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Suit Challenges Credit Card Fees

June 24, 2005
A class action lawsuit filed by several small businesses accuses Citigroup, Bank of America and other large banks of illegally fixing the price of credit card transaction fees.

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"Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a ‘hidden tax’ that raise prices paid by consumers for almost every product they buy," says attorney K. Craig Wildfang, representing the plaintiffs. "Visa, MasterCard and the banks now have the burden of proving that they have set the interchange fees at the correct competitive level. Even Visa’s own economists admit that they cannot satisfy this burden."

"For the average consumer, you have to pay $200 to $300 per year in additional costs for merchandise, whether you pay with plastic or in cash," Wildfang said. "It's like an invisible 2 percent sales tax on everything you buy."

"Interchange fees are just a way that credit card companies squeeze merchants to enhance their revenue stream," said Mitch Goldstone, President and CEO of 30 Minute Photos Etc. and 30minphotos.com, a national online boutique photo service.

"There is absolutely no need for these fees to be so high, and without anything to control them, the banks and the credit card companies continue to find ways to escalate the fees. We hope this lawsuit leads to significant changes," he said. Goldstone and co-owner Carl Berman write The Credit Card Interchange Blog, at www.waytoohigh.com.

"Due to Visa and MasterCard’s market power, the United States has the highest credit card interchange fees among industrialized countries," Wildfang said. "Regulatory authorities in many other countries, from the European Union to Australia, have recently adopted measures to reduce interchange fees, but in the United States, it will take action by the courts to accomplish this."

The suit concerns the fees charged by banks to merchants each time a customer makes a purchase using a MasterCard or Visa card, and charges that there is no limit on the banks' ability to set the "exorbitant" fees.

Paul Cohen, a vice president at Visa USA, said the company plans to defend the fees as a business practice that has been both successful in the marketplace and found to be legal in federal court.

The antitrust class action suit was filed in the U.S. District Court for the District of Connecticut against Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, JPMorgan Chase, Fleet Bank, Capital One and other major banks.

Named plaintiffs include, Photos Etc. Corporation, doing business as 30 Minute Photos Etc., of Irvine, CA; Traditions Classic Home Furnishings of St. Paul, MN; CHS Inc. of St. Paul, MN; A Dash Of Salt, L.L.C. of Bridgeport, CT; and KSARRA, L.L.C. of Newtown, CT.

They represent a class of merchants that operate millions of commercial businesses throughout the United States that accept Visa and MasterCard as a form of payment. At issue are the alleged practices by the defendants that cause merchants to pay allegedly excessive fees each time they accept a credit card as payment.

"The U.S. credit card system is seriously broken and mismanaged, and millions of merchants and consumers are unnecessarily paying for it through credit card interchange fees that are increasing at an alarming rate," said Michael Schumann, co-owner of Traditions Classic Home Furnishings, which operates retail furniture stores in St. Paul and Minneapolis, MN and Naples, FL. "This lawsuit will hopefully result in a much-needed major reform of the credit card industry."

In 2003, Wal-Mart negotiated a multibillion-dollar settlement with Visa and MasterCard over the use of the fees. Other large retailers are attempting to do the same but Wildfang's lawsuit says small businesses are helpless to negotiate on their own and must turn to the courts for relief.

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