What does US interchange ruling mean for retailers?

The US District Court’s ruling to accept a one-off settlement from Visa and MasterCard to merchants over credit card interchange fee overcharges in the United States means that no interchange cap has been proposed.

Therefore, CMSpi  are concerned that this decision could enable further credit card interchange rate increases to compensate for reduced debit card interchange income following the implementation of the Durbin Amendment in 2011.

Credit card interchange fees in the US, at more than 2% of the transaction value, are amongst the highest in the Western world and are around double what retailers are charged in Europe. The fees totalled nearly $45bn across all credit cards in the US in 2012. 

Using the European Commission endorsed Tourist Test interchange rate cap of 0.3% for credit card transactions as a basic indicator (which itself has been criticised for being too high), interchange payments on the approximately $2.25tn of annual credit payment volume in the US should be $6.75bn per annum – a reduction of over $35bn on current charges. We should note that although we would not expect these fees to be as low in the US as they are in Europe due to the higher usage of unsecure signature card transactions, we can still identify that a total settlement of $7.25bn is completely insufficient in compensating merchants for years of overcharges. 

Many of the largest US retailers (accounting for around 25% of all credit card transaction volume between them) have opted out of the pay-out, and it’s not difficult to see why; the benefits of successful litigation greatly exceed the current compensation offer, and make the convenience of a quick one-off fee a very undesirable option. Accepting the offer also eliminates retailers’ ability to fight interchange increases in the future. 

Considering all of these facts, we can see why the American Bankers Association are so keen to escape with such a meagre punishment. It is very easy for anyone to “put this matter behind” them when the outcome suits them so well. We expect this announcement to initiate a lengthy legal battle between merchants and card network providers. 

Please contact me if you have any questions or views on the above.