WASHINGTON-Costs for the historic settlement of antitrust charges against Visa, MasterCard and several big banks will ultimately be passed on to owners and beneficiaries of the two card networks, with hundreds of millions of dollars of the $7.2-billion settlement being paid by credit unions.
"Even though consumer-owned credit unions were not part of the lawsuit, the settlement announced today affects all credit unions with credit card programs," said Bill Cheney, president of CUNA in a statement. "We all know that interchange revenue enables credit unions to provide essential and cost-effective credit card services to their consumer members."
The historic deal settles civil antitrust charges originally brought in 2005 that the two card companies, which control more than 80% of the credit card market, violated the Sherman Antitrust Act by manipulating the fees they charge merchants on credit card transactions. The case does not affect debit transactions, which were the target of the Dodd-Frank Act's Durbin Amendment directing the Federal Reserve to set caps on debit interchange.
The Costs To Credit Unions
The huge antitrust deal will cost credit unions in several ways.
First, the $6 billion Visa and MasterCard agreed to pay merchants was accumulated by credit union- and bank-owned stock in the two companies that were converted to cash to create legal reserve funds in expectation of the settlement.
Second, Visa and MasterCard agreed to reduce credit card interchange fees charged merchants-fees that are passed on to bank and credit union card issuers-by $1.2 billion for eight months. Credit union experts estimated that could amount to $50 million for the credit union share.
And third, what may be the biggest yet also unknown effect, is the provision allowing merchants to encourage consumers to use cheaper forms of payment by, among other things, imposing their own surcharges on Visa and MasterCard payments.
There are major indirect costs to credit unions, too.
The processing fees paid by Visa and MasterCard to card issuers is a major source of revenue for credit unions and will be reduced significantly under this deal.
In addition, lower profits by Visa and MasterCard will mean reduced dividends paid to their stockholders, which include thousands of credit unions (Visa and MasterCard are the only two common stocks credit unions are permitted to hold).
Cannot 'Afford To Lose A Penny'
"The major affect this is going to have is on fees and we all know that credit unions cannot afford to lose a penny," Michael Moebs, an industry consultant who has studied the financial structure of thousands of credit unions and banks, told Credit Union Journal.
But Moebs, who believes the antitrust deal will benefit consumers, said the biggest financial effects will be felt by the 40 or so primary credit union Visa and MasterCard issuers, with a much lesser impact on the majority of credit unions.
Moebs said the antitrust settlement will benefit consumers by driving down pricing for card transactions and giving merchants and consumers more choices to lower their costs. "This is extremely good for consumers," said Moebs.
But just as importantly, the credit card settlement comes just six months after the Federal Reserve set new limits in interchange fees banks and credit unions can earn on debit transactions. While the Fed's rules were supposed to limit fees earned by the biggest institutions, those over $10 billion, it has put downward pressure on fees earned by all credit unions and banks, according to Bill Hampel, chief economist for CUNA.
Hampel estimated that average debit fees earned by credit unions declined by 5% to 10% for the first six months of the rule and he projected they will decline another 5% to 10% over the next six months.
Three Response Strategies
Moebs suggested three ways credit unions can cope with the new landscape on card interchange. First, he said, credit unions can try to retain major members, such as local businesses, by offering their own discounts on card transaction. Or, he said, they could move toward merchant acquiring for the member business services; that is, allowing local or regional merchants to transact their business with their credit union's checking, if they prefer that to cards. While this may drive down the pricing for transactions, credit unions may be able to capture greater volume, he said.
In addition, credit unions are going to have to continue to look at other areas where they can earn more fee revenue and reduce expenses.
How The Deal Works
Under the deal, Visa, which accounts for roughly two-thirds of the U.S. cards market, will pay $4.4 billion in cash to the merchants group, which includes six million companies, including Kroger Co., Safeway, Walgreen, RiteAid, QVC, among others, and give them a 10 basis point reduction in credit card interchange for eight months and modify its surcharge rule to allow U.S. merchants to levy checkout fees on credit cards.
MasterCard agreed to the same terms and to pay $790-million in cash.
A handful of banks that dominate the transaction volume for the two card companies will pay about $1.1 billion into the settlement, making a total of $7.25 billion. Those banks are: Bank of America, Barclays Bank, Capital One, JP Morgan Chase, HSBC, Citibank, Fifth Third Bancorp, SunTrust, National City Corp., Wells Fargo and several others.