On July 14^th, payment network operators VISA and MasterCard announced that they had agreed to pay over $6B to settle a complaint dating back to 2005, when several large retailers, including grocers Kroger, Safeway and drugstore giant Walgreen, filed price-fixing lawsuits against the two large card networks (American Express and Discover were not included). The complaints relate to alleged price-fixing by the two networks for credit card fees (not debit).

On the surface, the settlement deal looks like a “win ” for retailers. After all, $6+B is a lot of money. Additionally, there will be an 8-month discount of 0.1% on the transaction fees for retailers who accept the settlement. Finally, merchants gain the “right ” to charge customers directly for credit card transaction fees (they have been contractually prevented from doing so up until now).

Faint Praise Indeed

But the proposed settlement doesn’t sit well with Target and the National Association of Convenience Stores (NACS) industry group- and the list of dissatisfied retailers is expected to grow. What do they find objectionable? First and foremost, the settlement doesn’t fundamentally fix what they consider to be a “broken ” system. The lack of transparency in how the current system establishes fees goes unchallenged, and the credit card networks can continue to raise “swipe ” fees without any limitation. The lack of transparency will stifle competition for the business, according to the NACS and Target. Beyond that, the settlement restricts retailers’ ability to take legal action against the card networks in the future; because there is no new transparency in the process and no limit on future increases, the retailers are concerned that the deal invites the card networks to simply increase their fees to recover the settlement dollars and to play on as if nothing had happened. Said NACS Chairman Tom Robinson, “Visa and MasterCard will continue to separately price-fix fees for thousands of their bank members. This means that banks won’t have to set their own prices and compete like other businesses throughout the U.S. economy. And Visa and MasterCard can continue to police how merchants price their products and stop them from showing consumers the cost consequences of using different credit cards… “.

What about the 8-month discount on the transaction fees? “The money is significant but money is only temporary- it’s here today and spent tomorrow, ” says Mallory Duncan, general counsel to the National Retail Federation, in a statement. And those $6+B settlement dollars? “A mirage “, according to Robinson: “Merchants won’t get these funds for years and will have paid more than that through increased swipe fees long before they see those funds. “

Beyond those concerns, the agreement apparently will allow Visa and MasterCard to continue to require that merchants accept all of their credit cards no matter how expensive they make those cards. But it’s unlikely that too many retailers will pass fees, whatever they are, on to customers. Although the settlement opens up that possibility, strict rules about how much retailers can up-charge consumers are specified, and retailers will be required to explain to consumers exactly what the fees are for. According to the settlement:

• Merchants are only allowed to assess a fee that is equivalent to what they pay to accept credit cards – which in the U.S. is typically between 1.5%-3%.
  
• Consumers can only be charged checkout fees for credit card usage. Merchants cannot charge customers for the use of their debit card.
  
• Merchants must provide “clear disclosure ” of any checkout fees at their store entry and at the point of sale or on their first page if it is an online environment.
  
• The disclosure must list the amount of the surcharge, that the charge is being imposed by the merchant, and that the surcharge is not greater than the costs merchants pay to accept cards.
• Merchants must provide “clear disclosure ” of the dollar amount of the checkout fee on the transaction receipt.

Even if retailers aren’t concerned about the customer-satisfaction problems such fees would create, 10 states in the U.S. now disallow them anyway (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas) – and it turns out that many of those states represent a huge chunk of U.S. retail business.

Winning the Battle But Losing the War?

Who the real winners are in this settlement is unclear, based on the reaction a week after the announcement. According to the card processing group called the Electronic Payment Coalition, “The recent interchange settlement agreement capped years of significant gains for retailers, which — collectively — have given them dramatically more power over their acceptance costs. ” But according to a Target statement, “the proposed interchange fee settlement is bad for both retailers and consumers “, i.e. the card processors are the winners.

I called long-time friend and retiring ARTS (Association for Retail Technology Standards) director Richard Mader about the settlement last week. Richard has been instrumental in defining electronic payment handling standards at POS, and has been a leader in shining a light on the standards required to make next-generation mobile payments workable in the retail industry. The question I put to him was, “will this push either retailers or consumers away from electronic payments? And if so, will that delay the acceptance of mobile payment options? “

Mr. Mader’s answer: “not really. People are moving to payment alternatives – PayPal and Google are out there now, and we still don’t know what Apple will do. But what is working even without those technologies is something like the Starbuck’s card. Starbucks is a debit system – you put money in and then spend it a cup at a time. Starbucks launched their system in January 2011. By April 2012, the company reported a total of 42M transactions, 16M that were paid for using the Starbucks card. A lot of people are going in that direction. “

But that opinion flies in the face of the conventional wisdom. For example, in a 2011 executive summary of the state of card payments, the giant payment processor First Data smugly stated that, “Credit is back … for good. Consumers fled credit cards during the Great Recession, but recent evidence indicates that consumers are now returning to credit usage. First Data Advisors believes that this return to credit is a permanent shift back towards greater credit usage… “.

But that was before the settlement. As the First Data report says, “a cash-conscious creature that emerged from the Great Recession. ” RSR has certainly seen it in its data related to pricing. Consumers are watching every penny, and whether its perceived as the retailers recovering their cost of accepting a credit card or not, consumers aren’t likely to be happy about an upcharge – a “tax ” – levied for the privilege of using a credit card. That, and the rise of Millenials into the work-force (according to Pew Research, millennials – or “digital natives ” as some call them – now make up about 37% of the workforce), seem to dictate a diminishment of credit in the future – and as noted by VISA itself in 2010, millenials are “avid debit card users “.

So it may be (as Target says) that the big card networks have “won ” this battle, but in so doing have shot themselves and downstream issuing banks in the foot (in terms of profitability, since credit card fees make up a big part of that).

But the last word goes to the consumer. And according to ARTS’ Mader, that means a one-two punch to conventional wisdom: “debit ” and “mobile “. “People will go mobile – the mobile revolution is consumer-led “.