Originals

Moving the goal posts on credit-card transaction fees

by Timothy H. Lee |

For seven long years, protracted litigation between retail merchants on one side and MasterCard, Visa and several large banks on the other side had dragged on. At the heart of the case was retailers’ allegation that credit-card companies and banks conspired against them to set arbitrarily high transaction fees.

Finally, last summer, the parties reached an out-of-court settlement. In addition to receiving greater negotiation strength on transaction rates and the ability to charge customers a fee at time of purchase for credit-card purchases, retailers also received an unprecedented $7.25 billion in cash. Clearly, a very pretty good deal for them.

But now some of the plaintiffs – some of the very largest and most successful retailers – seek to move the goal posts and scuttle the parties’ voluntary agreement.

Specifically, a few retail-industry trade associations, who typically do the bidding of their largest members, posted deceptive information on their websites misrepresenting the terms and conditions of the settlement agreement in a campaign to discourage their smaller members from participating in the settlement. United States District Judge John Gleeson read those trade associations the riot act, even threatening them with contempt of court if they did not remove the misleading information from their websites.

The trade associations grudgingly complied, and no contempt order was ultimately issued, but the damage had been done. Many smaller retail merchants who stood to benefit from the terms of a settlement had already been misled into believing it was a bad deal.

So what explains the retail trade associations’ campaign to break with their own legal team and dismantle the settlement agreement? And why their need to mislead their members regarding a settlement that gives them exactly what they wanted?

Although retailers got an optimal result with the proposed settlement, they calculated that there might be an even greater pay-out if their lobbyists in Washington could achieve legislation that would prompt federal regulators to set debit and even credit-card fees below market rates — a victory they could never win in the courts.

The retail industry had achieved a similar piece of legislation in 2010 through the controversial Durbin Amendment to Dodd-Frank, which capped the “interchange” fees banks could charge retailers for debit-card transactions. Retailers have since reaped sizable profits from that legislation.The banks, credit unions and their customers, in contrast, have predictably borne the brunt of the regulations.

Accordingly, a few retail trade associations seek to extend similar counterproductive regulations to credit cards. Moreover, they hope to retain the ability to bring future lawsuits to improve their lot even more.

It’s disappointing that contemporary society is so susceptible to this type of litigious and regulatory gamesmanship. A free-market solution mutually reached by all parties would be the more ideal situation in which to handle such a disagreement. In other words, keep Washington out of it.

However, as illustrated by this effort to upend the parties’ mutual legal settlement, the lure of special favors in Washington is strong. Retailers may understandably remain concerned with their own bottom line, but elected officials must not allow those groups’ self-interest to come at the expense of everyone else.

 

Timothy H. Lee is vice president of legal and public affairs at the Center for Individual Freedom, a non-profit organization focused on safeguarding and advancing economic freedom.

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