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.

Posted by Jim Newton on Jul 17 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.