Paying with a credit card may get costlier
Over the past week, VISA and MasterCard took their second big hit over the past decade in terms of how they interact with the nation’s retailers when consumers use credit or debit cards when buying merchandise. In both cases, a number of the country’s major retailers accused the two credit card companies of engaging in anti-competitive practices that were robbing them (retailers) of legitimate profits.
In the first instance, the VISA-MasterCard network was accused of developing an illegal tying scheme known as the “accept all cards” requirement. Under the program requirements — which was developed in the relatively early days of debit card usage — any retailer who accepted one VISA-MasterCard card was forced to accept them all. So, if a merchant accepted a credit card for payment purposes, they were forced to also accept debit cards.
For consumers this alleged tying contract had no discernible impact. Not so for retailers. By enforcing this “accept all cards” program, VISA and MasterCard forced retailers to accept the debit card operations of VISA-MasterCard no matter what the associated interchange fees. And that was the rub for retailers.
At a time when retailers indicated that a debit card interchange fee was about 10 cents (for on-line purchases) for a non-VISA-MasterCard transaction, the fee was nearly one dollar higher when a VISA-MasterCard transaction occurred. Retailers indicated that, given millions and millions of transactions over even short periods of time, the tying contract was robbing them of millions of dollars of profits. And since virtually everyone had a VISA or MasterCard credit card in the 1990s and the early 2000s, it meant that retailers had to accept the situation or face losing customers who used VISA-MasterCard credit and/or debit cards.
Eventually, retailers sued VISA-MasterCard under U.S. antitrust laws for engaging in an illegal tying contract. Just before the case was set to begin, an out-of-court settlement was reached with a reported $3 billion price tag for VISA-MasterCard and an agreement to end the “accept all cards” program.
More recently a new antitrust charge was leveled at VISA-MasterCard which alleged another illegal activity — this time a price-fixing scheme — was once again proving disadvantageous to retailers. This case involved the swipe fees that are charged to retailers when consumers pull out charge cards. Generally, retailers pay somewhere between 1.5 to 3 percent of the consumer’s purchase to the card issuer. Naturally, the retailer would like to avoid such huge swipe fees, which reduce potential profits. As such, retailers would like to have the opportunity to charge a higher price for credit card purchases so as to offset the lost (net) income from the cost of the swipe fee.
Under VISA-MasterCard agreements, such activities were strictly prohibited. Interestingly enough, however, VISA-MasterCard did allow for cash-customers to be given a discount, though very few retailers found such an opportunity to be helpful. Last week, in an effort to avoid further litigation, VISA-MasterCard reached yet another settlement with most retailers accusing them of price-fixing, and removed the prohibition against charging more to customers who engage in credit card purchases. In total, the settlement costs of the alleged price fixing scheme amount to just more than $7.2 billion.
Unlike the first settlement from 2003, the latest one may have an impact on consumers. Since retailers can now distinguish cost of merchandise based upon means of payment, it is possible that use of a credit card may produce a higher price of some 1.5 to 3 percent so as to offset the swipe fees paid by the retailer to the card issuer. If this happens, it could produce a change in how Americans pay for their purchases. It may also make various “rewards” programs seem a whole lot less rewarding (compared to cash transactions) if the swipe fees are passed along to credit card users. If any or all of this comes about, it may help bring a halt to the “cashless” society that many envision.
It should be noted, however, that in the weakened state of the economy with very modest growth in jobs, passing along higher final prices to consumers paying with a credit card may amount to little better than a death sentence for this very important segment of a retailer’s total sales. So until a far more vigorous recovery occurs, the functional impact of this settlement will probably mean little to American consumers. For merchants, however, it marks yet another victory against the alleged anti-competitive practices by the nation’s two major credit card companies.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.