Costs of Cashless Transactions Raise Conflicts Between Franchises, Card Issuers, Banks

For merchants of all types, accepting credit card and debit card payments is almost a requirement of doing business in today's increasingly “cashless” economy. However, as the numbers of these transactions have increased, the costs that merchants must absorb on those payments have become a serious issue.

Two major lawsuits ' one possibly reaching settlement ' highlight the importance that merchants place on reining in those fees. The fees can cut significantly into margins for quick-serve restaurants, convenience stores, and many other franchises that complete large numbers of small transactions. As a result, franchisors and franchisees are on the same side of the table in opposition to some of the largest financial institutions in the United States. Yet, as developments indicate, nothing is settled at this time, and even the proposed solutions are controversial.

Credit Card Interchange Fees

On July 13, Visa, MasterCard, and several large U.S. banks announced proposed settlement terms in a huge class action lawsuit about the “interchange” or “swipe” fee payments charged to merchants when they accept credit card payments. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05- MD-1720 (JG) (JO) (E.D.N.Y. Aug. 27, 2010). However, several of the 19 plaintiffs in the class action lawsuit, which represents more than seven million retailers, quickly responded that they will not accept the terms.

According to Alan R. Greenfield, shareholder with Greenberg Traurig LLP, the settlement would end a lawsuit that began in 2005, when several retailers filed a class action complaint alleging that credit card issuers and banks “fixed” credit card swipe fees paid by retailers for consumer purchases. Visa and MasterCard set the rate schedule, but retailers pay the fees on each transaction, based on the agreement between the card company and the bank issuing the credit card.

The settlement proposes payment of $6.05 billion and reduced fees of $1.2 billion to retailers, and it would be one of the largest antitrust and class action settlements ever. “If certain conditions are met and the settlement is approved by the U.S. District Court for the Eastern District of New York, the effects of the settlement could prove to be far-reaching for both retailers, including franchisees and other small-business owners, and consumers alike,” said Greenfield.

One of the key aspects of the settlement would be that, for the first time, retailers could add a surcharge to Visa and MasterCard credit card transactions. “Retailers could assess the charge at either the 'Brand Level' (the same surcharge to all Visa or MasterCard credit card transactions, regardless of the card's issuer or product type) or the 'Product Level' (the same surcharge to all Visa or MasterCard credit card transactions of the same product type, e.g., Visa Classic Card or Visa Signature Card, regardless of the card's issuer) ' but not at both levels,” said Jenine Hinkle, attorney at Greenberg Traurig.

Some franchisors might decide not to impose a surcharge even if they can, said Victor D. Vital, shareholder at Greenberg Traurig. “Franchisors should take into account both how many customer purchases are made with credit cards and whether their franchisees would be negatively affected by implementing a surcharge,” he said. “For some franchise systems, such as hotels, which rely heavily on credit cards, the decision on whether to permit franchisees to implement a surcharge may be different than with other franchise systems, such as quick service restaurants, which rely on credit cards as a payment method merely for customer convenience.”

Greenfield cited a recent study by Morgan Stanley in which 43% of respondents said they would consider using cash or a debit card if a credit card surcharge was imposed at the retail level. “Franchises are aware of customer resistance to fees, so they are taking a wait-and-see attitude about the settlement,” said Greenfield. “Some of our clients say they will add a surcharge, but others say they won't.”

The settlement agreement describes in general terms the disclosure requirements for imposing a surcharge, including:

1. Notifying the credit card companies of their intent to surcharge at the brand or product level at least 30 days in advance;
2. Posting a clear disclosure notice of the surcharge for consumers at the store entry;
3. Posting a clear disclosure notice at the point of sale that includes specific information in a manner that does not “disparage the brand, network, issuing bank, or the payment card product being used”; and
4. Clearly disclosing the dollar amount of the surcharge on the transaction receipt provided to the consumer.

However, disclosure is only one of several complicated operational issues that will have to be solved by franchises that wish to add a surcharge. Others include developing appropriate disclosure language and exempting franchises in the 10 states that prohibit them (see “Implementing Surcharge Rules,” below).

While the settlement has been praised by the Electronic Payments Coalition, which represents credit card issuers, banks and credit unions, several of the 19 original retailer plaintiffs have voiced opposition. Within days of the announced proposed settlement, the National Grocers Association, the National Cooperative Grocers Association and the National Community Pharmacists Association rejected the proposal.

