Last November 2012, Judge John Gleeson of the U.S. Eastern District Court of New York gave preliminary approval to a proposed $7.25 billion antitrust settlement claim against Visa and MasterCard.  This class action lawsuit brought on behalf of 7 million U.S. merchants alleged that the card networks artificially inflated interchange rates charged for credit and debit cards.  Despite objections to the settlement from major retailers like Wal-Mart, Target, and Home Depot and associations like National Retail Federation and National Association of Convenience Stores, the proposed settlement is moving full steam ahead.

The opponents of the settlement cite that the proposed remedies do not address “structural flaws” of how interchange rates are set.  In other words, there is a lack of market forces that place downward pressure on interchange fees.   Merchants also note that this settlement will release Visa, MasterCard, and the card issuing banks from future antitrust lawsuit, and the settlement only amounts to a few months of interchange fees collected by the card industry.

The proponents of the settlement are anxious to put the long-running battle to bed.  They note that this case has been thoroughly litigated and there is meaningful relief for merchants.  As noted in a CNNMoney article, Jason Kupferberg, an analyst at Jefferies who’s been covering this dispute, said that despite all the objections, he expected the court to sign off on the settlement.  “That will basically leave the merchants having to go down the legislative path if they want to actually change some elements of industry structure,” he added. “They’re going to have to go to Congress, because they’re not going to get that relief from the court system.”

Many large merchants do not want to publicly comment on the settlement because they are exploring their legal options and have not decided whether they are going to participate or opt-out of the settlement.  But one treasury manager at a large retailer stated, off the record, “any windfall from a settlement would be more than I have ever expected to receive, nevertheless it would be welcome if should it materialize. However, I feel that foregoing the right to any and all future litigation is an invitation to Visa/MC to abuse us in the future.”

The next critical milestone is September 12, 2013.  This is the date when Judge Gleeson is expected to give his final approval to the proposed settlement.  Even if this settlement is approved, it will likely be appealed on several grounds, thus delaying the claims process.  To understand this settlement and the potential claims process from a merchant perspective, here is a summary of the best information available to date.

1.  What are the primary provisions of the $7.25 billion settlement? 
The four key provisions include:

  • Cash Settlement Fund – Visa, MasterCard, and their issuing partners will make a $6.05 billion cash payment to merchants to compensate them for previous interchange charges. This amount will be reduced by legal fees, payment disbursement costs, and merchants opting out of the settlement.  The disbursements to merchants will be based on the interchange fees paid on Visa and MasterCard credit and debit cards between January 1, 2004 and November 28, 2012.
  • Interchange Fund – Visa and MasterCard will lower interchange fees for U.S. issued credit cards by 10 basis points (0.10%) for a period of eight months, providing a total of $1.2 billion in additional relief to merchants
  • Surcharging – merchants will be allowed to surcharge or charge higher prices on transactions paid with a credit card.
  • Buying Groups – merchants will be allowed to band together to try to negotiate better interchange fees for their members. However, Visa and MasterCard are under no obligation to accept terms put forth by the buying groups.

2.  As a U.S. merchant, how can I participate in the class action settlement?
If your company processed Visa and MasterCard credit and/or debit cards between January 1, 2004 and November 28, 2012 then your company is a member of the class action settlement.   Merchants have until May 28, 2013 to opt out of the Settlement Class.

Merchants will be paid from the $6.05 billion Cash Settlement Fund as follows:

  • Merchants must file a claim after the settlement is approved (tentatively scheduled for September 12, 2013 but this date will likely get pushed out due to appeals)
  • Claims can be filed at www.PaymentCardSettlement.com.  You can also obtain valuable information from this website.  Most merchants will receive settlement and claim information via postal mail or e-mail.  You can use the website above to pre-register so that when the settlement is approved, you will receive notice via e-mail to complete the claims process online.  Merchants can also call 800-625-6440 to obtain more information.
  • Merchants will be paid a portion of their actual or estimated Visa and MasterCard credit and/or debit interchange fees paid from between January 1, 2004 and November 28, 2012.
  • Merchants will be paid out of the $6.05 billion fund minus legal and administration fees and minus an amount not to exceed 25% of the Cash Fund for merchants who exclude themselves from the Cash Settlement Class.

