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Fitch: Merchant Settlement's Impact on Card Industry Muted
CHICAGO--()--The long-term financial impact on the credit card industry from the $6 billion settlement of the antitrust suit against Visa, MasterCard, and major card-issuing banks will likely be modest, according to Fitch Ratings.
While the agreement reached on July 13 offers merchants an opportunity to temporarily reduce interchange fees paid to banks, we do not believe that the fundamental economics of credit card transactions have been changed materially as a result of the settlement.
In addition to the agreed eight-month cut in swipe fees by 10 bps for merchants accepting Visa and MasterCard, the settlement also supports a merchants' ability to impose credit card surcharges on customers to recover part of their card-related costs.
We believe the October 2010 settlement between Visa, MasterCard, and the U.S. Department of Justice (DOJ) already provided merchants with some flexibility in offering incentives for customers to move away from higher cost payment methods toward debit cards or cash. The incremental impact of the new settlement on merchants' willingness to apply card surcharges will likely be limited, particularly in highly competitive consumer markets where customers would be expected to respond negatively to surcharges on card transactions.
The introduction of surcharges would also not be permitted in several states (including California, Massachusetts, New York, and Texas, among others) due to state-specific laws/regulations that prohibit charging a fee to consumers using a credit card.
The settlement does not impose a long-term cap on interchange rates, which Fitch believes removes a significant overhang from the card networks. This would have represented the most negative outcome for card processors and banks over the long term, given the potential decline in fees.
In terms of the settlement costs, named defendants were adding to litigation reserves in recent periods, as the case progressed. Given the potential for some merchants to opt out of the settlement, we believe defendants will manage litigation reserves accordingly.
American Express (AmEx) and Discover Financial were not parties to the merchant suit, but AmEx continues to fight the October 2010 DOJ suit in court, which would allow for surcharging between various card products.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
