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Merchants May Gain Right to Surcharge Card Customers Under Potential Settlement

--Potential settlement of merchant lawsuits likely to allow surcharging --Settlement expected before September trial date --Merchants say surcharging would help defray costs of accepting cards By Andrew R. Johnson Merchants may soon begin to charge an extra fee each time a customer pays with credit card, a practice Visa Inc. (V) and MasterCard Inc. (MA) currently prohibit. Retailers have long pushed for the right to surcharge customers who pay with plastic, arguing 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. "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 last 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 spokeswoman for Visa and a spokesman for MasterCard declined to comment on the status of discussions Friday. Several attorneys in the case also declined to comment. A settlement could be finalized as soon as this week, Bloomberg News reported Thursday. The lawsuits, filed by merchants including Kroger Co. (KR), Payless ShoeSource and Safeway Inc. (SWY) and several trade groups, argue the card giants engage in anticompetitive behavior by conspiring over the fees, known as interchange, retailers pay every time a consumer swipes a card. Last year, a provision of the Dodd-Frank financial reform 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). "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 include three components: payments from the defendants in the range of $8 billion to $12 billion, a temporary reduction in interchange fees and the elimination of the no-surcharge rule, according to KBW. Retail experts said the ability to surcharge would have a longer-term benefit to merchants than a temporary reduction in fees or monetary payments. The rationale is surcharging could exert pressure on Visa and MasterCard to make more permanent cuts to card fees anyway. The networks rely on transaction volume for revenue, and the threat of losing transaction volume if consumers stopped using their cards because of surcharging may prompt the card networks to lower costs. "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 issues and is now chief executive of the Merchant Advisory Group, which represents merchants in payments industry issues. Merchants gained the ability to offer discounts to customers who paid with lower-cost cards versus ones that carry higher swipe fees, typically rewards cards, under a legal settlement approved last year between Visa and MasterCard and the U.S. Justice Department. But merchant groups said surcharging could have a greater impact on their ability to control costs. Whether merchants widely adopt surcharging, if it is allowed, remains to be seen. Experts said there are logistical challenges in doing so, and they note the practice could anger consumers. Merchants in Australia have been able to surcharge since 2003, though last month the Reserve Bank of Australia said it will allow card networks to set limits on how much merchants can surcharge. It cited concerns that some merchants may be using surcharging to pad their bottom line instead of simply recouping the cost of card acceptance. About 35% of merchants in Australia surcharge, according to East & Partners, a banking research firm. In the U.S., 10 states, including New York and California, have laws prohibiting surcharging, 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. American Express Co. (AXP) and Discover Financial Services (DFS) allow merchants to surcharge as long as they apply surcharges to transactions made with competing payment networks' cards. That means merchants who also accept Visa and MasterCard cards have been limited in their ability to surcharge because of their rules. Write to Andrew R. Johnson at

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