Our Financial Services Group summarizes the closely observed preliminary settlement agreement over the fees credit card companies and banks charge merchants.
- Interchange fee rates would be reduced and capped for five years
- Network rules for surcharging and discounting would be changed
- Merchants would be precluded from seeking future relief for five years
On March 26, 2024, a motion for preliminary approval of settlement was filed by the class of merchant plaintiffs seeking equitable relief1 and the defendants, including Visa, Mastercard, and multiple banks, in decades-long antitrust litigation over the interchange fees merchants must pay when they accept credit cards for payment. While the settlement agreement is subject to final approval by the U.S. District Court for the Eastern District of New York, the court has preliminarily approved the proposed settlement.2 The proposed settlement would become effective on the business day on which all of the conditions outlined in the proposed settlement have been satisfied.3
In their complaint, the plaintiffs alleged that the defendants engaged in conduct in violation of federal and state antitrust laws by adopting interchange rules and rates, and other network rules, that constitute unlawful price fixing, unreasonable restraints of trade, and monopolization.4 A separate settlement for merchant plaintiffs for damages for past injury resulting from the same alleged anticompetitive practices by the defendants was previously approved by the court on December 13, 2019, and affirmed by the Second Circuit on March 15, 2023.5
If finally approved in its current form, the proposed settlement would reduce current interchange fee rates paid by merchants, impose a five-year interchange fee rate cap, and require changes to certain of Visa’s and Mastercard’s respective card network rules, including rules related to surcharging and discounting. Additionally, the plaintiffs would be precluded from seeking or obtaining any form of declaratory, injunctive, or equitable relief with respect to the claims released in the proposed settlement until five years after the commencement of the average effective rate reduction (which is defined below).6
Interchange Fee Rate Changes for U.S. Domestic Credit Cards
Five-year average effective rate reduction
Each of Visa and Mastercard would be required to implement a combined system-wide volume-weighted average effective credit card interchange rate for most domestic credit card transactions that is at least 0.07% lower than the Visa and Mastercard combined system-wide volume-weighted average effective credit card interchange rate for the 12-month period ending on March 31, 2024 (the “average effective rate reduction”).7 Notably, the proposed settlement does not restrict Visa or Mastercard from negotiating custom credit card interchange rate agreements with any merchant at any rate level, but any transaction conducted pursuant to a custom rate agreement generally would be included in calculating the average effective rate reduction (subject to an exception).8
Coinciding with the standard release process for Visa and Mastercard, the average effective rate reduction would commence as of the first April or October that is no earlier than April 2025, and no earlier than four months following the proposed settlement’s final approval date.
The average effective rate reduction would remain in effect for five years following the commencement date.9
Three-year posted interchange reduction
As of the commencement of the average effective rate reduction, each of Visa and Mastercard would be required to reduce all posted interchange rates for most domestic credit card transactions that existed as of December 31, 2023 (which rates are set forth in the proposed settlement), by a minimum of 0.04% (the “posted interchange rate reduction”).10
The posted interchange rate reduction would remain in effect for a period of no less than three years following the commencement of the average effective rate reduction.11
Five-year interchange rate cap
As of the proposed settlement’s final approval date, each of Visa and Mastercard would be prohibited from increasing any of their posted interchange rates for most domestic credit card transactions above the rate that existed as of December 31, 2023 (the “posted interchange rate cap”).12
The posted interchange rate cap would remain in effect for a period of no less than five years following the commencement of the average effective rate reduction.13
Impact on other network fees
While the proposed settlement makes clear that Visa and Mastercard may continue to set default and custom interchange rates and network fees (subject to the proposed settlement), the proposed settlement would prohibit Visa and Mastercard from circumventing the requirements of the proposed settlement, including, for example, by changing all of the published rate categories.
The proposed settlement sets forth a non-exhaustive list of potential practices that would be prohibited.
