After a vicious 13 years of legal battles and class action lawsuits, Visa and Mastercard announced on September 18, 2018, that they would pay $6.2billion to settle the lawsuit. The original class-action lawsuit against Visa and Mastercard dates back to 2005 when the companies were still owned by banks and not the public. Merchants alleged that these two companies abused their dominant market position to impose interchange fees, otherwise known as ‘swipe fees’, that were artificially too high. Even while settling the lawsuit, Visa and Mastercard repeatedly deny these allegations.
It is without a doubt that the American credit card industry is an oligopoly as Visa, Mastercard, American Express and Discover, own the majority of the market shares in that respective order. As of December 2018, Visa had 323 million cardholders and was accepted by over 8 million merchants, and Mastercard had 191 million cardholders and processes transactions in over 210 countries and in more than 150 currencies.
It seems as if history is repeating itself. Throughout the nineties, Visa and Mastercard took advantage of their dominant market shares to attempt to stop rising businesses such as American Express, from getting into the credit card industry. This was done so by creating parallel policies, otherwise known as ‘exclusionary rules’, while simultaneously blacklisting any bank that had intended to deal with American Express.
Regarding this current lawsuit, Doug Kantor, an attorney representing the National Association of Convenience Stores, stated that due to the convenience store profit margins of 1% to 3%, these stores could not have survived unless they passed the fees onto the customers. Due to this, Visa and Mastercard allegedly took advantage of their authoritative position and engaged in price-fixing of interchange fees. In addition, they have been accused of encouraging or introducing restrictions that prevented merchants from providing discounts for other payment methods.
Despite agreeing to settle the lawsuit, merchants are opposed to the current settlement as they claim it would not change a thing about the current situation and could potentially worsen it due to several reasons. First and foremost, merchants are prohibited from filing future lawsuits over interchange fees, even if new technologies are created for payments. This settlement allows Visa and Mastercard to be able to set high fees for their bank, subsequently eliminating price competition benefits which would cause merchants to gain virtually nothing in the long term. Furthermore, after splitting the hefty sum of money accordingly between them, each owner’s portion will be relatively small. Kantor, another lawyer representing the National Association of Convenience Stores stated that “to come away from 7 years of litigation and have the situation worse is not what merchants had in mind.”
Economists and merchants predict that while merchants continuously build interchange fees into prices, due to this ineffective settlement, after a few months these prices will return to previous levels and possibly even increase.