Visa Inc. and Mastercard Inc., which appear poised to settle a multibillion-dollar antitrust lawsuit, are sitting pretty.
A Supreme Court victory for American Express Co. AXP, +1.06% earlier in the week solidified core elements of the card companies’ business models and will make it harder for merchants to challenge the networks going forward. The ruling set forth more onerous standards for retailers seeking to prove that the card companies, which run two-sided networks, are engaging in anticompetitive practices.
Now, Visa V, -0.22% Mastercard MA, -0.29% and bank issuers are reportedly on the brink of settling a merchant class-action suit from 2005 that alleged the networks and banks colluded when raising swipe and other transaction fees. A Wall Street Journal report that came out shortly following the AmEx decision said that the parties were preparing to settle the case for about $6.5 billion.
The prospect of being on the paying end of a multibillion-dollar settlement isn’t normally viewed as a positive, but for Visa Inc. and Mastercard Inc., the settlement is about more than just money. Large retailers in particular also wanted structural changes, or injunctive relief, from Mastercard and Visa, including the ability to selectively surcharge. They also wanted a relaxation of a rule that requires merchants who accept all cards from one of the issuers to treat equally all cards from that issuer.
Visa, Mastercard, and the involved banks settled with certain merchants years ago for $7.25 billion, but that agreement was vacated by the courts because there was not deemed to be enough merchant representation on the injunctive-relief portion of the settlement.
Back then, some large merchants like Amazon.com Inc. AMZN, -0.10% chose to opt out of the monetary portion of the group settlement and pursue their own litigation, and they weren’t happy with, among other things, an injunctive-relief provision that would have made it difficult for businesses to sue the networks in the future. That rule would have applied broadly, even to businesses that didn’t accept the monetary part of the agreement or were, for example, yet to even be created, according to Mizuho analyst Thomas McCrohan.
The Wall Street Journal report on the expected settlement didn’t discuss whether there would be any changes to the injunctive relief portion of the settlement. Further, assuming that the $6.5 billion settlement figure is accurate, McCrohan explained that it’s not directly comparable to the $7.25 billion number due to merchant opt outs of the original agreement.
Mastercard declined to comment on the antitrust case. Visa didn’t immediately return MarketWatch’s request for comment.
Though the details of the settlement are unknown, and it remains unclear if the parties are indeed close to an agreement, analysts in general see Mastercard and Visa as being in a strong position now that the court has made it harder for retailers to prove that the networks are stifling competition.
“The Supreme Court AmEx ruling probably dissuaded [merchants] from the notion that they had more leverage,” DA Davidson research director Gil Luria told MarketWatch. “The networks appear to have won a couple of major battles against retailers and have cemented their role in the payment ecosystem.”
Mizuho’s McCrohan thinks it’s highly unlikely that this massive deal was negotiated in the hours surrounding the AmEx decision, as it almost certainly would have required months of talks. The Supreme Court ruling is “somewhat separate” from the Journal’s litigation report, he said. However, it means that merchants “are going to have more of a hurdle to overcome” when trying to argue that card-network practices are anticompetitive.
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From a monetary perspective, the Journal reported that the involved parties still have about $5 billion sitting in escrow following the original settlement, and both Visa and Mastercard put out filings this week saying that they added to litigation escrow funds or reserves.
“We are encouraged that settlement may be moving along, and would consider a final agreement to remove a 10+ year overhang (granted the sentiment overhang has become quite small),” Baird analyst David Koning wrote Friday in a note discussing the litigation-fund filings.
Of debate is whether the sort of injunctive provisions that the merchants want make sense from a practical standpoint. Mizuho’s McCrohan notes that some states, like Texas, prohibit surcharges altogether.
In addition, Forrester analyst Brendan Miller said it would be pretty much impossible for retailers to execute different surcharges for every different credit card, even though merchants have to pay higher fees on transactions made with fancy rewards cards.
Visa and Mastercard’s settlement, if it is to occur, won’t have much of an impact on the broader payments landscape. PayPal, for example, will continue to benefit as usual from the fact that it has good relationships with the card networks, according to DA Davidson’s Luria.
Worth watching will be whether the American Express ruling has ramifications across the broader tech industry. McCrohan said that the new standard for proving anticompetitive behavior by two-sided networks could give more leverage to companies outside of payment technology that also have such networks. Amazon, for one, might be better able to fend off complaints that its fees for participating merchants are anticompetitive.
Visa and Mastercard’s stocks both fell a bit more than 2% on the week. Visa shares are up 40% over the past 12 months, while Mastercard shares have gained 62% and the S&P 500 SPX, +0.08% has risen 12%.