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NEW YORK -- The National Association of Convenience Stores (NACS) was one of four major merchant associations that on Friday filed an antitrust, class-action lawsuit alleging that Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, J.P. Morgan, Chase, Fleet Bank, Capital One, and other banks are engaging in collusive practices by setting credit-card interchange fees at supracompetitive levels. The suit was filed in the U.S. District Court for the Eastern District of New York by Robins, Kaplan, Miller & Ciresi LLP.
NACS and the other plaintiffs -- the National Association of Chain Drug Stores (NACDS), the National Community Pharmacists Association (NCPA) and the National Cooperative Grocers Association (NCGA) -- represent hundreds of thousands of drugstores, convenience stores and food stores across the United States that accept Visa and MasterCard as a form of payment. In addition, the case, as a class action lawsuit, represents millions of card-accepting retailers in the United States.
Interchange is the largest component of credit-card fees and has a significant impact on American consumers, who are affected by interchange rates that are among the highest in the world. These rates cost the average American household approximately $232 a year in 2004.
When consumers purchase goods or services with a credit card, the payment is processed through the merchant’s bank and the bank that issued the consumer the credit card. The issuing bank charges the merchant’s bank a fee to process the transaction. The merchant’s bank then adds its own fee for processing the transaction, and passes on both of these fees, collectively known as interchange, to the merchant.
"The credit-card interchange system serves as a hidden tax, both on merchants and consumers, and raises the costs of all products regardless of the form of tender," said NACS CEO Hank Armour. "And these credit-card interchange fees have rapidly increased over the past several years, despite efforts by individual convenience stores to control these costs or make the competitive market work."
Interchange fees are meant to cover the cost of processing a credit-card transaction and the risk taken by the issuing bank that the credit will not be repaid. However, NACS and the other the plaintiffs say that both fraud costs and the cost of processing are steadily decreasing, while U.S. interchange rates continue to increase. Interchange fees are substantially higher in the United States than almost any other industrialized country. Other countries have taken action to address the market problem created by these monopolies. Recent changes in Australia and countries in Europe, for example, have decreased rates from about 0.95 percent to about 0.55 percent.
"Credit-card interchange fees are the third-largest expense for many chain drugstores after rent and the cost of labor," said NACDS CEO Craig Fuller. "These costs have skyrocketed over the past years even though the costs of credit card transactions for the banks have fallen. NACDS weighed many options in dealing with this issue and decided to seek litigation only after careful deliberations, with the ultimate recognition that it was necessary for the long-term reform of the system."
The suit’s plaintiffs added they would seek damages and injunctive relief to stop the alleged anticompetitive practices of banks and credit-card companies.
"We are not seeking some form of temporary relief; we are looking for long-term reform of the credit-card interchange fee system," said John Rector, NCPA general counsel. "The current system discriminates against small, independent businesspersons, and there is no basis for that discrimination. We ultimately seek a competitive and fair interchange fee system. Interchange is much higher in the United States than any other country, and there is no legitimate basis for that."
In May 2005, The Merchants Payments Coalition Inc. (MPC), a broad coalition of business organizations, including NACS, applauded the Federal Reserve Bank of Kansas City for holding a conference on credit and debit card interchange fees, saying that the rapidly escalating fees amount to a hidden tax on U.S. consumers.
"The fees that the credit-card companies charge defy logic and they are using them to increase profits far more than to provide any meaningful benefits to retailers," said NACS senior vice president for research Teri Richman, who serves as the MPC secretary.
"Credit-card company rules and some state laws effectively prohibit retailers from providing discounts for cash or checks in all but a handful of situations. As a result, consumers pay more even when they don’t use their cards. It’s time for this constant picking of consumers’ pockets to come to an end," Richman said.
A number of the associations were involved in antitrust litigation settled in 2003 that forced Visa and MasterCard to lower interchange rates for signature debit transactions. The MPC estimates that interchange collected from its members' accounts for about 25 percent of U.S. interchange.
The next stop for the NACS litigation will be Asheville, N.C., on Thursday, Sept. 29. More than 30 cases now filed against either VISA, MasterCard and banks will be reviewed by a panel during a Multi District Litigation (MDL) hearing. The purpose of the hearing is to hear arguments from the plaintiffs and defendants on how and where these cases should be consolidated and adjudicated. There are differing opinions between which court is the best venue for the cases. For the NACS class-action matter, the preferred venue is the second circuit, Eastern District of New York, which is the same court that handled the Wal-Mart case that settled in 2003.