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Another Class Action Suit Shakes Up Payment Processing


The payment industry, banks, merchants, and ultimately consumers are likely to see some changes from yet another looming class-action lawsuit against Visa and MasterCard. A class of nearly 5 million retailers, including heavy hitters like the National Restaurant Association and National Association of Convenience Stores, have filed a suit claiming antitrust violations due to collusion between Visa and MasterCard (card brands) and the member banks. Some of the notable banks named in the suit are Bank of America, Citigroup, Wells Fargo, JP Morgan Chase, Fifth Third, and HSBC.

This case is quite similar to a 1996 suit in which another class of 7 million retailers, spear-headed by Walmart and Limited Brands, accused the card networks of a monopoly because their merchant agreement forced acceptance of branded debit cards along side of credit cards under the “honor all cards rule”. The case was settled in 2003 when the defendants agreed to pay more than $3 billion in monetary damages. In addition to the cash payout, Deutsche Bank analyst Bryan Keane estimates resulting changes in business practices cost another $25 billion conservatively.

More recently, Visa and MasterCard saw two other significant blows to their practices and profits this past October. First, provisions from the Durbin Amendment went into effect capping the fees merchants would have to pay to accept debit cards. Next, the card brands announced a settlement agreement with the U.S. Department of Justice and the attorneys general of seven states to resolve antitrust investigations into the companies’ merchant acceptance rules in the U.S. As part of the settlement, Visa will allow U.S. merchants to offer discounts or other incentives to steer customers to a particular form of payment including to a specific network brand or to any card product, such as a “non-reward” Visa credit card. While the second settlement hasn’t meant much in terms of direct monetary damages yet, the Durbin Amendment “is expected to cost banks about $6.6 billion a year in revenue,” according to Javelin Strategy and Research.

So what can we expect from the pending suit slated to be tried this September?

First, we can expect that there won’t be a trial at all. The case will be settled. Why? Because the circumstances are eerily similar to the 2003 settlement: both were antitrust cases, both brought by a similar plaintiff class of merchants, and both are under the supervision of U.S. District Judge John Gleeson. Yes, the same judge that approved the 2003 settlement. And as Yale law professor George Priest stated in his Wall Street Journal essay about the 2003 case, “MasterCard and Visa could have had Oliver Wendell Holmes and Clarence Darrow on their legal teams and it still would have been foolish to try the case.”

Second, we can expect the damages to Visa, MasterCard, and the member banks to amount to the largest antitrust settlement in U.S. history. One claim of the suit is that when Visa and MasterCard spun off into public companies through initial public offerings in 2006 and 2008, the action was “disingenuous” and only to avoid the appearance of a monopoly. The suit seeks compensation for alleged overcharges “for the fullest time period permitted” by statutes of limitations. This “fullest time period” goes all the way back to 2004.

JPMorgan notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.” According to Dan Free in his article for, “Those numbers cited by JPMorgan would appear to point the way to a very large settlement, since the case covers at eight years and counting… even if one assumes an overcharge of just 10%–the figure used by the Justice Department in its antitrust cases–that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion.”

Third, we can expect serious shockwaves in the banking industry resulting from potential revenue shortages. Another allegation of the suit is that interchange costs are too high due to lack of sufficient competition. If credit card interchange rates were capped in a manner similar to debit card rates under the Durbin Amendment, it would mean a 75% reduction in fees to merchants and revenue to the banks.

But what exactly does “too high” mean?  To put things in perspective we can look at how the same fees work in other parts of the world.  In the United States the overall average cost to a merchant to accept a credit card is 2%. Mexican merchants pay 1.66%, Canadians and Germans pay 1.50%, merchants in the U.K. pay an average of .79%, Australians pay .5%, and EU member merchants pay around .30%.

As bank analyst Matt O’Connor states in his January 4 report, reducing credit card interchange fees by 75% would cost US Bancorp about $1.2 billion of 2012 revenues, would cost JPMorgan Chase $5.38 billion, and would cost Bank of America $3.68 billion. These losses in revenue are between 2 and 5 times the total impact of the Durbin Amendment.

So come this September we will see what the final price tag is likely to be. Regardless of the final settlement amount, look for Visa and MasterCard to remain dominate players in the game, for the banks to scramble to replace lost revenue, and for consumers to see little to no change at the register.

Add comment March 5th, 2012

Playing The Match Game With The IRS


Now You Have A Little More Time To Fall In Line.


Good news. The deadline for complying with the IRS mandate related to the Housing and Economic Recovery Act of 2008 has been extended a full year, until January 2013.

In an effort to ferret out underreported or unreported business income, the IRS devised a plan within the Housing and Economic Recovery Act of 2008 that requires payment processing networks to report a merchant’s monthly processing volume along their TIN (taxpayer identification number) and legal name. To ensure this reporting system is functional and accurate, the IRS requires that the TIN & legal name on the merchant account matches the data they have. If the IRS records and merchant account information do not match, the merchant has to complete Form 1099K and the processor must submit it to the IRS.

The penalty for not complying with this new Act is the imposition of backup withholding to the tune of 28% of the merchants gross credit card revenue. Backup withholding is similar to the payroll tax withholding all merchants with employees are familiar with. The difference here is that the IRS would order the credit card processor to hold back 28% of the merchant’s credit card processing receipts and turn it over to them.

