Walmart, Target reject Visa-MasterCard settlement. Should your business follow suit?

Walmart, Target reject Visa-MasterCard settlement. Should your business follow suit?

Two weeks ago, Visa and MasterCard reached a landmark settlement with U.S. retailers. In addition to coughing up more than $6 billion to the retailers that brought the lawsuit, the card companies have agreed to drop restrictions on credit card surcharges.

Yet retail giants Walmart and Target have said, "No thank you," to the settlement -- and are encouraging other merchants to follow suit. By accepting the settlement, the retail giants point out, merchants must give up the ability to bring antitrust lawsuits against the card networks in the future. And what they gain in return (the dubious privilege of charging customers extra for using credit cards) isn't worth it, they say.

That leaves small merchants with some tough questions. What's best for them -- and their customers?

Background: the lawsuit and settlement
The settlement is the culmination of seven years of disputes between approximately 7 million merchants, MasterCard, Visa and major banks, including Bank of America and JPMorgan Chase. In 2005, the retailers brought a class-action suit against the card issuers, claiming they were violating federal antitrust laws through price-fixing.

By charging merchants swipe fees for credit card payments, card issuers were essentially raising the cost of doing business for merchants whenever a customer paid with a credit card. However, merchants' contracts with the issuers prevented retailers from charging extra for credit transactions. That left merchants unable to reveal the extra costs to customers -- or use surcharges to persuade them to use less expensive forms of payment (like debit or cash).

Under the settlement terms, MasterCard and Visa agreed to pay retailers $5.2 billion and reduce transaction processing charges for eight months (worth an estimated $1.2 billion). The card companies also agreed to drop requirements that retailers charge the same price for cash and credit purchases. This gives merchants the option of recouping the extra costs of processing credit cards by adding surcharges.

The settlement must still be approved by a federal court. And it's already facing some threats. Walmart, Target, the National Association of Convenience Stores and the Society of Independent Gasoline Marketers of America have all come out against it.

The settlement has a "termination" clause that gets triggered if merchants comprising 25 percent of credit card sales volume decide to opt out. However, financial services firm Keefe, Bruyette & Woods ran the numbers and concluded that, even if all the remaining top retailers that don't like the settlement opt out, they'll only make up a maximum of 20 percent. KBW also concluded that, "outside of a coordinated and large retailer movement to opt out of a settlement, we believe the risks to a settlement are relatively low."

Is the settlement really a win for merchants?
Yet a coordinated movement to opt out is exactly what Walmart is hoping for. The retailing giantreleased a statement encouraging all merchants to reject the settlement as it limits merchants' ability to pursue further claims against the card networks Visa and MasterCard..

Under the settlement, retailers can still negotiate with the card companies about rates, however,   they must give up the right to sue Visa and MasterCard for antitrust violations, thus sacrificing one of the most powerful weapons in their negotiating arsenal, says Leigh McAlister, marketing professor at the University of Texas at Austin's McCombs School of Business.

"Retailers would lose that antitrust tool, and that's a powerful tool," McAlister says. "That's what brought the credit card companies to the point where they are willing to make these concessions and this settlement in the first place."Without that leverage, merchants' hands could be tied if credit card companies increase swipe fees in the future. Retailers (whose profit margins are already slim) would have to raise their prices -- and risk losing customers.

"[Retailers] are in very tight competition with each other," McAlister says. "Consumers are in and out of the store comparing prices, and shopping around online. Pennies can make a difference," says McAlister.

Is charging extra for credit cards a savvy move for merchants?
The settlement does give retailers an option the card networks have prohibited them from doing in the past: the ability to charge more for credit card transactions.

Yet that could be a "PR disaster for most retailers," says Robert Antall, managing partner for Shaker Heights, Ohio-based Consumer Centric Consulting, an independent retail management consulting firm.

"This would have the potential to have different prices for cash or credit, which is confusing and aggravating to the consumer," Antall says.

Even though credit cards are pricier to process, retailers charging customers for that convenience is risky, says Alyson Anderson, director of marketing at Norwell, Mass.-based retail marketing and consulting firm Retail Concepts.

What about offering cash discounts?
If merchants don't want to raise prices or charge extra for credit cards, they still have the option of offering discounts for less expensive payment methods, such as cash. That gives customers the freedom to use a credit card for no penalty -- or win a discount by taking on the small inconvenience of carrying cash.

Yet even that may look bad to customers, McAlister says.

"If I see the person ahead of me in line paying with cash and getting a discount, I would go over to the cash machine and pay with cash," McAlister says. "That's a hassle. And it would still feel to me like they were charging me for the convenience of using a card."

Anderson suggests that rather than trying to recoup costs through consumers, merchants should try to save through better margins elsewhere.

"Build trust with your customers through your product expertise," she says. "They will spend more and cover the difference. Charging a fee would frustrate them and may cause them to not return to your store -- a bigger loss than eating the credit card fee."

The bottom line
If the settlement stands, merchants will find themselves in a tricky position. Most customers won't know that credit card surcharges stem from the credit card companies. They'll see only the merchant asking them to pay extra at check-out.

"This is a settlement that leaves both retailers and potentially consumers unhappy," Antall says. "One way or another, the consumer will pay for these fees in the end if they use a credit card, and likely the retailer will get most of the blame, even if they are just passing them along."

Published: July 26,2023