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While the Justice Department's antitrust lawsuit against three major card networks appeared to bolster merchants' case for regulating interchange fees, it may also have undercut a push for legislation targeting the issue.
October 5 -
A settlement involving the top two payments networks over their merchant acceptance policies gives retailers more clout to promote the use of cheaper cards, but an analyst doubts many businesses will change their practices.
October 4
In theory, retailers just gained significant ground in their fight against payment card fees.
But whether the government's antitrust settlement with Visa Inc. and MasterCard Inc. will hurt card issuers depends on the extent to which retailers can overcome logistical concerns and influence consumer behavior.
"I think it would be a concern to an issuer if they thought that a merchant would actually steer from a premium card to a lower-cost card," said Aaron McPherson, a practice director with IDC Financial Insights in Framingham, Mass.
Though retail lobbying groups cheered news Monday that Visa Inc. and MasterCard Inc. had agreed to eliminate the merchant-acceptance rules that the Justice Department called anticompetitive, payments experts are skeptical that merchants will change the way they operate, because of headaches that might cause.
"I don't think that's feasible," McPherson said. "It's got customer service problems. It's got training problems. It's got expense problems [and] administrative overhead."
Retailers will likely be hard-pressed to come up with simple strategies that don't alienate consumers, McPherson said.
That American Express Co., which the DOJ named in a lawsuit with Visa and MasterCard, is fighting the litigation means merchants accepting all three card brands will have an even harder time steering customer payments, McPherson added.
Amex said merchants that accept its cards will not be allowed to steer customers away from its cards while the lawsuit is pending.
"Amex has to sign, too, or it's effectively meaningless," McPherson said, echoing sentiments of Attorney General Eric Holder during a press conference about the lawsuit Monday. "Bottom line, I don't think this is going to have a huge impact at the point of sale."
Retail lobbying groups, fresh off a legislative victory with the passage of a regulation expected to reduce debit card interchange rates, said the DOJ's settlement with Visa and MasterCard was another major win for merchants.
While card-issuing banks have long been able to steer consumers to use costlier payment forms, such as signature debit over PIN, merchants in practice have been unable to push cheaper options because of payment network rules.
"This is yet another regulatory agency taking a look at how the card companies operate and finding fault with it," said John Emling, the senior vice president of government affairs for the Retail Industry Leaders Association.
Wal-Mart Stores Inc., Walgreen Co., Target Corp. and other retailers either declined to comment or did not respond to inquiries Tuesday about how the Visa and MasterCard agreements would affect their practices at the point of sale.
However, the RILA and the National Retail Federation said merchants are closely evaluating the impact of the settlement and expect many to adopt new strategies to push lower-cost payments.
"I think a lot of our [members] are obviously looking at … how they might approach this operationally in the stores," Emling said. "It certainly provides retailers flexibility where there was none before."
One idea is that retailers could set up express checkout lanes for cash and debit card purchases that would also provide a discount on a customer's overall receipt.
The settlement "provides the creativity for a lot of different options and what those particular options are, we'll see," Emling said.
Mallory Duncan, a senior vice president and general counsel for the National Retail Federation, said he expects the settlement may lead some card issuers to forge partnerships with retailers to deliver a card product that retailers would offer an incentive for consumers to use. The DOJ "has opened up a lot of tantalizing opportunities but we'll need to see whether and how they can be implemented."
Visa and MasterCard, the two largest payments networks by merchant acceptance and branded cards in the market, played down the potential impact of the DOJ's action on their business.
Both companies said their policies have already allowed merchants to provide discounts for paying with cash and debit cards, which carry lower interchange rates than credit cards. MasterCard said it also has allowed merchants to offer customers a discount for other payment card brands, a measure that is part of the DOJ settlement.
"We have been very public about the fact that we allow all forms of discounts between networks and between types of payments," Noah Hanft, the general counsel for MasterCard, said in an interview Tuesday.
The settlement requires the Purchase, N.Y., company to modify the language of its rules to match practices it has allowed.
The fact that few merchants actually offer discounts when Visa and MasterCard have allowed certain types has led many analysts to figure few will change their habits.
"While [MasterCard] currently allows for steering to other payment methods and payment brands, it is our observation that merchants rarely … do this," Adam Frisch, an analyst with Morgan Stanley, wrote in a research note. "If an 'easy' fix has not been implemented, we don't believe a more disruptive change poses a material threat to volumes."
Discounting at the point of sale is not very common, said Bill Sheedy, Visa's president of the Americas. "There are many reasons why merchants accept cards, and there are many reasons why consumers use cards," Sheedy said in an interview. "While acceptance costs and potential discounts are an element, ultimately it's the feature functionality of those products, the speed at the point of sale" that "contribute to the value proposition to the merchant community and the cardholder."
The fact that the DOJ settlement does not eliminate network prohibitions against surcharging — which many analysts expected would be part of a potential lawsuit — bodes well for card networks.
"In our view, surcharging was a significant negative as charging an additional fee for the use of a credit product created demand destruction and would cut at the heart of the value proposition for customers using credit card rewards products," John Stilmar, an analyst with SunTrust Robinson Humphrey, wrote in a research note on Amex.
