Pay Now or Pay Later?

Credit cards have become an almost indispensable part of conducting business in this country. Even the most routine and mundane of purchases see us using the number-emblazoned plastic to complete a transaction. Generally speaking, with credit cards we can track our purchases, pay all at once, and not have to worry about running out of cash in a bind. They have become a necessity for some rather than a mere convenience.

However, a change happened this week that could make you think twice about swiping that card at some retail establishments. As a result of a settlement in a lawsuit that dragged on for over seven years involving a number of retail merchants against the two biggest credit card issuers -- Visa and MasterCard -- merchants are now free to pass along to their customers certain "swipe fees" that the issuers charge to merchants for the use of their cards by customers.

The fees generally apply to credit cards
rather than debit cards.

For decades Visa and MasterCard prohibited merchants who accept their credit cards from charging a fee to customers to compensate the merchant for having to pay a percentage fee to MasterCard or Visa. (Discover and American Express were not named as defendants in the lawsuit.) Merchants must contract with the credit card issuers whose cards they accept in order to set up the payment process, so these two issuing companies essentially held a monopoly on the credit industry. Merchants who wanted to increase their business by accepting credit cards were told by these two card issuers that they could not charge a "swipe fee" to customers, meaning merchants were not allowed to pass on the fee atop the established price.

Here's an example. If a customer came to XYZ store and purchased $100 worth of goods, Visa and MasterCard would only send the merchant $97 to $99, depending on the fee arrangement (based on volume of sales and other factors). The "swipe fee" was called an administrative fee -- it is how credit card companies make money since (believe it or not) a majority of consumers pay off their bills on time monthly and thus owe no interest or finance charges. If a customer was forced to cover that $3.00 fee (thus paying $103 for a $100 purchase), s/he may go elsewhere for a credit card that did not charge the merchant, and who was thus not passing it along to the customer. So the prohibition was a way that the issuers could make the retailer absorb the cost of doing business.

But for some merchants, that cost of doing business put them out of business in the highly competitive markets. Some merchants found creative ways around the problem, such as offering a discounted lower price for those who pay with cash -- a favorite of gas stations across many states. But this did not truly resolve the credit card dilemma -- since many people do not carry cash in large enough quantities to cover purchases.

The class action law suit was an attempt by several thousand merchants who cried foul over what they deemed to be an unfair practice by Visa and MasterCard. The two companies have such a large market share of the credit industry that they were able to suppress the freedom of retailers and control the commerce with their contractual obligations and prohibitions. The court agreed with much of the plaintiffs' arguments, and is now considering approving a $7.2 billion dollar settlement that millions of plaintiffs would have to share. Although the settlement of the lawsuit is still pending final approval, January 27 was the date on which merchants were allowed to start charging up to a 4% surcharge on credit cards issued by these two credit industry giants. Several large merchants, such as Target, Home Depot, and Wal-Mart, have said they will not tack on the credit card surcharge when customers pay by Visa and MasterCard credit cards. Some smaller companies are unwilling--or unable-- to make that promise.

There are still a number of troubling unresolved issues in case that continue to make some retailers unhappy. For instance, Visa and MasterCard have not been precluded from re-imposing the prohibition later, and they will be free to raise the interchange rates that they charge in the future. A final hearing on the settlement is set for September of this year.