Another plaintiff, the National Association of Convenience Stores (“NACS”), actually left the settlement talks a few days before the proposal was announced, and it has perhaps been the most vocal opponent of the settlement. “The proposed settlement doesn't change anything on a permanent basis about how swipe fees are charged,” said Jeff Lenard, vice president of industry advocacy for NACS. “It's a one-time payment of about $7.25 billion, which, to put it in perspective, is a little less than two months of fees that are collected from merchants. And there's an eight-month reduction of 10 basis points (0.1 cent). That's it.”

Lenard said that the settlement as drafted “would only benefit the credit card companies. They could even raise fees after eight months and, essentially, have retailers pay for the settlement over time.” NACS also opposes a provision in the settlement that would not only prohibit litigants from suing about swipe fees again but also would prohibit lawsuits from retailers that do not yet exist.

To resolve the dispute, retailers are seeking a system with greater “transparency and competition,” said Lenard. The lack of transparency means that retailers do not know what the swipe fee charge will be on a particular card until after a transaction. The lack of competition means that the fee schedule set by Visa or MasterCard is presented to banks on a take-it-or-leave-it basis, so banks cannot negotiate with the credit card companies for lower fees.

Counsel have until Oct. 19 to submit the settlement proposal to the court. In a court conference on Aug. 9, EPC's counsel reportedly said that it is not planning to submit revisions to the announced proposal. So it is unclear what the court will do with a proposal that has at least a few plaintiffs rejecting it.

Lawsuit Arises Against Debit Swipe Fee Regulations

Meanwhile, a different lawsuit is making its way through the courts about swipe fees for debit cards. A law went into effect on Oct. 1, 2011 to set a cap for debit card swipe fees, but several associations and individual companies filed suit in November in the U.S. District Court in Washington, DC, saying that the Federal Reserve failed to follow key requirements of the Consumer Protection Act of 2010 when it set the fees, thus resulting in much higher fees than can be justified by the incremental expense of each transaction to banks and credit card issuers. The lawsuit is NACS, National Retail Federation, Food Marketing Institute, Miller Oil Co., Boscov's Department Store, LLC, and the National Restaurant Association v. Board of Governors of the Federal Reserve System.

About two months ago, a coalition of franchised quick-serve restaurants (“QSR”) and convenience stores joined the lawsuit. A brief filed by CKE Restaurants, Inc. (parent of Carl's Jr. and Hardee's), 7-Eleven, Inc., Auntie Anne's, Inc., Burger King Corporation, International Dairy Queen, Inc., Jack in the Box Inc., Starbucks Corporation and The Wendy's Company was accepted by the court in June 2012. The brief specifically cites the challenges that stores which typically handle transactions of $15 or less face with the new debit card swipe fees.

Under the new regulations, credit card companies are allowed to charge as much as 22 cents plus 0.05% of the transaction (includes 1 cent for fraud prevention). However, NACS pointed out that the Fed's initially proposed regulations said that fees would be capped at 7 to 12 cents per transaction, based on a finding that the cost of the transactions to card issuers were about 4 cents. “We have serious questions as to how the final rules came out at more than double the proposed rate,” said Lenard of NACS.

Since the final rules went into effect, members of the National Retail Federation (“NRF”) have found that card issuers are taking advantage of the new fee structure, according to J. Craig Shearman, NRF's vice president for government affairs public relations. NRF surveys indicate that card issuers have been charging the maximum amount allowed by law, even on small-ticket transactions that had formerly been processed for 6 to 8 cents when they were charged as a percentage of the transaction under the old system. With the cap on the maximum fee, card issuers say they need higher charges on small-ticket transactions to make up the difference.

Among the briefs submitted in the lawsuit is one from U.S. Sen. Dick Durbin (D-Ill.), who is so closely associated with the section of the Dodd-Frank Act that resulted in the new debit card swipe fee rules that the section of the law is known as “the Durbin Amendment.” In his brief, he wrote, “Senator Durbin agrees with the position of the Plaintiffs that the Final Rule issued by the Board is not in accordance with the plain text and intent of the Durbin Amendment in a number of crucial respects and that the Rule must be revised to comply with the law.”

Both parties have filed briefs and motions for summary judgment.

