The love-hate relationship between retailers and the credit-card industry is tipping into greater acrimony, as the burden of installing secure new technology aggravates longstanding tensions over fees.
The latest blow came Thursday, when a federal appeals court panel threw out a $7.25 billion antitrust settlement between Visa Inc. and MasterCard Inc. and millions of retailers after determining that some of the merchants covered by the pact weren’t adequately represented.
The three-judge panel’s unanimous ruling upends more than a decade of efforts to resolve litigation between the card industry and merchants ranging from Wal-Mart Stores Inc. to the Iron Barley Restaurant in St. Louis. The settlement already had been fraying, as big retailers including Home Depot Inc. and Macy’s Inc. dropped out.
The reversal comes after Wal-Mart and Kroger Co. recently filed separate lawsuits against Visa seeking the ability to require use of a personal identification number, or PIN, when customers pay with a chip-enabled debit card. Visa’s rules require that customers also have the choice of signing, which retailers say is more expensive and less secure.
The developments are the latest in an argument that has run for a quarter-century about the fees merchants must pay when customers use cards and the rules Visa and MasterCard impose as conditions for using their networks. U.S. merchants paid roughly $40 billion in interchange fees last year—roughly 2% of every transaction—according to payments consulting firm R.K. Hammer Inc.
“Shots are being fired by really large and powerful merchants where payments matter big time,” said John Grund, a partner at First Annapolis Consulting Inc., which advises financial institutions and retailers on payment issues.
Wal-Mart is also battling Visa over fees in Canada and has threatened to stop accepting Visa cards in its stores there starting in mid-July.
MasterCard said it was disappointed by the ruling and is reviewing the decision to determine its next steps. “We believe we presented a clear case to the court that the settlement was fair and appropriate based on more than four years of negotiation and the close involvement of the District Court,” the company said.
A spokeswoman for Visa declined to comment.
Shares of Visa ended the day down 3.3%, at $74.17, while MasterCard’s shares fell 4.4%, to $88.06.
The ruling by the U.S. Court of Appeals for the Second Circuit comes at a time when merchants and card companies are scrambling to embrace technology that lets customers pay with their phones at the checkout line or swap payments with friends over social networks like Venmo.
Merchants also are spending millions of dollars to install new technology that enables the higher security protections of cards embedded with a computer chip. The chip cards are aimed at reducing counterfeit fraud after a rash of hacks at retailers including Home Depot and Target Corp.
Chip cards are used around the world, but many merchants have been unhappy with aspects of the U.S. rollout, prompting Visa and MasterCard to speed up the certification process for new checkout terminals, limit costs that retailers will incur for counterfeit transactions and introduce new software to make the transactions faster.
The settlement thrown out Thursday had been struck in 2012 and approved by a court in 2013. Visa and MasterCard originally agreed to pay merchants $7.25 billion, although the total was later reduced to about $5.7 billion as many dropped out. The pact also allowed retailers to charge customers more for using credit cards than other forms of payment.
In return, merchants who participated in the pact agreed not to sue Visa and MasterCard over those fees in the future.
The settlement divided merchants into two classes: those that had accepted credit cards up to that point and those that would accept them after the settlement, including retailers that don’t yet exist. The deal allowed members of the first group to opt out, as many have, but the second group would be required to abide by the terms.
The appeals panel challenged the structure of the accord, in particular the constraint on future merchants, calling it “unreasonable and inadequate.”
“The benefits of litigation peace do not outweigh class members’ due process right to adequate representation,” the ruling said.
The case dates back to 2005, when merchants began accusing Visa and MasterCard in lawsuits of conspiring with card-issuing banks to set fees on transactions. Merchants pay the interchange fees that are set by Visa and MasterCard to card-issuing banks for each transaction.
The merchants had challenged a series of card-industry rules as being anticompetitive, including an “honor all cards” requirement that forced merchants to accept all Visa and MasterCard credit cards regardless of the different fees associated with them. Other rules prohibited merchants from charging different prices for different types of payment.
Out of the 12 million merchants included in the class-action suit, 8,000 opted out, representing roughly 25% of total purchase volume for Visa and MasterCard, according to a report issued by Sanford Bernstein. They included Wal-Mart, Gap Inc., Target and Amazon.com Inc.
Wal-Mart and Target both said they were pleased with the ruling.
Jason Kupferberg, an analyst at Jefferies LLC, said any future settlement could have a larger price tag and be hard fought.
“If history is any guide, the new litigation could take years,” he said in a note to clients.
(Published by The Wall Street Journal - June 30, 2016)