Network Rule Changes
All network rules changes will commence on the respective dates set forth in the proposed settlement (within some period of time following the date the proposed settlement is finally approved by the court) and extend for a period of five years following the commencement of the average effective rate reduction, unless otherwise noted below.
No discounting and nondiscrimination rules
Consistent with final judgment in United States v. American Express Co., et al. in 2011,14 the proposed settlement would require Visa and Mastercard to continue to refrain from adopting or enforcing any rule or agreement that prohibits, prevents, or restrains any merchant from steering customers to use a particular form of payment (e.g., cash, check, debit, credit), card brand, or type of card (e.g., non-rewards card, rewards card).15
Notably, the proposed settlement would require Visa and Mastercard to modify their existing “no discounting” and “nondiscrimination” rules to permit merchants to provide discounts at the issuer level (i.e., discounts that vary based on the financial institution that issues the credit card or debit card), which historically has been prohibited under the card network rules.16
“All-outlets” rules and nonacceptance pilots
The proposed settlement would require Visa and Mastercard to continue to allow merchants to decline acceptance of all Visa or Mastercard POS debit devices or all other Visa or Mastercard products, depending on the merchant’s limited acceptance designation, at all outlets operating under the same trade name or banner.17
At the same time, the proposed settlement would not restrict Visa or Mastercard from providing volume-based pricing and pricing incentives or from contracting with individual merchants, including for more favorable pricing, based on the merchant’s acceptance of Visa and Mastercard cards at all outlets. However, Visa and Mastercard would be prohibited from requiring a merchant to accept their cards at all outlets in connection with a volume-based incentive program made generally available by the card networks to all U.S. merchants.18
Within 90 days of the proposed settlement’s final approval date, Visa and Mastercard would be required to modify their rules to permit merchants to engage in the practices described above, and to permit merchants, on a pilot basis, to decline acceptance of Visa and Mastercard cards, at some but not all outlets operating under the same trade name in the U.S., subject to all of the following restrictions:
- The pilot must be limited to outlets within the same trade name or banner.
- The pilot must be limited in time and scope.
- Merchants must provide advance written notice of the pilot and the outlets at which the pilot would occur.19
Steering
Under the proposed settlement, Visa and Mastercard would be required to modify their rules to relieve merchants from any obligation to employ the same types of permissible steering in all of their outlets for each of Visa and Mastercard. These permissible steering requirements also would apply to Visa and Mastercard cards provisioned in digital wallets.20
Honor all wallets requirements
Under the proposed settlement, Visa and Mastercard would be required to modify their “Honor All Cards” rules to permit merchants to accept the digital wallets of their choosing, subject to the following limitations:
- The non-acceptance must be at the digital-wallet level without respect to the payment card brands within the digital wallet.
- The non-acceptance of a digital wallet cannot include a Visa or Mastercard card provisioned in a digital wallet owned or operated by the applicable card network so long as the “acceptance characteristics” of the associated transaction (e.g., network fees, interchange rates, etc.) would be the same as the characteristics of a non-digital wallet transaction (but Visa and Mastercard cannot require the merchant to accept any non-Visa or non-Mastercard card provisioned in the wallet).
