Ken Paxton

Monday, October 4, 2010

States, DOJ Reach Agreement with Credit Card Networks over Anti-Competitive Merchant Restraints

AUSTIN The State of Texas, six other states and the U.S. Department of Justice today resolved a lengthy antitrust investigation into the anti-steering and non-discrimination rules of MasterCard International and Visa Inc. Under a federal consent decree filed today in a New York federal court, the longstanding rules governing MasterCard and Visa’s relationship with merchants will be substantially altered.

State and federal authorities investigated whether MasterCard and Visa’s non-negotiable rules, policies, and practices known as merchant restraints insulated the defendants from competition. The consent decree prohibits the defendants from enforcing rules that prohibit merchants from encouraging customers to pay with a competing credit card or with cash, checks or debit cards. The consent decree also restricts rules that prohibit merchants from promoting a particular type of payment through customer discounts, rebates, or free goods and services.

Rules imposed by MasterCard and Visa required that banks’ contracts with merchants contain provisions that prevented vendors from discouraging the use of a Visa or MasterCard that is subject to higher interchange fees. Interchange fees which are sometimes called swipe fees’ are the prices that Visa and MasterCard’s network of issuing banks charge merchants for processing credit card sales. In 2009, Visa and MasterCard issuing banks received approximately $35 billion from swipe fees.

As a result, merchants who accepted credit cards were forced to charge all customers higher prices in order to cover the costs of accepting credit card transactions especially premium credit cards that offer benefits such as airline miles or cash-back bonuses. Sellers were effectively prohibited from informing their customers about the costs associated with using a credit card. The defendants’ unlawful rules and contracts prevented merchants from encouraging buyers to use less costly forms of payment. According to antitrust investigators, customers who used food stamps, cash, checks or debit cards ended up subsidizing credit card holders and indirectly subsidizing the entire credit card industry.

Today’s consent decree prohibits the defendants from imposing any rules or agreements that restrain merchants from encouraging customers to pay with a competing credit card or with cash, checks or debit cards. Permissible practices under today’s decree include merchants’ use of discounts, rebates, or free products or services if the consumer uses a particular type of card or form of payment.

Merchants are also expressly authorized to promote a particular type of credit card or other form of payment through posted information or other communications to customers, including communicating the cost of accepting a particular form of payment. The consent judgment dictates specific re-written language for Visa’s no-discount rule and MasterCard’s non-discrimination rule.

In addition to Visa and MasterCard, state and federal authorities also filed antitrust legal action today against American Express over its anti-discrimination rule. That litigation is ongoing as American Express did not enter into today’s consent decree.