Visa and MasterCard ordered to pay $5.7 billion settlement

Visa and MasterCard have been ordered to pay a settlement fee of $5.7 billion to trade groups and merchants.

The class action lawsuit was filed in 2005 by a large number of trade groups and merchants, including the National Association of Convenience Stores (NACS), the National Community Pharmacists Association (NCPA), and the National Retail Federation (NRF). The reason for the lawsuit came after allegations of MasterCard and Visa fixing rates and fees for their swipe fees, also known as interchange fees. These fees were added onto the already existing transaction fees merchant are forced to pay in exchange for accepting Visa and MasterCard. Online merchants were hit the hardest, as the majority of them only accept credit card payments. The settlement fee was originally for $7.25 billion and the amount was lowered to $5.7 billion after some retailers backed out of the lawsuit.

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In result of the settlement, merchants are free to charge Visa and MasterCard cardholders a surcharge to cover the swipe fees. The surcharge will be the merchant’s way of passing on the fees to the customer, and will present the customer with a choice of completing the transaction or not. Charging a surcharge can result in loss of market share as the added price may drive away clientele. In addition Surcharges are illegal in the states of California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

The NACS, the NCPA, and the NRF have voiced their objection to the settlement, claiming it is deeply flawed and the ability of adding surcharges is not a sufficient solution. Amazon, Wal-Mart, Target, and Macy’s already objected the initial settlement proposed last year, stating it would not protect them from price fixing between the card companies and prevents them from taking legal action in the future against swipe fees. The NRF are in plans to appeal the court’s ruling.

“It (the settlement) does nothing to curb the anti-competitive behavior of Visa and MasterCard,” NRF President and CEO Mathew Shay.

According to the National Association of Retailers, transaction fees add up to around $30 billion a year for the card companies. These fees result in higher prices for consumers to cover merchant costs. The fees charged by MasterCard and Visa average out to around 2% of the transaction price.

In recent news, American Express was fined $76 million as a result of charging hidden fees from cardholders.