Retailers debate whether card swipe fee settlement is fair
Clint Engel -- Furniture Today, August 21, 2012
HIGH POINT — Some furniture retailers and the National Home Furnishings Assn. are joining a growing chorus of retail voices urging fellow retailers to say "no" to the recent multibillion-dollar settlement over credit card swiping fees.
Under the antitrust litigation settlement reached in July, Visa, MasterCard and several large banks agreed to pay more than $6 billion to end long-running lawsuits alleging the companies conspired to inflate interchange or swipe fees.
The agreement was initially touted as a victory for retailers as the banks and credit card companies agreed to make the payment, temporarily lower the swiping fees, and clear the way for retailers to charge more to customers who pay with plastic by adding a surcharge.
But the deal has since come under fire, partly for protecting the credit card companies from future lawsuits over the issue.
Retailer also are complaining that the payment doesn't come anywhere close to making up for alleged overcharging, and say there are too many strings attached to keep retailers from adding surcharges on purchases made with a credit card.
Wal-Mart and Target are urging merchants to reject the settlement, as is the National Assn. of Convenience Centers, which was a plaintiff in the class-action litigation.
"It sounds like a lot of money, but it really isn't when you peel back the onion," said Michael Ray, chief financial officer for Mulberry, Fla.-based Badcock Home Furniture & more.
Card networks and banks have agreed to pay about $6.6 billion in addition to cutting swipe fee rates by 10 basis points for eight months, a move valued at about $1.2 billion for all merchants. But Ray said the case involves interchange overcharges that merchants suffered for years, worth well over the nearly $8 billion they'd receive.
"We're looking at getting pennies on a dollar here," he said. "The number sounds humongous, but when you put it in the right perspective, it's a pittance."
And while the settlement would allow retailers to add a surcharge, there are a lot of rules on how to do it. Among them: a provision that says if merchants are going to surcharge a Visa purchase, for instance, they must surcharge every card purchase that carries the same or higher "cost of acceptance."
So a retailer such as Badcock, which also takes American Express, wouldn't be able to add the surcharge because its agreement with American Express - which is excluded from the settlement - doesn't allow surcharges.
But the biggest sticking point may be a covenant in the settlement that releases the card companies from being sued later for anything that has transpired in the past or anything in the future related to this issue.
"That ties our hands in getting potential regulatory relief going forward," Ray said, because the government wouldn't look favorably on complaining merchants after they happily took the settlement money. He said that for the bank cards and lenders, "It's kind of a get-out-of-jail-free card forever."
Ray said Badcock wouldn't support the settlement as it stands. The National Home Furnishings Assn., with about 1,550 company members with some 8,000 stores, also is leaning against it for the reasons Ray outlined, though few members have called to inquire or complain about it, said Steve DeHaan, NHFA executive vice president.
"I see no reason for them to accept it because the benefit is so small and the ramifications could be very large in the future," he said.
DeHaan said retailers pay interchange rates ranging from 1.5% to more than 4% of the purchase price depending on any number of variables, ranging from who's processing the transaction to the type of credit card and the rewards program attached to the average ticket size.
The National Retail Federation is still reviewing the 113-page settlement and has not taken an official position yet, said Mallory Duncan, NRF senior vice president and general counsel.
"The comments we're getting from our members, by and large, have not been supportive of this deal," Duncan said. "They don't think it's sufficient or fair."
There are some new tools for merchants to use, he said, but they don't really affect what credit card companies do in the future, so swipe fees could continue to rise.
Traditions Classic Home Furnishings, a high-end retailer with showrooms in Minneapolis and St. Paul, Minn., and Naples, Fla., is one of the plaintiffs in the original card swiping suit and the class action. Co-owner Michael Schumann said he has heard similar complaints.
"I'm not 100% happy either," he said, but his question to the merchants opposing the settlement is, "What exactly do you want in a settlement?"
The "hold harmless" provision that releases the defendants from future litigation is common in antitrust settlements, he said. If the settlement is approved, the case would remain in the jurisdiction of the same judge presiding over the current case, who would hear complaints from any parties who believe the pact is being violated.
What more, the settlement gives merchants and merchant associations the right to come together and bargain for rate relief with the card companies - something that hasn't happened before, Schumann said.
Some who are opposed may want the court to impose some kind of fee structure or cap on the swipe rates along the lines of debit cards, but he said that's not going to happen in an antitrust case.
And while he said he agrees with Badcock that the settlement money is tiny compared with the interchange overcharges, the significance of the settlement is not the money.
"The key issue is going to be changing the whole way the system works, so there are competitive forces at play that counteract the tendency of the banks and Visa and MasterCard to keep increasing interchange rates," he said, adding that that's where the surcharges come in.
The real concern is whether the surcharges will be an effective tool. Among the problems with it: 10 states, among them California, New York and Florida, have statutes that prohibit surcharges. And potential future legislation could further prohibit surcharges.
But Schumann added that he's not as pessimistic as some and believes surcharging can work to hold the credit card companies in check, as long as it becomes common practice.
"It boils down to whether or not merchants will have the guts to stick their necks out and take advantage of this tool," he said.
For customers, it will take some explaining, but Schumann believes surcharging is doable and can gain acceptance, like the fees now charged at ATM machines.
Asked if a better option might be to reject the settlement and let the case go to trial, Schumann said he doesn't believe retailers are going to get a better deal.
"There's a lot of exhaustion going on and that's why this case settled after seven years," he said. The plaintiffs, the defendants and "most importantly" the judge are exhausted, he said, adding that it was the judge who applied pressure on all parties to settle.
If retailers want a trial, they might want to examine the Exxon Valdez oil spill class action case, he said. That has been ongoing for more than 13 years and "no one has received a dime yet," he said.
"If this goes to trial, this case will drag on for another decade."
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