US Financial News

Reasons for the Suit and Fast Settlement

The consumer-targeted CARD Act (2009) is designed to help consumers save money and make better credit card decisions. Numerous consumer-unfriendly practices—double cycle billing, increased interest on former purchases, and insufficient disclosure of account changes—are now prohibited.

The current issue directly relates to merchants who accept credit cards. In 2005 and 2006, VISA and MasterCard greatly expanded their fees for many card types. Prior to these changes, there were three primary categories of transactions and fees.

• Swiped, card present. The most common type, swiped transactions occur when you are at a merchant, make a purchase, and hand over your credit card. Swiping the card through a terminal, the store employee receives a printed consumer receipt, a printed store receipt for your signature, and a unique transaction (approval) number. These transactions have the lowest merchant processing fees.
• Not swiped, card present. These transactions are identical to in person, swiped card use with one major difference. For one or more reasons, i.e., damaged magnetic stripe, your card is unreadable by the store terminal. While you offer your credit card, the merchant must physically enter your account number to receive an approval. These transactions generate higher processing fees.
• Card not present. The most expensive transactions involve those when a physical credit card is not presented to a merchant. This occurs when you visit a store without your card—only your account number. Should you make mail order or telephone order (MOTO) purchases, your card is also not present. These are the most expensive transactions for merchants—and VISA, MasterCard—because of the much higher risk involved since neither you nor your card is present.

The wide use of rewards, affinity, and corporate credit cards prompted VISA and MasterCard to expand their merchant fee schedules, with different transaction rates for all types of cards that differed from basic accounts. At the same time, however, the “language” in the merchant agreements remained unchanged.

Merchants MUST accept all valid credit cards, regardless of the sale amount, type, e.g., rewards, and applicable transaction fees. Your merchant cannot recommend that you use a basic card in lieu of a corporate account—which has a higher fee—to save the store money. Also, your favorite stores cannot offer you a discount for paying cash or using a basic credit card instead of the more expensive rewards or corporate cards.

The U.S. Justice Department, recipient of many merchant and consumer complaints, finally sued the three major credit card companies. While American Express remains resolute, VISA and MasterCard quickly agreed to change some of these restrictive provisions.

Will Consumers Benefit From the Settlement?

There are more questions than answers at the moment.

• When you compare credit cards, will there be any difference in rates and terms for your account?
• When you examine credit card offers, will you see any benefits directly offered to you?
• Will a credit card comparison mention any benefits—or detriments—to consumers because of this settlement?
• Will credit card rewards be increased or decreased because of this Justice Department settlement?
• Will the credit card industry still offer low interest credit cards? Could credit card rates increase?
• When consumers compare credit card offers, will they see any difference at all?

>While you might see no mention of this settlement when looking for credit card deals, how might merchants use these new terms to help them—and you—improve the shopping experience? Merchants could—not must—take any of the following actions.

• Recommend that you use a different credit card when paying for your purchases.
• Offer discounts to consumers for presenting lower cost credit cards.
• If one card charges a three percent processing fee, but another charges only one percent, the merchant might influence the purchaser to use the smaller percentage card.
• After influencing consumers to use lower cost cards, they could keep the difference as added profit, and offer their purchasers nothing. There are no requirements in the current settlement that require merchants to pass savings to consumers.

Regulators hope you, as a consumer, receive some direct benefits, but experts are skeptical. You could hope that merchants’ higher profits would spur them to keep or improve their competitive pricing and quality that attracts you now.

Since the settlement must be approved by the U.S. District Court, changes in terms are still possible. American Express, which operates differently from VISA and MasterCard, is unsure of their future strategy, but has, to date, refused to settle with the Justice Department. Consumers should follow future developments closely.