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Credit Card Companies Rocked By New Merchant Lawsuits

By Martin H. Bosworth
ConsumerAffairs.com

September 27, 2005
Visa and MasterCard, along with major banks such as Capital One and Bank of America, face an accelerating legal challenge by merchants ranging from chain stores to photo shops to grocers.

Credit Card Fees • Visa, Mastercard Settle Suit With West Virginia • House Studies Credit Card Fees • Retailers Fret Over "Swipeless" Credit Cards • Visa Publishes Interchange Fees For Credit Cards • MasterCard Offers Concessions In Interchange Fee Battle • Merchants Testify Before Congress on Credit Card Price-Fixing • MasterCard IPO Shifts Risk from Banks to Investors • Thanksgiving: A Day Without Credit Cards? • Credit Card Companies Rocked By New Merchant Lawsuits • Merchants Sue Credit Card Issuers Seeking Lower Fees • Suit Challenges Credit Card Fees

The lawsuits allege that major banks and the Visa and MasterCard associations charge excessive "interchange fees" to retailers when customers pay for goods using a Visa or MasterCard.

Retailers have to pay the interchange fees in order to receive payments from transactions made using those cards, and the plaintiffs claim the fees are disproportionately high compared to the money they receive from the transaction.

The costs of the interchange fees are passed on to consumers, who have to pay more for goods without realizing it. Mitch Goldstone, CEO of Irvine, CA-based 30 Minute Photos, one of the original lawsuit plaintiffs, has called it a "hidden tax" on consumers.

The various lawsuits now go to a Multi-District Litigation (MDL) hearing on Sept. 29th in Asheville, North Carolina. The MDL hearing will determine what form the lawsuits will take and how they will proceed.

Goldstone told ConsumerAffairs.com the lawsuits are "the biggest litigation since AT&T in the late '80's."

His crusade started when he received a notice from MasterCard that his interchange fee for frequent-flyer card usage was going up. "I sent letters, cards, and e-mails asking for them to rescind this fee. No response…I didn't anticipate being the lead plaintiff in a case this big."

Goldstone views the lawsuit as standing up for retailers and consumers who are forced to shore up banks' profits.

"Retailers are beholden to credit card companies. We've moved so far to an e-commerce model that if I don't accept credit cards, I'm out of business."

Visa and MasterCard, he said, enjoy the benefits of a "noncompetitive" situation, where "a mother going out for a gallon of milk is subsidizing a wealthy customer's free flight," because they're paying the same rates for goods, even if the mother pays cash or writes a check.

Jeff Lenard, spokesperson for NACS, concurred.

"This is an imbalance between fees and economics," he stated. "If you look at other countries' [interchange fee] rates, they're far lower than ours. Why are they so much higher in the United States?"

The, in both Lenard's and Goldstone's views, is to move to a "cost-based interchange" system with "no other component or profit" attached. "Ultimately," Lenard stated, "this hits our bottom line."

Credit card companies and banks are already reaping tremendous windfalls from the interchange fees levied when drivers use credit cards to pay for gas. The Washington Post reported on Sept. 25th that banks' fees for credit card purchases of gas have risen by 64 percent since last year, generating huge profit while forcing gas station owners to eat up more of the costs of processing fees, and leaving consumers paying higher and higher prices.

"Credit card companies are making 8 or 9 cents a gallon" off the fees, says Lenard.

Despite gorging on interchange fees, many large financial services companies face a cloudy future. Homeowners are using home equity loans to pay down debt and buy items usually reserved for credit cards, while cardholders are paying off their debts faster and in greater amounts. MBNA has already felt the backlash of lost revenue, leading to its buyout by Bank of America.

As one insider analyst put it in an interview with Reuters, "You've got consumers and merchants revolting. They're the two customers of this industry ... That's not good."

Goldstone theorizes that the rush to set up credit card companies for initial public offerings (IPOs) is a way for them to "throw off liability onto the consumer." As profits drop and consumer anger grows, "you'll see a lot of them running to the exit as quickly as possible."

Goldstone runs an online blog, WayTooHigh.com, which tracks the daily updates of the lawsuit. "Since this case started," he says, "I haven't received a single negative complaint."

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