Credit Card Suit: What the DOJ's Suit & Settlement Mean to You

Last Updated Oct 5, 2010 11:45 AM EDT

The Department of Justice announced Monday that it filed a civil antitrust lawsuit against American Express, MasterCard and Visa for engaging in hidden anti-competitive practices that may boost the cost of goods and services to consumers.

At the crux of the suit are $48 billion in so-called "interchange fees" -- a transaction fee that's triggered whenever you pay with plastic. Even though the fee is invisible to the consumer, the merchant must pay anywhere from 1.5% to 5% of the sales price to Visa, MasterCard or American Express when one of their cards are used.

Merchants have long groused that these fees have been rising rapidly in recent years as plastic has become more ubiquitous. To give a read of just how fast the fees are growing, the Justice Department said that $35 billion in fees were paid in 2009, but Retail Industry Association says the current number is $48 billion.

Meanwhile, merchants have been contractually barred from steering consumers to payment methods that are less expensive, said Brian Dodge, senior vice president with the Retail Industry Association. The cost of interchange fees are ultimately born by consumers because the interchange fees are folded into the retailers' other fixed expenses when they determine how to price their products.

It's the rules, not the fees themselves, that are the problem, said U.S. Attorney General Eric Holder, when announcing the suit.

"Visa, MasterCard and American Express don't just impose fees-- they also prevent merchants from offering consumers any cost-saving options such as discounts or rewards for using less expensive forms of payment," he said. "The companies put merchants and consumers in a no-win situation: accept our card, pay our fees, and don't even think about trying to get a discount."


Visa and MasterCard have already agreed to a settlement that will allow merchants to ignore the segment of their credit card contacts that stop them from giving customers discounts when they pay with cash or a check. American Express had not settled at press time and was not immediately available for comment.

What does the settlement mean to you?

Discounts & Prizes: Merchants may soon start offering price breaks or other incentives to those paying with cash or checks, said Dodge.

"I think every retailer is looking today at how they can operationalize this," he said. "Whether it's a cash discount, an enhanced service or a free item, the settlement gives merchants flexibility. Merchants will have many ways to encourage consumers to use a lower-cost form of payment."

Payment preferences: If you want to use a credit or debit card, your retailer may also want to steer you to using one that's less expensive for them, Dodge noted. That card may not always be the same. The reason: Merchants often get volume discounts on their interchange fees, so a merchant that sends a ton of business to Visa is likely to pay less to Visa than, say, MasterCard or American Express. Consumers wouldn't know about the volume discount in the past, but now the merchant can tell you.

What if you get rewards from the credit card company that's not preferred? You'll probably still be able to use the credit card of your choice--as long as that's a type of card that the merchant accepts. (Credit cards are not accepted everywhere.) But the merchant may only offer incentives to those paying with the preferred method.

Dueling Incentives: Credit card companies may also get more generous with consumers willing to charge large amounts, said Bill Hardekopf, chief executive of LowCards.com. Several issuers of "rewards" cards already give cash bonuses to those who charge more than a set amount in the first few months of receiving a card, Hardekopf said. He anticipates that card issuers will start creating reward "tiers" that get more lucrative the more you charge.

"I think we could see more of that," he said. "Credit card companies see bonuses and more generous rewards as a way of countering retailer incentives to use cash."

The bottom line: It may pay you to keep several methods of payment in your wallet. Then when you are about to charge it, you can ask: "Which payment method is better for you, and how might you, Mr. Merchant, make it better for me?"

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