a customer who pays with a plain Visa card instead of a Visa rewards card, which typically costs more for retailers to accept.
Some retail groups have argued discounting for different types of cards is tricky because cashiers typically do not know what interchange fees a particular card carries when a customer hands it over.
With surcharging, a retailer would add an extra charge to a customer's receipt, typically as a percentage of the total bill. In Australia, where merchants have been allowed to surcharge since 2003, the average surcharge on purchases made with Visa and MasterCard cards is 1.7%, according to East & Partners, a banking research firm.
Visa and MasterCard credit cards accounted for 68% of credit-card spending at U.S. merchants in 2011, according to the Nilson Report, a payments-industry newsletter.
The payment networks have opposed surcharging out of fear that cardholders would be angered and stop using their cards, resulting in lower transaction volume and brand damage for the card companies.
Ten states, including New York and California, have laws against surcharging, so merchants in those states still will not be able to engage in the practice after the settlement is approved.
But retailers have argued the practice would help them recoup the money they pay to accept cards, while exerting pressure on Visa and MasterCard to lower their fees.
Interchange rates are set by Visa and MasterCard but are paid to the banks that issue their cards, such as Bank of America Corp. (>> Bank of America Corp) and J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co.).
"At this time we have made no decisions in regards to charging different prices in the future for different tender types," said Sears Holdings Corp. (>> Sears Holdings Corporation) spokeswoman Kim Freely.
"We've not yet seen the settlement, much less studied what it might mean," Macy's Inc. (M) spokesman Jim Sluzewski said. "So it's way too early to know anything."
A spokeswoman for upscale Saks Inc. (>> Saks Inc) had no comment.
Several other retailers did not respond to requests for comment.
About 43% of consumers surveyed by Morgan Stanley said they would be "very likely" to switch from using a credit card to another payment method if a retailer added a surcharge. Of those consumers, 38% said they would use a debit card instead, while 31% said they would use cash.
There are several requirements for merchants who ultimately decide to surcharge as a result of the settlement. Among them, merchants must notify the card networks of their plans to surcharge at least 30 days in advance. They also must post notices at their store entrances and at their cash registers that they apply surcharges, and the dollar amount of the surcharge must appear on the customer's receipt.
At least one merchant group, the National Association of Convenience Stores, has rejected the proposed settlement, partly because it does not see the deal changing the way interchange rates are set, said Douglas Kantor, an attorney with Steptoe & Johnson LLP, one of the law firms that works with the trade group.
Kantor said there are too many strings attached to the surcharging provision for merchants to effectively take advantage of it.
But Trish Wexler, spokeswoman for the Electronic Payments Coalition, said the requirements are in place to prevent merchants gouging their customers.
"They're not allowed to hide a surcharge and trick their customer into paying more without their knowledge," Wexler said.
Under the proposed deal, surcharging would be allowed starting 60 days after the settlement receives preliminary approval, or likely in early 2013.
Write to Andrew Johnson at andrew.johnson@dowjones.com
Write to Karen Talley at karen.talley@dowjones.com
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