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Monday, July 16, 2012

Interchange Fee Legal Settlement

Well, a settlement has been reached on a lawsuit involving interchange fees paid by merchants on credit card transactions. Is this good news for small businesses? Given the situation, it would be a positive move.

As widely reported on July 13, Visa. MasterCard and various banks agreed to a settlement with retailers that brought lawsuits regarding interchange fees. The settlement is valued at $7.2 billion, with Visa, MasterCard and the banks offering $6 billion for the settlement, and $1.2 billion in interchange fee relief.

This interchange fee case has been strange from the start, dating back to 2005 when various large retailers began suing Visa, MasterCard and assorted large banks. Naturally, in addition to the courts, lobbying was stepped up to impose price controls on these interchange fees. So, the peculiar situation arose whereby private businesses were suing and lobbying to impose price controls on other private businesses. Of course, those same firms who were suing and lobbying for price controls would vehemently oppose any kind of price controls being imposed on their own goods and services. But politics and lawsuits being what they are, these retailers forged ahead.

In the Dodd-Frank financial regulation bill, Congress and President Obama actually imposed price controls on debit card interchange fees, with the fees per transaction capped at between 7 cents and 12 cents, versus the previous average cost of 44 cents. In that case, some small businesses actually have experienced increased fees.

The court settlement, which still must be reviewed and get approval in U.S. District Court, pertains to credit card fees.

Under this agreement, retailers will be able to impose a surcharge on credit card transactions, while before they could offer a discount on cash transactions. Retailers will have to be careful in how they might use such abilities given competition in the marketplace.

The big plus for small businesses and consumers coming out of this settlement is the potential removal of uncertainty. As quoted in The Wall Street Journal, Noah Hanft, MasterCard's general counsel, said, “Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases.”

Unfortunately, as is so often the case when it comes to misguided lawsuits, firms must take actions to protect their business in terms of limiting costs and uncertainties even when they are in the right. By eliminating such uncertainty, the credit card industry will be able to move ahead with new innovations and services that will continue to benefit both retailers and consumers.

And make no mistake about the benefits for small businesses through improved payment options, as they mean enhanced business and reduced transaction costs overall.

Unfortunately, one group involved in seeking price controls, the National Association of Convenience Stores, is not satisfied, and reportedly is going to challenge the settlement.

That would be unfortunate if they gained traction in the courts or in the halls of Congress, as it would simply translate into continued uncertainty.

In this entire mess, Congress took the wrong step on debit card fees, which have resulted in cost shifting and reduced services, as predicted. It’s time for Congress to deregulate debit card fees, and swear off any further meddling on credit card fees.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

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