MasterCard, Banks May Not Be off Hook in Latest Interchange Case

Though they are not named as defendants in the antitrust case filed today by Kroger Co. and six other retail chains against Visa International and Visa U.S.A., MasterCard International and individual member banks of both bank card networks could find themselves named in separate actions later, according to one of the attorneys representing the merchants. “All options in that regard are open,” says Richard Alan Arnold, an attorney with Kenny Nachwalter P.A., Miami. “Each [potential defendant] has to be analyzed separately.” The suit, which is the second legal action to challenge the system of bank card interchange filed in the past three weeks (Digital Transactions News, June 23), accuses Visa of price fixing and using “restraints” to hinder merchants in negotiating interchange pricing, the fees merchants pay acquirers for bank card acceptance. Filed in U.S. District Court for the Southern District of New York, the suit mentions Visa member banks as co-conspirators but does not name any individual banks or competing bank card association MasterCard as defendants, as earlier cases related to the interchange issue have done. It asks for injunctive relief and three times damages sustained since January 2004, to be determined by a jury. Besides Kroger, plaintiffs include three other large supermarket chains and three major pharmacy retailers: Albertson's Inc., Safeway Inc., Ahold U.S.A. Inc., Walgreen Co., Maxi Drug Inc., and Eckerd Corp. Neither Arnold nor a spokesman for Kroger will say why this latest legal challenge to interchange concentrates on Visa, even though interchange pricing is set by both Visa and MasterCard. Bank card acquirers pass on to issuing banks interchange fees collected from merchants. Arnold says only that his clients feel this is the best way for now to address the issue. “My clients are interested in solving this problem going forward,” he says. Cincinnati-based Kroger, operator of more than 2,500 stores, says it will pay $350 million in interchange fees on all cards it accepts?not just Visa cards–in its fiscal 2005, which runs roughly from late January to late January 2006. That represents an increase of 35% from 2004, says a Kroger spokesman. He won't break out the retailer's Visa volume nor say what rates the company pays now. He says the company has sustained 11 increases in interchange rates since 2000. Merchants typically pay interchange as part of their discount rate, which is set by their acquirers and includes a markup on top of interchange. The lawsuit comes after a long period of frustration for the grocery chain, says the spokesman. “We've talked to Visa about our concerns over interchange for years and years,” he says. “It's all been to no avail.” Echoing a complaint made in today's lawsuit, the spokesman says Visa can raise interchange at will without suffering lost business, a reflection of the network's market power, the merchant contends. “We aren't against paying interchange fees, but we believe those fees should be based on competition and market forces,” he says. “Visa can charge whatever they want whenever they want.” The suit also charges that Visa unlawfully restrains merchants from negotiating for better interchange. Among the restraints listed in the filing are bans on merchant surcharges to cardholders, prohibitions on bypass arrangements when issuer and acquirer are one and the same, and a requirement that all locations within a chain must accept Visa cards. It also cites as a restraint a so-called honor-all-cards rule, which both Visa and MasterCard enforced until 2003. It required, for example, that merchants accepting a Visa credit card must accept a Visa debit card. Though this rule was struck down two years ago as part of the settlement of the Wal-Mart case, Kroger and the other six chains contend it still has force, alleging that merchants that refuse one type of card while accepting the other are assessed higher interchange rates. The filing calls this “economic coercion.” In a statement, Visa responded to the suit by contending it is an effort by “some merchants” to reap the benefits of electronic payments and shift the costs to consumers. The network says it will “fight to protect consumers from this attempt to shift costs.” The statement goes on to say Visa expected this latest suit and that interchange is “determined by the most efficient and fair mechanism possible: a highly competitive marketplace…experience shows that the marketplace–not a courthouse–is the best determinant of price.”