Price of Plastic Going Up? Merchants May Get Surcharge Rights

Merchants may soon begin to impose a surcharge each time a customer pays with a credit card, a practice Visa Inc. (V) and MasterCard Inc. (MA) currently prohibit.

Retailers have long pushed for the right to charge extra to customers who pay with plastic versus cash, saying the practice would help defray their costs for accepting credit and debit cards. Merchants pay transaction fees on each card swipe.

But Visa and MasterCard, which operate the world's largest card-payments networks, ban the practice in the U.S. as part of rules they require retailers to follow to accept their cards. That ban is expected to be eliminated or altered, though, under a potential settlement of long-standing lawsuits retailers have brought against the card networks and numerous banks that issue their cards.

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"Merchants prefer complete flexibility, and in their eyes relaxing some of these rules like surcharging [is] something that will be permanent," said Glenn Fodor, an analyst with Morgan Stanley.

Settlement discussions have taken place over the past year, and Mr. Fodor and other analysts have predicted a deal would be reached before a September trial date for the litigation, which includes more than 50 lawsuits filed since 2005. The suits have been consolidated in U.S. District Court in Brooklyn.

A settlement is likely to include changes to Visa and MasterCard rules, including the card companies' ban against surcharges, analysts have said.

A spokeswoman for Visa and a spokesman for MasterCard declined to comment on the status of discussions Friday. Several attorneys involved in the case also declined to comment. A settlement could be finalized as soon as this week, Bloomberg News reported last week.

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The lawsuits, filed by merchants including Kroger Co. (KR), Payless ShoeSource and Safeway Inc. (SWY) and several trade groups, contend the card giants engage in anticompetitive behavior by conspiring over the fees, known as interchange, that retailers pay every time a consumer swipes a card.

Last year a provision of the Dodd-Frank financial-overhaul law known as the Durbin amendment took effect, cutting in half the swipe fees on debit-card transactions. However, it left credit-card swipe fees untouched.

So-called swipe fees are set by Visa and MasterCard but collected as revenue by the banks that issue their cards. In addition to the card networks, the suits name large banks including Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Co. (WFC).

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"We continue to believe that a settlement is the likeliest outcome as neither side wants a drawn-out legal battle and the defendants don't want to risk having to pay treble damages if they lose," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, wrote in a research note last month.

A settlement is likely to have three components: payments by the defendants ranging from $8 billion to $12 billion, a temporary reduction in interchange fees and the elimination of the no-surcharge rule, according to KBW.

Retail experts say the ability to assess a surcharge would have a longer-term benefit to merchants than a temporary reduction in fees or monetary payments. The rationale is the practice could exert pressure on Visa and MasterCard to make more permanent cuts to card fees. The networks rely on transaction volume for revenue, and the threat of losing transaction volume if consumers stopped using their cards because of surcharges may prompt the card networks to lower costs.

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"If there were surcharges in the market place…the networks, who are primarily responsible for establishing prices for acceptance, would bring their product costs down," said Mark Horwedel, a former executive at Wal-Mart Stores Inc. (WMT) who handled payments-related matters and is now chief executive officer of the Merchant Advisory Group, which represents merchants in payments-industry issues.

Visa and MasterCard in the past have loosened other rules that have been a thorn in the side of merchants. Under a settlement with the U.S. Justice Department last year, the two companies agreed to drop rules that prohibit merchants from offering discounts and other perks to steer customers to lower-cost cards or cash. The card companies have been more agreeable to discounting as opposed to surcharges because the former practice is seen as being less punitive to consumers.

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In the U.S., 10 states, including New York and California, have laws prohibiting surcharges, according to Visa. It is unclear whether merchants in those states would be able to engage in the practice if Visa and MasterCard allow it.

A change in Visa's and MasterCard's rules also wouldn't affect purchases made with cards from American Express Co. (AXP) and Discover Financial Services (DFS), which aren't part of the litigation.

American Express's contracts discourage surcharges but allow it so long as merchants also surcharge customers who pay with other payment networks' cards, a spokeswoman said. Discover has a similar policy. This has meant that merchants who accept all four card brands have been unable to surcharge because of Visa and MasterCard rules prohibiting surcharges on their cards.