The credit card industry is inching closer to settling yet another challenge to its controversial interchange system — though the ultimate price banks and networks will have to pay to appease merchants is not yet clear.
MasterCard Inc. on Thursday provided something of a window into the industry's negotiations with merchants, when the payments network reported
The long-running merchant litigation faded largely into the background in recent years, as the legal process slowly ticked along and the banking industry fought relatively
The consolidated lawsuits are set to go to trial in September. But MasterCard, by setting aside funds for the potential settlement for the first time, indicated that the issue may be resolved before then.
"What it means is they now have enough certainty to say that there's a reasonable estimate of liability based on the progress of negotiations to date," says Jason Kupferberg, a senior analyst with Jefferies & Co.
MasterCard had
But there are still potential sticking points, and MasterCard's charge "doesn't necessarily mean that we've seen the last of this," he says.
Retailers have long decried the ways that Visa and MasterCard set the fees they have to pay for accepting credit or debit cards, and are likely to push for permanent changes to that system in any settlement.
But such changes would be a dealbreaker for MasterCard, chief executive Ajay Banga told analysts on a Thursday morning conference call.
"I want to make clear that we would not agree to any significant or long-term reduction in MasterCard's credit interchange rates as part of any settlement," he said.
Smaller concessions could include a change to MasterCard's rules, such as to allow merchants to add a surcharge if customers pay with credit cards instead of with cash, analysts say. (Visa and MasterCard in 2010
Banga on Thursday said that surcharges might annoy consumers, but he did not dismiss the possibility of changing MasterCard's rules to allow them.
"My personal belief is payment systems work best with the least friction. Whenever you introduce friction you always create the opportunity for consumers and merchants to feel less-than-perfect about their transaction," he said in response to an analyst's question about the impact of eliminating the no-surcharge restriction.
"Having said that, in different countries where surcharging was allowed, it's not as though every merchant has jumped onto the bandwagon to actually introduce a surcharge," Banga added.
Visa has already set aside more than $4 billion to cover potential costs from the lawsuits. In December, the San Francisco company said it had
Representatives for Visa on Thursday declined to comment on the status of settlement negotiations. The lawsuits are set to go to trial in the U.S. District Court for the Eastern District of New York.
The litigation charge overshadowed a relatively solid quarter for MasterCard, which reported its fourth-quarter results on Thursday. The second-largest payments network posted a quarterly profit of $19 million, down from $415 million a year earlier. But excluding the litigation charge, profits were up 23.7% from a year earlier, to $514 million.
Net revenue rose 20% from a year earlier to $1.73 billion and total processed transactions climbed 23%.
MasterCard also continues to see domestic debit card growth: purchase volume for U.S. debit cards grew 18% from a year earlier. Observers have expected MasterCard, the perennial underdog to larger rival Visa, to gain market share under new rules that
The company is also snagging some new business from major banks. It has secured deals to offer debit cards with
"It seems they're picking up a modest amount of market share, which is basically within everybody's expectations," says Glenn Fodor, an analyst with Morgan Stanley.
But Fodor nods to frequent analyst concerns that MasterCard may be bringing in new business by slashing its prices too low.
"The questions people are going to have, which are unanswerable, are what prices are [the deals] coming in at, whether they are being too aggressive on price," he says. "I think it's something to observe and push back on, but I'm not overly negative on it."