COMMENTARY: Why Merchants’ Legal Assault on Acceptance Costs Is Anti-Consumer: Part II

Merchants want lower interchange. In their Shangri-la, interchange would be negative, meaning merchants would be paid to accept credit and debit cards. This is not unknown in the real world. For example, Australia’s national debit network for many years had negative interchange.

Merchants want to be able to freely surcharge credit and debit cards. And large merchants, in particular, oppose Mastercard’s and Visa’s honor-all-cards rules.

But moves to eliminate interchange, permit surcharging, and end the honor-all-cards doctrine would each decrease the value of Mastercard’s and Visa’s two-sided platforms.

Merchants focus on their payment-acceptance costs. That’s one point in the value chain. They assume everything else is a given and feel aggrieved. But payment platforms must be considered holistically. There would be no credit and debit card payments for merchants without card issuance and motivated cardholders. The relevant market is the entire two-sided payment platform.

The Supreme Court’s epic 2018 ruling in Ohio et al versus American Express et al, penned by Justice Clarence Thomas, recognized that card networks are two-sided platforms. Thomas wrote that “evidence of a price increase on one side of a two-sided transaction platform cannot, by itself, demonstrate an anticompetitive exercise of market power.”

Thomas concluded that “[p]laintiff’s argument about merchant fees wrongly focuses on only one side of the two-sided credit-card market….the credit-card market must be defined to include both merchants and cardholders.”

Mastercard and Visa, too, are two-sided payment platforms. Thomas observed “[American Express] uses its higher merchant fees to offer its cardholders a more robust rewards program, which is necessary to maintain cardholder loyalty and encourage the level of spending that makes Amex valuable to merchants.”

Mastercard and Visa also employ asymmetric pricing. They charge merchants more to fund value for cardholders, spurring spend, encouraging financial institutions to issue their payment products, and delivering value to merchants—and thereby maximizing total platform value.

Understandably, consumers resist paying to pay. Merchants, however, are willing to pay to be paid. When consumer payment preferences are more important than those of merchants, interchange flows to issuers and then on to consumers in rewards and benefits, grace periods, and fee-free products. Interchange fees dynamically balance participation on both sides of the payment network and are best set in the market, rather than by the settlement of lawsuits, legislation, or regulatory diktat.

Most consumers don’t think giving up rewards and paying fees for credit cards so that merchants pay less is pro-consumer— even if, over time, most merchants’ savings would be passed on in lower retail prices.

No consumer likes being surcharged for using her credit card. Rules limiting or banning surcharging are pro-consumer. Several states ban credit-card surcharging for just that reason.

Also, the honor-all-cards rule is vital for a general-purpose payment network. There are 4,000 U.S. credit card issuers. If cardholders couldn’t rely on a Mastercard or Visa acceptance mark to know that their cards will be accepted, they’d use them much less.

Further, a payment market where thousands of issuers individually negotiated acceptance with millions of merchants would be impractical and nightmarish for all parties. It would dramatically weaken, if not destroy, Mastercard’s and Visa’s payment networks.

What merchants seek from Mastercard and Visa in their antitrust litigation would devastate the networks and harm consumers. Mastercard and Visa should vigorously defend their freedom to compete, to price as they see fit, to innovate, and enhance the value their two-sided payment platforms deliver. 

And, they should gird their loins and pillory plaintiff merchants’ demands as anti-consumer—in the public square and in court.