Saturday, July 14, 2012

Visa & Mastercard $7.3 Billion Settlement!

Visa, MasterCard and the nation's biggest banks have agreed to pay $7.3 billion to millions of merchants to end a seven-year dispute over credit card “swipe” fees. The settlement includes at least $6.05 billion in payments to some 7 million merchants for past damages and a temporary reduction in fees valued at $1.2 billion. The temporary reduction is only set for the next 6 months but may last longer, depending on court findings and client agreements.

Visa alone has agreed to pay $4.4 billion to settle the class action and related individual claims from merchants who alleged the card issuers violated the Sherman antitrust act by fixing the fees imposed to process credit card transactions. The settlement, which still requires judicial approval, is believed to represent the largest payment ever in a private antitrust case brought under the Sherman Act.

 Over time, the reforms induced by this case and in this settlement will help reduce card-acceptance costs to merchants and businesnes, which in turn will result in lower prices for all consumers. The settlement agreement also would give merchants new rights to impose a surcharge on credit transactions, subject to a cap and other limitations. The rules governing such surcharges likely would be implemented in early 2013. Merchants also would be allowed to band together to try to negotiate better rates on the so-called interchange fees.

How Cash & Credit Terms Have Changed
Most consumers are unaware that the cost of accepting credit or debit cards are already built in or included in the cost of the product or service they are producing. Fees for accepting certain cards range from 1.5% to 3.5% of the total cost of the transaction, not including any "per transaction", "swipe", or "interchange" fees which are imposed in addition to the percentage that the card processor charges and then the intermediary banks impose.

For example, let's say you (Johnny Consumer) goes to your local coffee shop. If the coffee shop accepts credit or debit cards (in all likelihood they do) and you decide to pay for your grande latte with plastic, here is an approximate breakdown of why your coffee costs about $4.00 or more nowadays.
  1. You are charged $4.25 for your grande skinny double-pump no whip latte
  2. You present your credit card for payment
  3. The cashier swipes your credit card through the terminal for an authorization
    1. An "authorization" is verification that your card is good and has funds available 
  4. The cashier hands you your card back and you go on your way enjoying your cofee! 
Now, here is what happens behind the scene with your financial transactions for your $4.25 transaction
  • The merchant is charged a $0.15 - $0.25 "swipe" fee per transaction
    • This is for each time a card is "swiped" at the terminal
    • If a card is "keyed" (not swiped) at the terminal the charge is sometimes twice that amount
    • If you use your card three times, the merchant is charged three "swipe" fees
  • The merchant is also charged between 1.5% - 3.5% of the total transaction amount called an "interchange fee"
    • This does not include fees imposed by the merchant or intermediary banks
    • This money is disbursed to the banks that process the transactions through the Visa, Mastercard, Discover, American Express network etc...
      • It pays the banks in-between your credit/debit card bank along the way while transferring funds through the network to the coffee shop's bank account.
  • Some merchants, depending on their contract, have to pay an "authorization" fee ranging for $0.05 to $0.15 per transaction
    • This is similar to a swipe fee and is actually quite common
    • This is not the same as an AVS fee but is more common for merchants that ship a product or service or process credit cards over the phone or internet to confirm the cardholder and present fraud. Typically these are $0.25 and it is unlikely your local coffee shop has this fee, but it's important to consider in other applications.
  • At the end of the day there is also a "merchant batch" fee, where the merchant submits all credit card or debit card transactions to their bank so they may collect the money for deposit into their account from your credit or debit card. This fee commonly ranges from $0.25 to $1.00 per batch. If for some reason the merchant batches more than once daily, though unlikely, the fee could be passed on twice.
    • For example, when your local coffee shop closes for the day and the cashier counts the cash in the register, the cashier will "batch" the credit card transactions and send them to the bank for deposit in one large group. If a merchant does not batch every 24 hours, those "interchange" or transaction percentage fees can double, costing the merchant more money.
  • Other merchant monthly fees: 
    • Statement fees: Some statement fees are $10 while others are $25 per month. 
    • Nuisance Fee: Which is absolutely ridiculous in my opinion... This is a fairly new fee that banks and merchant processors added to increase revenue. If your card was declined at the coffee shop and the cashier swiped your card a second or third time in an attempt to have it go through, the merchant processor or merchant's bank (coffee shop's local bank) will add an average $20 fee per additional "declined" swipe.
    • Chargeback Fee: Let's say you call your credit or debit card company and say you didn't recognize the $4.25 transaction from your local coffee shop because you forgot about it or maybe the transaction came up under a different name (some charges appear on our statements as the actual company name instead of the DBA [doing business as] name on the door... For example, Joe's Coffee Shop could show on your statement as Two Brothers Ventures INC because that is the official legal business name of the coffee shop)... For whatever reason, if a customer disputes a charge the merchant is immediately debited the amount of the transaction ($4.25 for the coffee) plus a "chargeback" fee which is usually $25. The merchant then has to find the receipt and fill in a report and fax or mail it back to the bank within a strict timeframe. If not, the merchant looses that money and is assessed the fee plus a possible fine of 1% of the total transaction.
  •  The Bottom Line:
    • Here is the breakdown of your grande latte:
      • $4.25 for the cup of espresso style coffee in revenue
      • ($0.25) for the swipe fee
      • ($0.10) authorization fee/inquiry fee
      • ($0.09) interchange merchant fee (assuming 2.24% standard Visa/Mastercard)
      • ($0.15) interchange merchant fee (for Amex customers only)
      • ($0.05) concervative estimate for this customer's share of the other fees imposed on the merchant by other customers as outlined below:
        • It's not possible to add this particular transactions share of the daily "batch" fee, any monthly chargeback fees, statement fees, or nuisance fees because this is a hypothetical coffee shop and I don't know how many transactions the business completes daily and how many chargebacks they receive etc.
        • It is important to remember that these aforementioned fees are passed on to each and every customer as they significantly impact the bottom line of the business.
        International Coffee Consumption
      • So how much did the bank and credit/debit card companies impact the price of your cup of coffee?
        • Of that initial $4.25 charge:
          •  $0.64 cents of that coffee went to "the banks"
          • Is that $0.64 cents really worth the convenience of using plastic instead of cash? For most, I argue probably not.
            • Unfortunately, cash or credit - Visa & Mastercard locked down the ability to pay less with cash instead of credit. That's what this settlement is all about.
          • According to a 2011 US report, the average American drinks 3.2 cups of coffee per day 7 days a week.
          • That means that the average American spends $2.04 in bank or merchant interchange fees a day. That is $14.37 a week...and is only part of the cost of their $4 grande latte. Does any of this concern you and how banks are ripping merchants and by proxy consumers off?
How Banks Changed How & How Much We Pay
How Banks Changed Prices In The Last 10 Years...