The mandate for compliance began at the beginning of 2011. While the IRS still requires reporting on Form 1099-K by the end of 2011, they are delaying the enforcement of the backup withholding aspect of the plan until January 2013. The IRS decided to extend the deadline after numerous complaints from the processing industry citing problems with consistency in the form as well as difficulties in collecting these forms from merchants.

So, if you have completed your 1099K and returned it to your merchant services provider, good for you- you are in the clear. If you have not received notice or a form, contact your provider right away. Otherwise you may find 28% of your credit card sales zapped after 2013.


Here is a link to the original IRS publication concerning this requirement:

Add comment October 31st, 2011

Ask for ID? Grrrrr…

As a self proclaimed “industry guru”, there are certain things I come across in everyday life that as a consumer really irritates me.

While many consumers may unknowingly think its protocol or just good business, I suspect there are a lot more consumers that find having to fork over an ID when presenting a credit card is just plain annoying. Not to mention, in our fast paced society, a giant waste of time.

The fact is, as a consumer we are protected against all unauthorized transactions, so I have little concern about my card being stolen. What’s worse is when I challenge the clerk and refuse to provide my ID; they state “It’s for your protection”. Well… no… it’s not. I’m already protected, but thanks :). Really, they are attempting to protect themselves from fraud–i.e. a stolen credit card.

So you say “Wait a minute there Mr. Guru—who’s side are you on here? Isn’t this blog for merchants? I want to prevent fraud. I don’t want to accept a stolen credit card and lose my money and merchandise. As a credit card processor, don’t you want your clients to stay safe?”

To which I say, I am on your side. I want your customers (which could include me) to have a great experience at your business and I want you to stay safe and follow the rules set forth by Visa and other card issuers.

As you will note on page 30 of Rules for Visa Merchants—Card Acceptance and Chargeback Management Guidelines prepared by Visa:

“In most cases, merchants may not ask for an ID as part of their regular card acceptance procedures, either when a valid card is first presented or to complete a sale.”

By “most” they mean there are certain circumstances in which you can ask for ID, which is outlined within the guide, but normal sales do not apply.

So you may be wondering how you stay safe. Well, that’s the good news. You already are. As a retailer, your obligation is to verify the card appears valid, swipe the card, ask the customer to sign the receipt, and verify the signature on the card matches the signature on the receipt. That’s it! Congratulations—you are protected.

“But wait; what if the card isn’t signed or says See ID”, you ask? Well, for that you will either need to consult a future post or read Rules for Visa Merchants—Card Acceptance and Chargeback Management Guidelines.

In all my years as a Merchant Service Provider, this is one of the best and easiest to read guides for merchants I have ever seen. It covers all the basics including, accepting cards safely, minimum charge requirements, charging for accepting cards, handling chargebacks and retrieval requests and so much more. This is a very fast read that any owner or manager of a retail store should carefully review from cover to cover.

Hopefully you will find it as informative and helpful for your business as it was intended to be. Let me know what you think!

Add comment July 19th, 2010

Credit Card Payment Surcharges and Fees – Are you in violation?

If you charge your customers a fee to pay by credit card, you are in violation of a heavily pursued rule of Visa and MasterCard. Find out just how costly this mistake can be, and find out legal ways to recoup your processing costs.

Continue Reading 1 comment January 13th, 2009

Gift Cards and Bankruptcy: Is your gift card worthless?

With the amount of stores declaring bankruptcy, and store closings, people are becoming weary of purchasing gift cards. Should you avoid buying that gift card for your loved one this Holiday season?

Continue Reading Add comment December 4th, 2008

“Wardriving”….are you the in drivers seat of your business?

Earlier this month, the Department of Justice announced 11 people from the U.S., Estonia, Ukraine, Belarus, and China are being charged for hacking into retailers’ computers and stealing more than 41 million credit card numbers. The perpetrators supposedly drove around in their vehicles with laptops, looking for unsecured “Wi-Fi” network connections, a technique called “wardriving.” Is your business protected?

Continue Reading Add comment August 21st, 2008

What is PCI Compliance? And should it concern me?

If you are a merchant, vendor or service provider reading this information for the first time, and have not heard about PCI compliance it might be time-or past time-to question and contact your merchant service provider, acquirer or credit card issuer.

Continue Reading Add comment August 12th, 2008

Truncation- What the law says about displaying credit card numbers.

It is the merchant’s responsibility to ensure that they are in compliance with the laws of the states in which they process. Do you know your states rules on credit card truncation?

Continue Reading Add comment June 9th, 2008

Understanding Discount Rates

If you pay attention to a few of the key factors affecting costs and put measures in place to prevent them, you can save thousands of dollars in annual processing fees. Review these factors to better understand and in return save a few dollars!

Continue Reading Add comment May 29th, 2008

Retrieval Request Reason Codes

Chargeback and retrieval requests can be complicated to understand. To give you a better idea of what the reason codes really mean, and some ways to avoid receiving retrieval requests we have provided a brief description of some of the most common reason codes.

Continue Reading Add comment May 22nd, 2008

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