Kevin Adler is associate editor of FBLA.

For merchants of all types, accepting credit card and debit card payments is almost a requirement of doing business in today's increasingly “cashless” economy. However, as the numbers of these transactions have increased, the costs that merchants must absorb on those payments have become a serious issue.

Two major lawsuits ' one possibly reaching settlement ' highlight the importance that merchants place on reining in those fees. The fees can cut significantly into margins for quick-serve restaurants, convenience stores, and many other franchises that complete large numbers of small transactions. As a result, franchisors and franchisees are on the same side of the table in opposition to some of the largest financial institutions in the United States. Yet, as developments indicate, nothing is settled at this time, and even the proposed solutions are controversial.

Credit Card Interchange Fees

On July 13, Visa, MasterCard, and several large U.S. banks announced proposed settlement terms in a huge class action lawsuit about the “interchange” or “swipe” fee payments charged to merchants when they accept credit card payments. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05- MD-1720 (JG) (JO) (E.D.N.Y. Aug. 27, 2010). However, several of the 19 plaintiffs in the class action lawsuit, which represents more than seven million retailers, quickly responded that they will not accept the terms.

According to Alan R. Greenfield, shareholder with Greenberg Traurig LLP, the settlement would end a lawsuit that began in 2005, when several retailers filed a class action complaint alleging that credit card issuers and banks “fixed” credit card swipe fees paid by retailers for consumer purchases. Visa and MasterCard set the rate schedule, but retailers pay the fees on each transaction, based on the agreement between the card company and the bank issuing the credit card.

The settlement proposes payment of $6.05 billion and reduced fees of $1.2 billion to retailers, and it would be one of the largest antitrust and class action settlements ever. “If certain conditions are met and the settlement is approved by the U.S. District Court for the Eastern District of New York, the effects of the settlement could prove to be far-reaching for both retailers, including franchisees and other small-business owners, and consumers alike,” said Greenfield.

One of the key aspects of the settlement would be that, for the first time, retailers could add a surcharge to Visa and MasterCard credit card transactions. “Retailers could assess the charge at either the 'Brand Level' (the same surcharge to all Visa or MasterCard credit card transactions, regardless of the card's issuer or product type) or the 'Product Level' (the same surcharge to all Visa or MasterCard credit card transactions of the same product type, e.g., Visa Classic Card or Visa Signature Card, regardless of the card's issuer) ' but not at both levels,” said Jenine Hinkle, attorney at Greenberg Traurig.

Some franchisors might decide not to impose a surcharge even if they can, said Victor D. Vital, shareholder at Greenberg Traurig. “Franchisors should take into account both how many customer purchases are made with credit cards and whether their franchisees would be negatively affected by implementing a surcharge,” he said. “For some franchise systems, such as hotels, which rely heavily on credit cards, the decision on whether to permit franchisees to implement a surcharge may be different than with other franchise systems, such as quick service restaurants, which rely on credit cards as a payment method merely for customer convenience.”

Greenfield cited a recent study by Morgan Stanley in which 43% of respondents said they would consider using cash or a debit card if a credit card surcharge was imposed at the retail level. “Franchises are aware of customer resistance to fees, so they are taking a wait-and-see attitude about the settlement,” said Greenfield. “Some of our clients say they will add a surcharge, but others say they won't.”

The settlement agreement describes in general terms the disclosure requirements for imposing a surcharge, including:

1. Notifying the credit card companies of their intent to surcharge at the brand or product level at least 30 days in advance;
2. Posting a clear disclosure notice of the surcharge for consumers at the store entry;
3. Posting a clear disclosure notice at the point of sale that includes specific information in a manner that does not “disparage the brand, network, issuing bank, or the payment card product being used”; and
4. Clearly disclosing the dollar amount of the surcharge on the transaction receipt provided to the consumer.

However, disclosure is only one of several complicated operational issues that will have to be solved by franchises that wish to add a surcharge. Others include developing appropriate disclosure language and exempting franchises in the 10 states that prohibit them (see “Implementing Surcharge Rules,” below).

While the settlement has been praised by the Electronic Payments Coalition, which represents credit card issuers, banks and credit unions, several of the 19 original retailer plaintiffs have voiced opposition. Within days of the announced proposed settlement, the National Grocers Association, the National Cooperative Grocers Association and the National Community Pharmacists Association rejected the proposal.

