Titanic Struggle Over Consumer Protection and Market Dominance

It appears that payment stakeholders in the US and UK are seeking to pass laws and take legal action to address a perceived lack of competition in the digital payment arena. In the last few weeks, there have been a series of reports detailing legislative, regulatory and court developments in this area.

US payments face pressure on three fronts

Visa and Mastercard have been involved in a long standing legal action where it was claimed that US consumers who withdrew cash from bank-operated ATMs since 2007 paid artificially higher amounts in access fees.

In April, the US Supreme Court rejected the card companies’ appeal challenging a lower court’s ruling. Now, according to court documents, Visa has agreed to pay $104.6 million to settle, and Mastercard $92.8 million. There are 175 million members of the class, so after the lawyers are paid, people may not receive that much money. The deal still requires court approval.

In 2021, three banks – Bank of America, JPMorgan Chase, and Wells Fargo – settled claims for $66 million.

It is not clear what impact the settlement will have. The plaintiffs’ attorneys said the settlement would ‘deliver immediate and assured relief’, suggesting ATM fees might be rolled back or future increases might be limited.

Two other related class actions, one from consumers who used non-bank ATMs and a third from businesses that own independent ATMs, are pending in Washington DC’s federal court.

US card schemes respond to regulatory pressure

US Banks are faced with new rules from the Consumer Financial Protection Bureau (CFPB) that aim to cap credit card late fees at $8, down from the current $32, and the Federal Reserve’s updated Regulation II proposal to cap debit card interchange fees. The Federal Reserve wants to lower transaction fees from 21 cents to 14.4 cents.

Banking trade groups have written a joint letter to the Federal Reserve arguing this plan would hurt both consumers and the industry. They claim that businesses would have to charge more for basic deposit accounts and the cut in income would reduce their ability to invest in payment innovation. After Regulation II was proposed, the percentage of banks offering free checking accounts fell from 60% to 20%. They also claim that costs were calculated based on the costs of high volume issuers, who only account for a third of issuers, ignoring smaller banks and credit unions.

Others point out that the Federal Reserve’s proposal focuses on a base rate, which doesn’t necessarily translate to lower overall fees for merchants. Acquiring banks, the institutions that process debit card transactions, often add markups on top of the base rate, potentially negating any benefit from the Federal Reserve’s proposal.

The CFPB’s plans have been blocked after the US Chamber of Commerce alleged the restrictions violated several federal statutes. The new rules were meant to come in to force on 14 May and were estimated to save $220 per year for over 45 million consumers who pay late fees. A full hearing will now be scheduled to argue the case in more detail.

One part of the background to these activities is the 2010 Durbin Amendment that capped swipe fees, often referred to as interchange fees, for banks with less than $10 billion in assets. However, a proposed ‘Bank Resilience and Regulatory Improvement Act’ wants to increase the asset threshold to $50 billion, which would exempt many banks from the Durbin Amendment. Those in favour of the bill say it will allow smaller and regional banks to compete more effectively with their larger counterparts.

In addition to increasing fees for merchants, it could also disincentivise the use of debit cards, which are widely used by low-income groups. But would a rise in swipe fees lead consumers to seek out alternative payment methods?

UK regulator steps back

In its interim report on the UK’s card schemes and processing of payments, the UK’s Payment System Regulator (PSR) has decided not to impose financial penalties on Visa and Mastercard’s scheme and processing fees, despite concluding that there is ‘no effective competition preventing the two biggest schemes raising prices’ and that the supply of services to merchants is ‘not working well’.

Mastercard and Visa were found to have increased their scheme and processing fees by 30% over the last five years in real terms without improving the quality of service. This takes into account volume changes.

Visa and Mastercard provide transactions for 95% of UK-issued cards, which means UK businesses have no real alternative but to use them. It also effectively means that they can’t negotiate fees. Visa and Mastercard provide complicated and unclear pricing statements to card acquirers, who cannot access information about fees in an easy way and face frequent delays and insufficient notice periods from the companies in relation to fee changes.

Despite concluding that the market is not working well, PSR is only looking to address the lack of cost transparency and to ensure acquirers and businesses have clearer information about the services provided, but nothing more. PSR seems to be relying on open banking to allow alternatives such as account-to-account payments to bypass Visa and Mastercard. It has opened a consultation process, which closes 30 July 2024, with a final report due in the last quarter of 2024.

Mastercard and Visa deny price-gouging, justifying their price increases as necessary to fund significant investments in their networks, particularly to address operational resilience and fraud.

A parallel PSR investigation of interchange fees in 2023 called for the reintroduction of a cap on interchange cross-border transaction charges, which was scrapped after the UK left the EU.

UK interchange fee legal action moves forward

London’s Competition Appeal Tribunal has allowed revised applications to proceed for a lawsuit against the interchange fees charged by Visa and Mastercard in the UK. The case is being brought by merchants over the multilateral interchange fees they are charged, with £7.5 billion in compensation possibly at stake.

The Competition Appeal Tribunal ruled in favour of certifying a set of four collective actions brought by proposed class representatives (Commercial and Interregional Card Claims I and II Limited (‘CICC I’ and ‘CICC II’) against Mastercard and Visa. These claims can now be brought along with individual merchant claims within the ‘Umbrella Proceedings’ and Merricks consumer collective action.

In April 2023, the card schemes had persuaded the Tribunal not to certify the claims. The Tribunal had had two key concerns about the original applications: 

  • Some merchants on so-called ‘blended rates’ would be unable to find out if they had accepted a commercial card transaction, and so paid a corresponding multilateral interchange fee
  • Whether the applicants had provided adequate methodology to establish a blueprint to trial.

The CICC claims were then revised and both concerns are now satisfied.