Industry Insiders Testify in Swipe Fee Showdown

BROOKLYN, N.Y. -- A proposed $7.25-billion settlement that would bring an end to an eight-year class-action suit over swipe fees does not go far enough to reform what retailers consider a broken system, according to industry insiders.

In the Eastern District of New York in Brooklyn, Hank Armour, president and CEO of NACS, the Association for Convenience & Fuel Retailing, testified today before U.S. District Judge John Gleeson. NACS, along with 25 percent of retailers, has opted out of the proposed settlement.

A fairness hearing on the swipe fee deal, over which Gleeson is presiding, began today. The judge could take 30 to 120 days to make his decision on whether to grant final approval.

"From the beginning of this litigation, our principal concern has been to obtain meaningful reforms of the credit card market to restrain the undue market power being used to set fees," Armour said. "Anti-competitive practices have resulted in our industry paying more in card fees than it makes in pretax profits every year since 2006. The vast majority of our industry is made up of small businesses. In fact, 60 percent are single-store operators. Because our industry pays such huge fees -- $11.2 billion in 2012 -- NACS has had thousands of conversations with our members about interchange fees and discussed the problems and potential solutions in depth."

The settlement, unfortunately, ignores the views of NACS, the majority of named plaintiffs and other merchants including NACS' 30-member board of directors made up of small and large retailers from around the country, he added. "We raised our concerns early and often, and we have now been joined by merchants far and wide."

Armour said the primary rules relief in the settlement, surcharging, is "completely unworkable" because of the negative consumer reactions to it, state laws that prohibit it, and the level-the-playing-field provisions.

"Most telling is the fact that since February when retailers have had the ability to surcharge under the settlement, there has been virtually no movement in that direction. That is compelling evidence that the ability to surcharge has no value to the class," Armour said.

In addition, he told Gleeson the proposal has the potential to make things worse by giving Visa Inc., MasterCard Inc. and other financial institutions a broad release of claims for future bad conduct.

"This settlement is worse than losing at trial," he said. "Losing would not bar the courthouse door to merchant challenges to future unfair card industry practices, including current bad practices being applied to new technologies like mobile payments. The settlement provides nothing of any real value beyond the money. And the scope of the release will allow the defendants to raise rates and recoup the money before it is even distributed to merchants, which is precisely what happened in the Visa check case."

The National Retail Federation (NRF) also appeared in court to ask Gleeson to either "right or reject" the proposed settlement, saying the measure needs to be rewritten to do more to bring the soaring fees under control and that retailers who don't support it should be allowed to completely opt out.

NRF attorney Andrew Celli argued that retailers should be given the ability to fully opt out of the settlement. He also said the judge should give K. Craig Wildfang, counsel for the lead plaintiffs, "invigorated and empowered" leverage to redraft the settlement and "make the deal fair" or reject it entirely if that cannot be accomplished.

"As it stands, the settlement rewards the perpetrators and traps the victims," Celli said. "But it is not hopeless. It can be made fair. You have the power to make it so."