Lots of news on the multi-billion dollar settlement today, but tough to get good details on what exactly has been agreed to and tougher still to predict how it will all play out.
But a case I wrote about earlier in the week, where merchants were suing over claims of price fixing in the fees charged to process credit cards, has been settled.
Visa, Mastercard, and several banks will pay out over $6 billion dollars. They will temporarily reduce interchange fees while they write new credit card processing agreements. And, as explained by Visa’s press release, we’ll see:
Modifications to Visa’s rules to permit retailers to impose a surcharge on credit transactions subject to a cap and a level playing field with other general purpose card competitors. The rule changes on surcharging likely would be implemented in early 2013.
(Mastercard, a party to the settlement, will be similarly affected.)
So beginning in 2013 we can expect to see at least some retailers charge more for credit card transactions (as opposed to discounting for payment by cash).
Raising the price on credit will make credit less used, and I don’t cheer this. And as I argued earlier in the week, consumers and merchants benefit greatly from electronic payment by credit card.
[C]ompanies get money right away, deposited straight into their account when processing credit cards, and without the risk that a check bounces. Consumers paying by credit card tend to spend more money per transaction. Credit card transactions also reduce the likelihood of employee theft significantly compared to cash transactions. And they allow consumers to better manage cashflow (one bill at a specified time each month rather than money coming out of an account right away). It’s easier to track balances in checking accounts in real-time when paying a single bill (most people don’t fill out their check register after each debit card transaction), and this helps consumers avoid overdraft fees.
Of course, it’s almost not necessary to point out that credit cards are big business. They fuel the mileage programs that drive the profitability of the airline industry. They’re hugely significant for the still fragile banking sector. And gosh darnit, they are my great source of frequent flyer miles that provide me access to premium cabin international travel. Is this disquieting for me personally? You’re darned right it is.
That said, if I had to guess in a vacuum I’d have guessed that little had changed. Companies could already discount for non-credit card payment, which is effectively the same as charging more for credit cards, and yet this isn’t widespread. Why should it become widespread now that surcharges are permissable?
Electronic payments are valuable. Visa, Mastercard, and American Express actually do provide a valuable service. Retailers charge a price they believe consumers are willing to pay, raising that price (through surcharges) will reduce sales.
Except that in countries like Australia where credit card surcharges are permitted they’re also common.
It remains to be seen how this will play out, and it may ultimately change little. I have to believe that Visa and Mastercard believe this, or else I’m not sure they’d have settled. They’re paying billions of dollars and surely must believe they’re getting something in return. And that something can’t be an end to their business model. The $6 billion must be buying them, or at least they believe is buying them, the ability to continue to operate and grow. So if they know their own business, then it would suggest much ado about nothing.
But we’ll see how that plays out next year, and to some extent even before — if it changes the calculus for the banks of what the profitability of a new customer looks like, that’ll change their willingness to pay signup bonuses. And that could happen even sooner.
Update: Since 10 states — California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas — have laws against adding surcharges to credit card transactions, I don’t expect this settlement to have much immediate effect.
National chains and online retailers will have a hard time adding those fees.
I expect flurry of lobbying in these states, and counterlobbying for laws such as these in the states without such laws. Since Visa and Mastercard won’t be able to prohibit the fees via contract, retailers and the credit card processors will tussle in the state legislatures, likely for years.
So mark this one as ‘developing’ and my guess is over a period of years before it has major effect.