Antitrust settlement opens door for competition

More price competition among credit card companies is expected to result from a an antitrust lawsuit settlement announced Monday, Oct. 4, over merchant contract terms imposed by Visa and MasterCard.

Credit card fees are often 2-3 percent of the cost of a purchase, Iowa Attorney General Tom Miller said Monday in announcing the settlement. Merchants must pay the amount to the credit card company and pass along the costs to customers through the price of merchandise.

The credit card companies' contracts with merchants forbid merchants from informing customers about the differences in fees charged for different kinds of cards, or offering discounts to customers who use cards with lower merchant fees.

Customers who have credit cards with merchant fees at the low end of the fee range end up subsidizing customers who have cards with high fees that pay out perks such as airline miles, cash rebates and merchandise credits, Miller said.

“The ones that have great rewards on them, MasterCard and Visa charge the merchants more for them, but the merchants could not give discounts or benefits for less expensive cards,” Miller said.

Critics have said that the restrictions also discriminate against consumers with lower incomes and credit scores, who tend to be ineligible for the cards with high rewards. They have also said the contract restrictions contribute to higher retail prices.

Iowa and six other states joined the United States Department of Justice in preparing lawsuits against Visa, MasterCard and American Express for violations of the antitrust laws. Visa and MasterCard reached settlement agreements. American Express did not agree to settle the probe, and is being sued by the states and Department of Justice in the United States District Court fo rthe Eastern District of New York.

The agreement was applauded by Merchant Payments Coalition that had been lobbying against the practice, and other credit card company practices that they say force them to charge consumers more than they should.

“For the first time in history, the Visa and MasterCard stranglehold prohibiting price competition on cards is being broken,” said Henry Armour, CEO of the National Association of Convenience Stores, Alexandria, Va., a member of the coalition. “With price competition on cards, consumers and small businesses win.”

Miller said he isn't sure what kind of discounts or incentives merchants might offer in response to the agreement. He expects the main reaction to be greater competition among credit card companies on merchant fees.

Congress recently passed the Dodd-Frank Wall Street Reform and Consumer Protection Act that will reform credit card interchange fees for the benefit of consumers and merchants.

Miller said an amendment to the bill introduced by U.S. Sen. Dick Durbin, D-Ill., will also put a halt to merchant restrictions on offering incentives to customers who use debit cards instead of credit cards.

American Express said in a prepared statement that the government's new regulatory approach would ultimately limit consumer choice, reduce competition and curtail innovation.

“The government's new legal theory ignores a key point that the Justice Department previously made and that the courts have already decided: American Express does not have the ability to force merchants to accept its products or pricing,” the company said in a prepared statement.