Small Merchants File Class-Action Antitrust Case Against Interchange

Declaring the need for litigation to bring credit card interchange rates under control, five small merchants today filed a class-action antitrust suit against Visa, MasterCard, and at least seven major banks. The suit, filed in the U.S. District Court for the District of Connecticut, alleges the banks and their card associations have colluded to charge, “by horizontal agreement, credit card interchange fees at supra-competitive levels,” and asks the court for damages as well as an injunction to stop the alleged collusion. Among the banks named as defendants are Bank of America, Citibank, J.P. Morgan Chase, and Capital One. Robins, Kaplan, Miller & Ciresi LLP, a law firm in Minneapolis, is representing the named merchants, which include Photos Etc. Corp. (doing business as 30 Minute Photos Etc.,), Irvine, Calif.; St Paul, Minn.-based Traditions Classic Home Furnishings; CHS Inc., also based in St. Paul; A Dash of Salt LLC, Bridgeport, Conn.; and KSARRA LLC, Newtown Conn. These five “represent a class of merchants that operate millions of commercial businesses throughout the United States that accept Visa and MasterCard as a form of payment,” the law firm said in a statement released today. The statement also calls current interchange rates “exorbitant” and “fixed,” and goes on to argue that retailers, particularly small merchants, have no leverage in negotiating with the card networks over rates. The statement says credit card interchange rates in the U.S. are higher than in other industrialized countries. It says the class-action suit is necessary because government regulation is “unlikely” and because previous litigation has “proven ineffective at restraining the increase in credit card interchange fees.” The biggest previous case concerning bank card interchange was the Wal-Mart class action, settled in 2003, which forced Visa and MasterCard to pay a $3 billion settlement to merchants and cut their signature-debit rates by one-third. These rates have increased since then. “The U.S. credit card system is seriously broken and mismanaged, and millions of merchants and consumers are unnecessarily paying for it through credit card interchange fees that are increasing at an alarming rate,” said Michael Schumann, co-owner of Traditions Classic Home Furnishings, an operator of furniture stores, in the statement released today. “This lawsuit will hopefully result in a much-needed major reform of the credit card industry.” Visa released a statement saying it would defend its interchange structure, which it called “a practice that has been successful in the marketplace as well as upheld as legal and necessary in federal court.” MasterCard did not immediately return a call seeking comment. U.S. merchants paid $17.4 billion in card interchange in 2004, according to research from Morgan Stanley. The weighted average interchange rate, according to this research, reached 1.75% last year, up 17 basis points since 1998. Total discount fees, which include interchange as well as markups from acquiring banks and processors, totaled $25 billion, according to research by the Merchants Payments Coalition, a Washington, D.C.-based trade group founded earlier this year by major retail trade associations to lobby for regulatory relief on interchange costs.