If you remember, in the 1980's and into the 1990's there were always two prices at gas stations: cash price and credit price. Visa & Mastercard made that go away... so now even cash paying customers have to pay the price as merchants/businesses increase prices to help offset these bank fees. Now, that may change as this is what the settlement is all about.

The proposal involves a payment to a class of stores of $6 billion from Visa, MasterCard and more than a dozen of the country's largest banks who issue the companies' cards. The card companies have also agreed to reduce swipe fees by the equivalent of 10 basis points for eight months for a total consideration to stores valued at about $1.2 billion, according to lawyers for the plaintiffs.

An additional $525 million will be paid to stores suing individually, according to the documents.
"This is a historic settlement," said Bonny Sweeney, a lawyer for the plaintiffs. "In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers."

Noah Hanft, general counsel for MasterCard, said the company believed its interests were "best served by an amicable resolution" of the case. Visa CEO Joseph Saunders said the settlement was in the best interest of all parties and did not expect the settlement to impact its current guidance.

But not everyone was pleased. One class plaintiff, the National Association of Convenience Stores, slammed the deal in a statement from its president, Tom Robinson, who is also president of Robinson Oil Corp. "Not only does the proposed settlement fail to introduce competition and transparency, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces," Robinson said.
The proposed considerations are a far cry from the $50 billion in swipe-fees paid each year by U.S. retailers, he said.

The U.S. Department of Justice brought and settled a civil antitrust suit against Visa and MasterCard in 2010. As part of the consent decree, the companies agreed to drop certain policies that kept stores from steering their customers to cheaper forms of payment.

Want to help your local merchant when using plastic? When given the option opt for or press the "debit" button at checkout with the cashier. Any transaction that you have to enter your PIN on the keypad saves the merchant all of those fees I just mentioned. Debit "PIN" transactions cost the merchant $0.25 in most cases without any additional fees. If enough people follow this trend, merchants and businesses will lower costs on their products as they are charged less by their banks respectively. It's really common sense!


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