Merchants will be paid from the $1.2 billion Interchange Fund as follows:

  • Claim filing dates for this fund will likely occur in the second quarter of 2014…note that filing for this claim is separate and independent of the claim filed for the Cash Settlemen
  • Merchants will be paid 0.10% of their actual or estimated Visa and MasterCard credit card sales from July 29, 2013 to March 30, 2014
  • Merchants will be paid out of the $1.2 billion fund minus legal and administration fees

3.  How much money is a merchant likely to receive from the Cash and Interchange Settlement Funds?
Cash Settlement Fund
The plaintiff’s attorneys will be providing more information in the coming months but they have stated the merchant payouts will be based on the following variables:

  • $6.05 billion Cash Settlement Fund minus up to 25% carve out for merchants who opt-out from the settlement
  • Carve out for legal and administration fees
  • Number and the value of valid claims filed

Each claimant’s payment will be paid in proportion to all claimants’ damages or interchange paid over the nine years.  So it is important to file a claim as soon as the claims process is opened.  Since it is easier for a merchant to estimate their Visa/MasterCard sales during the litigation period versus the interchange fees, we are using sales as a proxy for interchange fees paid.

Based on our research and analysis, the banks earned $350 billion in interchange fees during the nine-year litigation period.  The $6.05 billion Cash Settlement represents 1.7% of the interchange fees paid.  So if every merchant in the U.S. files a claim, they will receive 1.7% of the interchange fees they paid over the last nine years.  However, the claims rate for the $3.05 billion Visa/MC ‘honor all cards’ settlement in 2003 was about 55% (based on card sales).  “We anticipate the claims rate for the current settlement to be higher, around 65%-75% due to the publicity and magnitude of the settlement,” notes Monika Llorens, a research analyst and consultant at Optimized Payments.

Any unclaimed settlement funds will be distributed to participating claimants. So the payout for participating claimants may range from 2.3% to 2.7% of interchange fees paid.  “This can be translated to 3 to 5 basis points of Visa and MasterCard sales during the litigation period,” continue Ms. Llorens. So if a merchant processed $100 million in Visa and MasterCard sales during the litigation period, the merchant might receive $30,000 to $50,000 from the Cash Settlement Fund.

Interchange Settlement Fund
The payout calculation for the Interchange Settlement fund is very straight forward.  It is simply 0.10% times the Visa and MasterCard credit card sales for an eight-month period (July 29, 2013 to March 30, 2014).  Note that debit sales are excluded from this calculation.  So if a merchant processed $10 million in credit card sales during this eight month period, the merchant would receive $10,000 (minus legal and claims processing fees).

It is important to note that the Cash Settlement needs final approval, and payout information will be provided by the Claims Administrators.  Our analysis above is meant to provide general guidance to merchants.  “To help merchants estimate their claims payout, we have launched a free online calculator (found at http://www.optimizedpmts.com/resources/calculators/settlement_calculator/),” notes Ms. Llorens.

4.  Should I use a third party to file the claims?
There are dozens of firms, and more will be coming in the near future, who are offering to file claims on behalf of merchants for a percentage of the eventual payouts.  There are some firms who are also willing to purchase the rights to a potential claim for an immediate liquidity event for the merchant.  Obviously, the latter types of firms have high confidence that the settlement will be approved and are willing to offer immediate cash payouts.  We have typically seen these types of firms offering 30% to 40% of the anticipated claims value.

Before signing a contract with one of these firms, you should review the claims-filing process and decide whether it is worth the cost.

5.  How long will the claims process take?
Merchants will be filing two separate claims, one for the Cash Settlement Fund and one for the Interchange Settlement Fund, as outlined above.  After they are filed, these claims will likely take months for the claims administrator to resolve and merchants to receive their claims payments. The entire process could be held up for years if the approved settlement is appealed (which is likely) and has to go to the Second Circuit of Appeals.

6.  Do I need to gather any information or prepare in any way?
The Claims Administrator will obtain data from Visa, MasterCard, and related parties to estimate total value of interchange fees attributable to each merchant Claimant.   Merchants do not have to gather any data.  However, we recommend that merchants compile Visa and MasterCard sales and interchange fee data for their organization from January 1, 2004 to November 28, 2012, as long as the process is not too arduous. This data can be useful in the event the Claims Administrator does not have information relating to your company or you dispute the data obtained by the Claims Administrator.

7.  How can I stay current on this settlement and my rights?
Continue to monitor the court authorized website – www.PaymentCardSettlement.com, check out our blog for our ongoing analysis and community interaction, and join our LinkedIn discussion group to stay informed.

 

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