Interchange Fee Settlement Includes Plans to Temporarily Reduce Swipe Fees for Card Issuers

Visa, MasterCard and several big banks announced a $7.2 billion antitrust settlement Friday with a large group of merchants, reconciling a dispute over interchange fees. Despite no credit unions being involved in the suit, the agreement has implications for all credit unions. As part of the settlement, which is reportedly the largest private antitrust settlement in history, Visa and MasterCard will reduce the swipe fees paid to card issuers by merchants for eight months, which could cost Northwest credit unions as much as $3.5 million in fee income.

The suit originated in 2005 when a group of roughly 7 million merchants charged the card companies and a number of card-issuing banks, including JPMorgan Chase, Bank of America, Citibank, Wells Fargo and Capital One, with fixing prices and unfairly increasing interchange fees on debit and credit card transactions.

“It is unfortunate that in resolving the merchants’ claim against the large banks, Visa and MasterCard will hurt our institutions by diminishing interchange in 2013 and 2014,” said Northwest Credit Union Association CEO John Annaloro. “Using CUNA’s estimate of total credit union costs and the relative Oregon and Washington share of the national market, this may amount to between $2.5 and $3.5 million in aggregate, apportioned between the card-issuing credit unions in the Northwest.”

Interchange fees are fees paid from one financial institution or payment card network to another for the acceptance of card-based transactions. In a typical card-based transaction, regardless of whether the card is a debit or credit card, the card-issuing institution transfers funds to the acquiring financial institution, deducting the interchange fee from that amount. The acquiring institution then pays the merchant the amount owed minus the interchange fee.

These fees are set by the credit card networks, representing the lion’s share of the cost merchants must pay to accept credit cards from customers—and a significant source of fee income for the card-issuing institutions.

Of the more than $7 billion settlement payment, $6.05 billion will be paid out to account for past damages to the participating merchants in the case. The remaining amount is the estimated value that will result from Visa and MasterCard reducing swipe fees, or interchange fees, for eight months while new rules for such transactions are put in place. While this will decrease costs for the merchants, the reduced interchange fees come at the expense of card-issuing credit unions and banks, not at the expense of the payment networks.

The settlement also allows merchants to charge higher prices to customers paying with cards, a surcharge that card companies had previously prohibited.

In a message sent by Credit Union National Association (CUNA) spokesperson Pat Keefe on behalf of President and CEO Bill Cheney Friday evening, Cheney said that the credit card interchange would be reduced by 10 basis points beginning sometime in 2013 for a period lasting eight months “as a way to compensate merchants.”

CUNA and the NWCUA will continue researching, monitoring and updating credit unions on the fallout from the settlement. Anthem reached out to a number of credit union CEOs in the region, almost all of whom were still exploring the implications of the decision for their individual credit union.

Annaloro reported that even while credit unions are penalized in a suit in which only banks are card payment networks were being faulted, the end result may be positive for credit unions in the grand scheme.

“All of this is contributing to a credit union renaissance and a permanent shift in relative market share,” he said. “Both the public and policy-makers alike appreciate the credit union difference,” he said. “In the near-term, however, credit unions seem to be burdened with excess regulation and expenses necessary to clean up problems in other parts of the financial system.”

Cheney reported that it also may impact the ability of merchants to continue fighting for regulation.

“Merchants’ argument that credit card interchange should be regulated by statute (as were debit card interchange fees, notoriously, two years ago) may have been deflated significantly,” Cheney stated. “The process of reaching this settlement—hashed out over seven years—included laborious fact-finding and negotiating. If the merchants attempt to bring this issue to Congress, we have a strong argument in our favor saying, ‘the courts addressed this; case closed.’”

Cheney also said that “CUNA was neither a party to the lawsuit nor were were involved in any aspect of the negotiations,” and that they have “asked the payment card networks to brief us on the settlement and potential impact on credit unions.”

“Consumer confidence in the U.S. banking system is certain to fall even further. In the last five years, banks have been charged with pervasive mortgage fraud, creating toxic securitizations, causing a recessionary economy, LIBOR interest-rate manipulation, and now credit card price-fixing,” Annaloro said. “This has been ruinous for the reputation of banks. It will only serve to drive more consumers into the long-term sustained exodus from the banking system. Credit unions, considered to be trusted safe-havens, are the only beneficiaries.”

Cheney echoed these sentiments in his statement.

“We all know that interchange revenue enables credit unions to provide essential and cost-effective credit card services to their consumer members,” he stated. “Interchange represents the merchants’ fair share of the responsibility for a payment system that benefits them and consumers alike. We also know that the temporary reduction in interchange will likely not find its way into the pocket of consumers, but will more likely into those of merchants. Consumers win nothing in this settlement.”

“Unfair charges and unnecessary regulation on credit unions must end,” Annaloro said. “Equally, the trespasses of the banking system need to end.”


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Posted in Advocacy News.