NEW YORK (Reuters) – Visa Inc, MasterCard Inc and banks that issue their credit cards have agreed to a $7.25 billion settlement with U.S. retailers in a lawsuit over the fixing of credit and debit card fees in what could be the largest antitrust settlement in U.S. history.
The settlement, if approved by a judge, would resolve dozens of lawsuits filed by retailers in 2005. The card companies and banks would also allow stores to start charging customers extra for using certain credit cards in an effort to steer them toward cheaper forms of payment.
The settlement papers were filed Friday in Brooklyn federal court.
The proposal involves a payment to a class of stores of $6 billion from Visa, MasterCard and more than a dozen of the country’s largest banks who issue the companies’ cards. The card companies have also agreed to reduce swipe fees by the equivalent of 10 basis points for eight months for a total consideration to stores valued at about $1.2 billion, according to lawyers for the plaintiffs.
An additional $525 million will be paid to stores suing individually, according to the documents.
“This is an historic settlement,” said Bonny Sweeney, a lawyer for the plaintiffs. “In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers.”
Noah Hanft, general counsel for MasterCard, said the company believed its interests were “best served by an amicable resolution” of the case. Visa CEO Joseph Saunders said the settlement was in the best interest of all parties and did not expect the settlement to impact its current guidance.
But not everyone was pleased with the proposal. One class plaintiff, the National Association of Convenience Stores, slammed the deal in a statement from its president, Tom Robinson, who is also president of Robinson Oil Corp.
“Not only does the proposed settlement fail to introduce competition and transparency, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces,” Robinson said.
The proposed considerations are a far cry from the $50 billion in swipe-fees paid each year by U.S. retailers, he said.
The American Bankers Association, a trade group whose members include the bank defendants, said retailers, not consumers, stood to gain the most from the proposed settlement.
“Big-box retailers will likely seize this opportunity to ask Congress for even more handouts,” said ABA president Frank Keating in a statement, referring to the Durbin amendment passed by Congress in 2010 limiting debit-card swipe fees – a move that banks say resulted in an $8 billion windfall for retailers.
“The legal process worked and should send a signal to Congress that it is wrong to pick winners and losers in a complex dispute between two industries,” the Electronic Payment Coalition, which represents payment networks, said in a statement.
Stores said Visa and MasterCard colluded directly and indirectly through the issuing banks to keep merchants from finding ways to mitigate credit-card costs.
Plaintiffs in the case include supermarket chain Kroger Co, pharmacy chain Rite-Aid Corp and shoe retailer Payless ShoeSource, as well as trade associations such as the National Association of Convenience Stores, National Grocers Association and the American Booksellers Association.
A number of banks that issue Visa and MasterCard cards, including JP Morgan Chase & Co, were also named as defendants in the lawsuit, along with Visa and MasterCard’s payment networks.
A spokeswoman for Bank of America NA said it believed the terms of the settlement were fair. JP Morgan declined to comment. Citigroup Inc acknowledged its role in the deal and declined further comment.
Swipe fees are set by the card companies and deducted from the transaction by the banks that issue the cards, essentially passing on the cost to merchants, the lawsuits said.
An estimated 7 million retailers will be affected by the settlement, according to lawyers for the plaintiffs.
Visa and MasterCard have been plagued by legal problems over their payment-card policies for the last decade. In 2003, the companies paid a combined $3 billion to settle a lawsuit by stores over their “honor all cards” policies, which tied acceptance of credit to debit cards.
The U.S. Department of Justice brought and settled a civil antitrust suit against Visa and MasterCard in 2010. As part of the consent decree, the companies agreed to drop certain policies that kept stores from steering their customers to cheaper forms of payment.
But the decree left intact policies that prohibit stores from charging customers more when they use certain payment cards, according to a July 2011 court filing from plaintiffs.
The defendants denied that any collusion took place.
In December, Visa announced it set aside an additional $1.57 billion to cover the cost of a potential settlement in the case, bringing its litigation reserve balance to $4.28 billion, according to a regulatory filing. MasterCard in the fourth quarter of 2011 recorded a $770 million pretax charge, as an estimate of its potential liability in the case, a filing with the U.S. Securities and Exchange Commission showed.
MasterCard said in a statement that it expected to incur an additional $20 million pre-tax charge in its 2012 second quarter financial statements to cover its portion of the settlement.
Visa and MasterCard together accounted for more than 80 percent of U.S. credit and debit card purchases by volume in 2011, according to data from the Nilson Report, a California trade publication.
The case is In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, in the U.S. District Court for the Eastern District of New York, no. 05-1720.