EU Court Adviser Puts MasterCard in Its Place

MasterCard is doing everything in its power to fight EU regulator’s 2007 decision to limit the fees European retailers pay for processing credit and debit card transactions. Fortunately, it seems like nobody believes MasterCard’s claim that capping interchange fees is not beneficial to merchants and consumers. Earlier this week an adviser to European Commission said MasterCard’s appeal should be completely dismissed.
 
European retailers stood up against credit card giants: Visa and MasterCard and have been fighting for a fair and competitive payments system. However, MasterCard doesn’t want to let go of huge interchange fee profits. Limiting swipe fees to 0.2 percent for debit and 0.3 percent for credit translates to €6 billion a year in savings for retailers and consumers in Europe.
 
Bloomberg quoted the CEO of Europe’s biggest home improvement retailers, Kingfisher Plc:

“Stimulating competition in the payment services market and ensuring fair interchange fees will create capital to enable a range of investments to be made.”

In U.S. transaction fee rates are even more overblown. They are 7 or 8 times higher! This reduces retailers profits significantly and forces them to either raise prices, which hurts consumers and limits their spending or prevents merchants from hiring new employees.
 
The EU court should make a decision within next 6 months and it usually agrees with the advisers’ opinions. In this case, the advice is spot-on.

Outdated System Guarantees More Data Breaches

As the extent of the Target data breach continues to trickle out and new revelations of similar violations at other major retailers come to light, one thing is crystal clear: the antiquated U.S. payment system is broken and needs a major upgrade.

Credit cards remain one of the most fraud prone payment options in our wallets today.  Why is this?  It’s essentially because there is no financial incentive for the banks to improve a system that relies on 40-year old technology.  Take for instance, the two largest credit card brands, Visa and MasterCard.  They control 80% of the marketplace and as a result get to call all the shots when it comes to how consumers’ account information is protected and who pays for the fraud.  Given that they pulled in $7.7 billion in combined after-tax profits in 2013 and rarely end up absorbing the losses from fraud, they are just not motivated to take on the costly expense to update the system.

It’s ironic that the United States lags so far behind the rest of the industrialized world given that we have long led the way when it comes to technological innovation.  Nevertheless, we are one of only a few developed countries that still rely on a magnetic stripe to hold all the pertinent financial information needed to make a purchase by credit or debit card.  This makes us a magnet for fraud.

Right now, the banks are content to sit back, enjoy their excessive profits and address the fraud after it has already happened.  But data breaches, both large and small, will continue to occur and consumers and merchants will continue to pay the price until the banks make the proper investment and take a more pro-active role in preventing the fraud from occurring in the first place.

For a detailed analysis, see David Dayen’s article, “Your Credit Card Has a Dangerous Flaw That the Banks Refuse to Fix,” in The New Republic here.

Swipe Fee Fight Goes On As Retailers Appeal Credit Card Settlement

The next chapter in the eight-year battle between the retail industry and Visa and MasterCard is set to unfold as the National Retail Federation (NRF) recently filed an appeal to the controversial antitrust lawsuit settlement covering credit card swipe fees.  At the heart of the appeal is the fact that the deal simply won’t prevent these fees from continuing to rise at exponential rates in the future.

In December, a federal judge approved the proposed $5.7 billion settlement between retailers and the credit card giants.  Merchants had brought the suit against Visa and MasterCard to fight the soaring cost of swipe fees, which drains $50 billion a year from the bottom line of retailers and consumers.  Given that the major credit card companies together control 80 percent of the market, they continue to set these fees in a manner that amounts to price-fixing.  Merchants, at no point, have ever been given an opportunity to negotiate these fees.

So, what is gained by the settlement?  From the merchants perspective, not very much.  Even with this settlement in place, the problems retailers face, which triggered the litigation to begin with, will remain.  The decision offers nothing in terms of reforming the system or curbing the escalating costs of the fees, which have tripled in the past decade alone.  In fact, the $5.7 billion settlement is a mere drop in the proverbial bucket for Visa and MasterCard as it represents less than three months of their swipe fee profits.

As Mallory Duncan, NRF’s Senior Vice President and General Counsel says,

“The only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class action lawyers who stand to collect half a billion dollars in fees without fixing the problem, and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process.”

To read more, see here.

New Surcharge Rule Does Not Ease Swipe Fee Pain

This week, American Express reached a settlement agreement with businesses that will allow merchants to surcharge customers who pay with the company’s cards.  While American Express is touting this as a “win” for merchants since it gives them the ability to lower their costs by adding a “checkout” fee, the settlement actually does precious little to address the root of the problem: the skyrocketing cost of the swipe fees themselves.

Right now, swipe fees cost merchants and consumers upwards of $50 billion a year.  This new settlement does nothing to rein them in and doesn’t begin to address the secrecy in which they are set.  Moreover, merchants will not be eager to tack on this fee and create a two-tier payment system in which customers paying by credit will be charged more than those paying with cash.  The potential consumer backlash could drive customers away and as merchants scramble for business in this fragile economic environment, it’s hard to fathom that they would take such a big risk.

This settlement does not do anything to fix a payments market that is fundamentally broken.  All it does is ensure that the status quo will remain in tact and merchants and consumers will continue to feel the pinch.

Below is a statement by the Merchants Payments Coalition in response to American Express' announcement.

“This agreement is a tragic mistake that will hurt merchants and their customers,” MPC Chairman and National Retail Federation Senior Vice President and General Counsel Mallory Duncan said.  “The settlement does nothing to lower credit card swipe fees while making sure the fees will continue to be hidden from consumers and that the big credit card companies can continue to fix prices without competition.  The result is that swipe fees will continue to be the fastest-growing expense for merchants and that consumers will keep paying overinflated fees without even knowing it.”

To read more about the settlement, read here.