Target’s Scathing Criticism Casts a Cloud Over Interchange Settlement

More evidence of widespread merchant antipathy to the credit card interchange settlement announced July 13 emerged late Friday when big-box retailer Target Corp. came out against the plan. Industry observers expect more opposition from merchants to emerge, casting doubt on the settlement’s future. But a lobbying group for payment card networks and banks says the settlement is “final and binding.”

“The majority of the comments that I’m hearing from my members are against the settlement,” says Mark Horwedel, chief executive of the Minneapolis-based Merchant Advisory Group, an association of mostly large, national retailers concerned with payments issues. “Their sentiments are very similar to those expressed by Target.” (Horwedel notes that MAG, whose membership includes Target, keeps its members informed, but does not get formally involved in policy issues such as the litigation that led to the settlement.)

The NACS, a trade group of 3,700 convenience stores and their suppliers, was the first to strongly criticize the settlement that averted a September trial of a massive group of merchant lawsuits over interchange involving individual and class plaintiffs pending in U.S. District Court in Brooklyn, N.Y. Some small merchants and big ones, including grocery giant The Kroger Co., however, appeared to support the plan struck by lawyers for Visa Inc., MasterCard Inc., a number of banks, and merchant interests.

But in its brief statement, Minneapolis-based Target, which did not sue individually, brought up two of the most-discussed issues since the settlement was announced: merchant surcharges for card payments, and the protection the plan would give to the networks from future lawsuits about interchange.

“Target believes the proposed interchange fee settlement is bad for both retailers and consumers,” the statement says. “The proposed settlement would perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards in order to allow Visa and MasterCard to continue charging unfair fees. We will continue to explore our options while working toward a solution that represents true reform.”

Neither Visa nor MasterCard would comment about Target’s statement.

The settlement includes $6.6 billion in cash payment by the networks and banks to class and individual merchants, up to $1.2 billion in interchange relief for class merchants, and relaxation of network rules banning surcharges. The settlement awaits sign-off by U.S. District Judge John Gleeson, who has overseen the cases since the first ones were filed in 2005.

Horwedel says that like Target, many MAG members are unhappy about the restrictions on future lawsuits over interchange. And the supposed lifting of rules on surcharging actually comes with a number of restrictions, he adds, not to mention that at least 10 states ban the practice. “It’s a convoluted process to do it,” he says. “It sort of makes it a hollow victory.”

But Trish Wexler, spokesperson for the Electronic Payments Coalition, a Washington, D.C.-based group of networks and banks that support the current interchange system, notes that while it expressed its displeasure, Target did not actually say what legal steps it would take. And those may be limited.

“Regardless what Target is saying about the settlement or their desire to hold out for more money, the agreement is final and binding and it resolves all interchange disputes, both those in the past and on a go-forward basis,” Wexler tells Digital Transactions News.

Merchants cannot opt out of the so-called injunctive part of the settlement that covers issues such as surcharging, she says. A merchant could opt out of the damages part and try to sue Visa and MasterCard for more, however. If enough of them, as determined by a threshold set through a complicated formula based on sales volume and interchange paid over more than eight years, did so, it could “blow up” that part of the settlement, she says. But if they lose in court, such merchants would forgo their right to any damages under the settlement. “If they lose in litigation, they get nothing,” says Wexler.

How ironclad the settlement ultimately turns out to be may not be known for months because it still must clear some hurdles, including preliminary and final approval by Gleeson, and a so-called fairness hearing. Mallory Duncan, senior vice president and general counsel for the National Retail Federation trade group, believes merchants still have negotiating options. He notes that Gleeson must give preliminary approval before the injunctive relief would be binding.

“It’s not clear to us as to whether there is a settlement, it’s almost as if this is a highly publicized trial balloon,” he says. “From what we’re seeing, this is less than solid.”

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Visa’s top executives are expected to field questions from analysts about the settlement when the company reports its quarterly earnings Wednesday afternoon.