Visa’s $7.2 Billion Credit Card Bill Comes Due

A local firm takes on the major credit banks and wins big.

Imagine if your bank charged you more than 3 percent of your weekly salary to process your paycheck. For those with poor math skills, that’s an annual bill of $1,800 for a family making $60,000 a year. That’s the situation that small business owner Marilyn Landis—along with every other U.S. small business owner—found herself in because she had to use Visa and MasterCard to remain competitive. According to the Associated Press, Landis’ business was charged 3.75 percent every time a customer paid with a credit card. Landis could have saved a lot of money had her customers used debit cards instead, but she was forbidden by the contract she signed with Visa/MasterCard to even suggest the alternative to customers. And if she wanted to charge back the credit card fee to the customer? Forbidden.

Riding to the rescue was the Minneapolis-based law firm of Robins Kaplan Miller & Ciresi, a firm with a long history of taking on impossible cases against too-big-to-fail opponents; in 1996, Robins took on and won the first successful lawsuit in U.S. history against the tobacco companies.

In 2005, they decided to take on the world’s largest financial institutions, in partnership with small and large retailers, including Walgreens, Safeway, and many mom-and-pop corner stores. The suit accused the banks that owned Visa and MasterCard at the time of conspiring to fix the charges assessed to businesses by the credit cards. “The documents made it completely clear that Visa and MasterCard were operated for decades as a way to maximize profits of the banks that owned them, rather than the profits of the [credit card] entities,” says Craig Wildfang, who lead the charge for Robins.

That changed because of the lawsuit. “The banks were just panic-stricken,” he says. “The big banks were terribly fearful that their liability exposure would be so great if they continued to operate as joint ventures. So they divested ownership, and that was the remedy we would have sought in a trial. This led to a complete transformation of the marketplace.”

After seven years, the settlement agreed to by the credit card companies went far beyond their ownership restructuring. In what is viewed as the largest antitrust case ever litigated, Visa and MasterCard agreed to pay more than $6 billion to retail establishments for past damages. They agreed to an eight-month discount of 1 percent on the transaction or “swipe” fees to participating retailers, worth about $1.5 billion; and they agreed that retailers should have the option of charging the swipe fee back to their customers. Retailers are no longer forbidden from suggesting that customers use a debit card. The Robins Kaplan effort was helped by the U.S. Department of Justice, which filed a similar suit of its own, almost completely based on the information provided to them by Robins.

Retailers seem to be generally happy with the deal. Home Depot told the Wall Street Journal that “any relief as it pertains to these fees will give the Home Depot the ability to reduce our cost of doing business. Such benefits are likely to include lower prices and investment in the business to better serve customers.”

But not everyone is happy with the suit’s outcome. Both Target and Walmart have announced that they intend to oppose the settlement. Target says it thinks the settlement would “perpetuate a broken system, restrict retailers from any future legal action, and offer no long-term relief for retailers or consumers.” Walmart issued a statement saying, “As Walmart continues to seek reform that will provide transparency and true competition among financial institutions, we encourage all merchants to put consumers first and reject the settlement.”

The credit card companies expressed their deepest sympathies for the consumers (with no regard for the drastic effects the legislation has had on their business, no doubt). “We continue to have concerns that the ultimate outcome of this legislation would be the passing of merchant acceptance costs to consumers at a time when Americans can least afford it,” Noah Hanft, general counsel at MasterCard, told the Wall Street Journal.

With some of the nation’s biggest retailers lining up against the settlement, is the deal unraveling?

“No,” Wildfang says. “We really got almost everything we could have gotten if we had a trial. To people who express dissatisfaction, we say it’s a settlement and nobody gets everything they want. To those who complain that the swipe fees are still set by Visa, there’s no ability of a judge to tell an individual what to charge. All a judge can do is to remove the impediments to competition, and that’s what we’ve done.” And as to Walmart’s complaints that the settlement doesn’t allow them to sue Visa, Wildfang says that’s a campaign of misinformation. “They can’t bring the same case we brought and get different relief,” he says. “But if in the future Visa/MasterCard engage in new anticompetitive conduct, they can bring a case if they want.”