Another plaintiff, the National Association of Convenience Stores (“NACS”), actually left the settlement talks a few days before the proposal was announced, and it has perhaps been the most vocal opponent of the settlement. “The proposed settlement doesn't change anything on a permanent basis about how swipe fees are charged,” said Jeff Lenard, vice president of industry advocacy for NACS. “It's a one-time payment of about $7.25 billion, which, to put it in perspective, is a little less than two months of fees that are collected from merchants. And there's an eight-month reduction of 10 basis points (0.1 cent). That's it.”

Lenard said that the settlement as drafted “would only benefit the credit card companies. They could even raise fees after eight months and, essentially, have retailers pay for the settlement over time.” NACS also opposes a provision in the settlement that would not only prohibit litigants from suing about swipe fees again but also would prohibit lawsuits from retailers that do not yet exist.

To resolve the dispute, retailers are seeking a system with greater “transparency and competition,” said Lenard. The lack of transparency means that retailers do not know what the swipe fee charge will be on a particular card until after a transaction. The lack of competition means that the fee schedule set by Visa or MasterCard is presented to banks on a take-it-or-leave-it basis, so banks cannot negotiate with the credit card companies for lower fees.

Counsel have until Oct. 19 to submit the settlement proposal to the court. In a court conference on Aug. 9, EPC's counsel reportedly said that it is not planning to submit revisions to the announced proposal. So it is unclear what the court will do with a proposal that has at least a few plaintiffs rejecting it.

Lawsuit Arises Against Debit Swipe Fee Regulations

Meanwhile, a different lawsuit is making its way through the courts about swipe fees for debit cards. A law went into effect on Oct. 1, 2011 to set a cap for debit card swipe fees, but several associations and individual companies filed suit in November in the U.S. District Court in Washington, DC, saying that the Federal Reserve failed to follow key requirements of the Consumer Protection Act of 2010 when it set the fees, thus resulting in much higher fees than can be justified by the incremental expense of each transaction to banks and credit card issuers. The lawsuit is NACS, National Retail Federation, Food Marketing Institute, Miller Oil Co., Boscov's Department Store, LLC, and the National Restaurant Association v. Board of Governors of the Federal Reserve System.

About two months ago, a coalition of franchised quick-serve restaurants (“QSR”) and convenience stores joined the lawsuit. A brief filed by CKE Restaurants, Inc. (parent of Carl's Jr. and Hardee's), 7-Eleven, Inc., Auntie Anne's, Inc., Burger King Corporation, International Dairy Queen, Inc., Jack in the Box Inc., Starbucks Corporation and The Wendy's Company was accepted by the court in June 2012. The brief specifically cites the challenges that stores which typically handle transactions of $15 or less face with the new debit card swipe fees.

Under the new regulations, credit card companies are allowed to charge as much as 22 cents plus 0.05% of the transaction (includes 1 cent for fraud prevention). However, NACS pointed out that the Fed's initially proposed regulations said that fees would be capped at 7 to 12 cents per transaction, based on a finding that the cost of the transactions to card issuers were about 4 cents. “We have serious questions as to how the final rules came out at more than double the proposed rate,” said Lenard of NACS.

Since the final rules went into effect, members of the National Retail Federation (“NRF”) have found that card issuers are taking advantage of the new fee structure, according to J. Craig Shearman, NRF's vice president for government affairs public relations. NRF surveys indicate that card issuers have been charging the maximum amount allowed by law, even on small-ticket transactions that had formerly been processed for 6 to 8 cents when they were charged as a percentage of the transaction under the old system. With the cap on the maximum fee, card issuers say they need higher charges on small-ticket transactions to make up the difference.

Among the briefs submitted in the lawsuit is one from U.S. Sen. Dick Durbin (D-Ill.), who is so closely associated with the section of the Dodd-Frank Act that resulted in the new debit card swipe fee rules that the section of the law is known as “the Durbin Amendment.” In his brief, he wrote, “Senator Durbin agrees with the position of the Plaintiffs that the Final Rule issued by the Board is not in accordance with the plain text and intent of the Durbin Amendment in a number of crucial respects and that the Rule must be revised to comply with the law.”

Both parties have filed briefs and motions for summary judgment.

Kevin Adler is associate editor of FBLA.