Brooklyn Court Could Be More Inclined to Rule Reform Than Interchange Cuts

With a trial date looming in September, speculation is rising that a major antitrust case challenging credit card interchange will result in new rules handing merchants wider latitude in surcharging for transactions, routing payments, and steering customers to other cards or forms of payment.

Settlement talks in the case, known as MDL 1720, are focusing increasingly on ways to allow merchants to track interchange costs in a more timely way, route transactions to lower-cost networks, and pass acceptance costs on to customers who use rewards cards and other cards that carry higher interchange, an industry consultant who has been following the case says. “It’s surcharging, steering, and routing stuff,” says Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy.

The case, which consolidates some 55 lawsuits filed by merchant groups since 2005 against Visa Inc., MasterCard Inc., and a number of major banks, is being heard in U.S. District Court in Brooklyn, N.Y. It is set to come to trial before Judge John Gleeson starting Sept. 12. While no one other than the litigants can say whether and when a settlement agreement might be reached, most observers argue the networks will strike a deal to avoid the risk of treble damages should they ultimately lose in court. “The fact so many people are talking about [a settlement] means it must be close,” notes Mott.

Visa has not commented on potential settlement costs but has set aside $2.93 billion in restricted cash for litigation, according to a quarterly report it filed last fall. MasterCard in the fourth quarter took a $495 million after-tax charge as its estimate of its settlement costs with the merchants. All but 10 of the 55 plaintiffs are seeking to have the case heard as a class action, a matter on which Gleeson has yet to rule.

While payouts for claims and some sort of overhaul of interchange pricing could result from a settlement, Mott says it’s possible interchange could be left more or less intact while longstanding network rules are abolished to free up merchants and transmit price signals to cardholders. In particular, he says, merchants could be permitted to use technology that returns real-time interchange pricing at the time of a transaction to decide whether to steer customers to other cards or to choose another network.

The Durbin Amendment to the Dodd-Frank Act of 2010 prohibits Visa, MasterCard, and card issuers from interfering with merchants’ choice of network, but that law applies only to debit cards. To ensure choice, the law requires the cards to provide access to at least two unaffiliated networks.

Merchants may also gain the freedom to levy surcharges on credit cardholders for costly point-of-sale transactions, a practice Visa and MasterCard have banned for decades. In October 2010, a settlement between the U.S. Department of Justice and Visa and MasterCard in a separate antitrust action allowed merchants to offer customers immediate discounts and other inducements to use a particular network, card, or other form of payment. But American Express Co., another defendant in the case, did not agree to the settlement, which effectively rendered the agreement moot.

Applying surcharges, however, is another matter. It passes on the costs of card use to cardholders and, for the price-sensitive, steers them to less expensive cards or other payment alternatives. The card networks have long opposed the practice for fear it would anger cardholders and tarnish their brands. But in reality merchants that surcharge are likely to be punished by customers who flock to those who don’t, rendering an outright ban unnecessary, argues Linda S. Perry, a former Visa executive and now an independent industry consultant. “I don’t think there’ll be massive surcharging,” she says, if the ban is lifted by the court.

Gleeson is the same judge who presided over the so-called Wal-Mart case 10 years ago that resulted in short-lived debit-interchange relief for plaintiff retailers. He may now view network-rule reform and new technology as more permanent solutions to the interchange problem than temporary or even permanent fiddling with rates, Mott speculates. “Gleeson has said repeatedly he’s not going to come back and do this again,” says Mott. “He’s tired of it.”