Credit card litigation settlement

CASH COMPONENT

• The cash payment from Visa, MasterCard, and the other defendants is approximately $6.05 billion to the ‘class’ plaintiffs and $525 million to the ‘individual’ retailers for a total cash payment to resolve the claims of $6.6 billion.
  
  
• Merchants may elect to opt out of the class settlement in an attempt to achieve a higher cash settlement, but if they do, then the class payment is reduced proportionately by that merchant’s share of the class volume.
  
  
• In the event the cumulative share of all merchants that elect to opt out exceeds 25% of the total class payment, the defendants have the option to terminate the settlement agreement.

CREDIT CARD INTERCHANGE REDUCTION: 10 BASIS POINTS FOR 8 MONTHS

• In addition to the cash settlement, another monetary component of the MOU is a temporary reduction in credit card interchange. For a period of 8 months, ‘class’ merchants will receive an amount equal to 10 basis points (bps) of default interchange credit rate across all categories, which is expected to commence 60 days after the deadline for merchants to opt-out. The 8 month period is currently expected to occur in the July 2013 – March 2014 time frame.
  
  
• As a point of comparison, gross credit card interchange approximates 180 bps or higher depending on the level of rewards. Accordingly, assuming a CU normally earns 180 bps, they would earn 170 bps during the eight month period.
  
  
• One estimate of the cumulative impact of the 10 bps reduction in credit interchange over eight months is $1.2 billion. In a related announcement, the Credit Union National Association (CUNA) estimated that the potential negative revenue impact to credit unions at $50 million, or about 4.2% of the estimated $1.2 billion.
  
  
• Card Services for Credit Unions® members can estimate the total interchange revenue reduction on their particular credit union with the following simple calculation:
  • (Total Annual Visa and MasterCard Credit Card Volume) x (0.001 or 10 bps) x (2/3 or 8 month reduction period divided by 12 months)
    
    
• Using Card Services for Credit Unions®’s average annual credit card volume per active account of approximately $5,000, below are some additional estimates of a 10 bps reduction for eight months of credit interchange based on the number of active credit card accounts a credit union has:

• 1,000 active accounts=$3,350
• 5,000 active accounts =$16,750
• 10,000 active accounts =$33,500
• 25,000 active accounts = $83,750
• 50,000 active accounts = $167,500
• 75,000 active accounts=$251,250
• 100,000 active accounts=$335,000

• For budget planning purposes, the current settlement timeline is for the reduction to occur in the July 2013 – March 2014 time frame. Accordingly, if that time line holds and the credit union utilizes a calendar fiscal year, then the interchange revenue reduction will be spread over 2 separate fiscal periods, 6 months of 2013 and 2 months of 2014. 

MERCHANT SURCHARGING AT POINT OF SALE

• Another component of the settlement includes changes to Visa and MasterCard’s rules that prohibit surcharging. As part of the settlement, retailers will now have the ability to surcharge their customers that pay with a credit or charge card a checkout fee (merchant surcharge) at the register to offset some or all of the amount merchants pay to accept the card.   This surcharge rule change does NOT apply to debit or prepaid cards. The specifics on how merchants may surcharge are outlined below:

   
• Surcharging will be permitted at the brand or product level.
  • Brand level surcharging - merchants may surcharge at the brand or network level. For example, a merchant could decide to surcharge all Visa or MasterCard branded credit card products.
    • However, if a merchant elects to surcharge Visa and MasterCard, then it must surcharge credit cards of all brands. This is known as the ‘level playing field’ component of the settlement and precludes merchants from discriminating against specific networks, cards or issuers.   If a merchant surcharges Visa and MasterCard, it must surcharge all credit cards (such as Discover and American Express). 
       
  • Product level surcharging - merchants may surcharge across the various types of products they accept. For example, merchant s may surcharge Classic credit cards without rewards at one rate and higher costing Platinum or Signature credit cards with rewards at a higher rate. The amount of surcharge at a particular product level must be the same across all brands.
    
    
  • Specifically beneficial for credit unions, merchants cannot surcharge in a manner that would disadvantage credit union issuers vs. the large issuers.
    
    
• Caps have been established to prevent merchants from turning surcharging into a profit centers, i.e., a merchant cannot surcharge a fee that is greater than the merchant’s cost of accepting the card.
  • If the merchant surcharges at the brand level, the cap is the merchant discount rate (MDR).
    
    
  • If the merchant surcharges at the product level, the cap is the MDR less the regulated debit interchange reimbursement fee (IRF).
    
    
  • The maximum checkout fee cap is calculated by a formula based upon a multiple average IRF, plus network fee.
     
• The settlement also requires merchants to disclose their surcharge policy to consumers at point of entry into the store, at the point of sale and on the cash register receipt. Additionally, the merchant must register with the networks and their acquirer 30 days prior to surcharging.
  
  
• Merchant surcharging will not be allowed in the following states where it is already prohibited by state law: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

BUYING GROUPS

• The settlement agreement also provides for Visa and MasterCard to meet with properly formed merchant buying groups (e.g., independent drug stores) that seek to negotiate interchange rates collectively and enter into commercially reasonable deals in their discretion and business judgment.

RELEASE OF CLAIMS

• One of great benefits of the settlement agreement for issuers is the broad and complete scope of the release of future claims by merchants for past damages (if rules were in place at the time of the settlement). As you recall, several years ago there was a significant settlement with respect to debit interchange, commonly referred to the Wal-Mart settlement which has now been followed by the credit card settlement. Accordingly, it was important for issuers that the settlement include provisions to avoid future litigation for past practices. This MOU attempts to lay the groundwork for a lasting peace between the issuers and the merchants.