- The merchant must provide Visa and Mastercard with advance written notice of the merchant’s non-acceptance of digital wallets and the wallets that the merchant does not intend to accept.21
These requirements generally would apply to the enablement of online transactions through digital wallets as well.22
The proposed settlement clarifies that the card network rules related to permissible steering (as modified by the proposed settlement) would continue to apply to Visa and Mastercard cards provisioned in digital wallets.23
Surcharge rules
The proposed settlement generally would require Visa and Mastercard to maintain their respective surcharge rules that permit merchants to surcharge Visa and Mastercard credit card transactions at either the “Brand Level” or the “Product Level,” and would require the networks to modify their rules to relieve merchants from some of the nondiscrimination requirements applicable to surcharging that historically have required merchants to surcharge Visa and Mastercard credit card transactions in the same fashion.24 The proposed settlement also would allow Visa and Mastercard to prevent a merchant from applying a surcharge of greater than 1% if the merchant does not apply the surcharge consistently across other network-branded cards (e.g., American Express and Discover).25 At the same time, the proposed settlement makes clear that Visa and Mastercard may continue to prohibit surcharging at the issuer level.26
The proposed settlement would allow Visa and Mastercard to continue to enter into individually negotiated arrangements with merchants pursuant to which such merchants agree not to surcharge, subject to certain requirements and restrictions.27
Under the proposed settlement, Visa and Mastercard would be prohibited from applying default interchange rate structures that target or penalize (or have the effect of targeting or penalizing) specific merchants that surcharge in a compliant manner.28
Surcharging merchants would continue to be required to abide by the notice and disclosure requirements imposed by Visa and Mastercard under their rules.29
Buying groups
Within 90 days of the proposed settlement’s approval date, Visa and Mastercard would be required to modify their rules to allow merchants to organize “merchant buying groups” to negotiate with Visa or Mastercard concerning interchange rates and rate categories, merchant rules, merchant fees, network practices and procedures, and other aspects of the operation of Visa or Mastercard that impacts merchants.30
Under the proposed settlement, a “merchant buying group” is defined as “two or more merchants . . . that form a group and incorporate as a not-for-profit corporation in any state in the United States for the purpose of negotiating with [Visa and Mastercard] in conformance with [the proposed settlement] . . . .”31
The proposed settlement would impose certain requirements on Visa and Mastercard in connection with negotiating with merchant buying groups, including an obligation “to conduct reasonable, bona fide negotiations” with merchant buying groups concerning their proposals.32
Merchant education program
The proposed settlement would require Visa and Mastercard to establish a merchant education program to advise and educate merchants about the card network rules changed by the proposed settlement and the benefits of such changes, including with respect to the formation of merchant buying groups.33
1The plaintiffs includes all members of the Rule 23(b)(2) class, without opportunity for opt-out, certified by Judge Margo Brodie of the U.S. District court for the Eastern District of New York on September 27, 2021, and consists of “all persons, businesses, and other entities that accept Visa and/or Mastercard credit and/or debit cards in the United States at any time during the period between December 18, 2020, and the date of entry of Final Judgment in [the] case.” In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05-md-01720, Doc. 8647 at 122 (E.D.N.Y. Sep. 27, 2021).
2In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05-md-01720, Doc. 9179-2 (E.D.N.Y. Mar. 26, 2024).
3Id. at 15.
4Id. at 3.
5Id. Opt-outs were permitted from the Rule 23(b)(3) class of plaintiffs.
6Id. at 71.
7Id. at 32-33, 53-54.
8Id. at 33, 54.
9Id.
10Id. at 35, 56.
11Id.
12Id. at 35-36, 56-57.
13Id. at 21.
14United States v. American Express Co., et al., No. 10-CV-04496 (E.D.N.Y.);
In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, supra note 3, at Appendix G.
15In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, supra note 3, at Appendix G.
16Id. at 22, 42.
17Id.
18Id. at 23, 43.
19Id. at 24, 44.
20Id. at 24-25, 44-46.
21Id.
22Id.
23Id. at 25, 46.
24Id. at 25-26, 46-47. The proposed settlement clarifies that a merchant may surcharge both Mastercard-branded credit card transactions and Visa-branded credit card transactions and may surcharge Mastercard-branded credit card transactions, but not Visa-branded credit card transactions, or vice-versa, at either the “Brand Level” or the “Product Level.” Also, a merchant may surcharge Mastercard-branded credit card transactions at the “Brand Level,” and surcharge Visa-branded credit card transactions at the “Product Level,” or vice-versa.
25Id. at 26-27, 47-48.
26Id. at 25-28, 46-49.
27Id. at 29, 50.
28Id.
29Id. at 28, 49.
30Id. at 31-32, 51-53.
31Id. at 31, 52.
32Id. at 31-32, 52.
33Id. at 40, 60.
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