Credit card payment networks and the stores that accept credit cards have been locked in an intense battle over the processing fees that the merchants pay for these services. In the latest round of this fight, a federal appeals court rejected a $7.25 billion antitrust settlement agreed to by Visa, MasterCard and millions of retailers.
How the System Works
Whenever you use your credit cards, you are utilizing a payment network such as Visa or MasterCard to transmit funds to a merchant. Merchants incur a fee when they accept credit card payments, roughly 2% of the amount of the transaction. Most of the time, customers do not pay these fees for choosing to pay with their credit cards.
Although the vast majority of retailers choose to accept credit cards, the merchants feel that the fees they must pay to do so are too high. The original case between Visa and MasterCard accused these companies of fixing prices, but the settlement was thrown out after the court determined that many of the merchants covered by it weren't represented.
The Case Against Merchant Fees
Merchants believe that the fees they must pay are too high and are the result of collusion between a limited number of credit card payment networks. In addition, the merchants would like to be able to pass on these processing fees to their customers in the form of surcharges, but that practice is currently forbidden in many states. Retailers have even sought to enlist the support of customers in their plight by portraying these fees as affecting consumers, even though it is the merchant that pays the fees, instead of the costs associated with other forms of payment.
The Defense of Merchant Fees
Every merchant has the choice of whether to accept credit cards or not, and there are many businesses that only accept cash, checks or other forms of payment. The retailers that choose to accept credit cards and pay merchant fees must be receiving valuable benefits from this decision, otherwise they would change their mind. By accepting credit card payments, merchants avoid the costs of handing cash, which is time consuming and presents a security risk, and retailers also avoid the risk of having a check bounce. Credit card processing fees are competitive with the expenses incurred when retailers accept other forms of payment. And by accepting credit cards, retailers enable their customers to finance their purchases, unlike debit cards.
For consumers, credit cards offer not just a means of financing purchases, but also unmatched security and convenience over other forms of payment. In addition, many credit cards offer valuable rewards in the form of points, miles and cash back, which are, no doubt, enabled in some part by the merchant fees received. As a result, most businesses have decided to accept credit cards in order to satisfy their customers.
Where this Fight Is Going
Merchants such as Wal-Mart and Target were happy that the settlement has been rejected, but industry observers expect this decades long fight between merchants and payment networks to continue for the foreseeable future.