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Visa, Mastercard, banks in settlement with U.S. merchants

Valentyn Volkov

Visa Inc., Mastercard Inc. and banks issuing their credit cards have agreed to a settlement with U.s. retailers valued at $7.25-billion (U.S.), and will allow stores to encourage customers to use cheaper forms of payment, according to settlement papers filed on Friday in a lawsuit in Brooklyn federal court.

The settlement, if approved by a judge, would resolve dozens of lawsuits filed by retailers in 2005, accusing the companies of fixing fees for processing credit and debit card payments and prohibiting stores from steering their customers to cheaper forms of payment.

It is believed to be the largest antitrust settlement in U.S. history.

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The settlement involves a payment to a class of stores and $6-billion from Visa, Mastercard and more than a dozen of the country's largest banks that issue the companies' cards. The card companies have also agreed to reduce swipe fees for eight months, valued at approximately $1.2-billion, according to lawyers for the plaintiffs.

An additional $525-million will be paid to stores suing individually, according to the documents.

"This is an historic settlement," said Bonny Sweeney, a lawyer for the plaintiffs. " In addition to refunding billions of dollars to retailers that paid artificially inflated interchange fees, the reforms will create real price competition, leading to reduced card-acceptance fees for retailers."

Noah Hanft, general counsel for Mastercard, said the company believed its interests were "best served by an amicable resolution" to the case. Visa chief executive officer Joseph Saunders said that the settlement was in the best interest of all parties, and did not expect the settlement to affect its current guidance.

Stores said Visa and Mastercard colluded directly and indirectly through the issuing banks to keep merchants from finding ways to mitigate credit-card costs.

Plaintiffs in the case include supermarket chain Kroger Co., pharmacy chain Rite-Aid Corp. and shoe retailer Payless ShoeSource, as well as trade associations like the National Association of Convenience Stores, National Grocers Association and the American Booksellers Association.

A number of banks that issue Visa and Mastercard's cards, including JPMorgan Chase & Co., were also named as defendants in the lawsuit, along with Visa and Mastercard's payment networks.

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Swipe fees are set by the card companies and deducted from the transaction by the banks that issue the cards, essentially passing on the cost to merchants, the lawsuits said.

Visa and Mastercard have been plagued by legal woes over their payment-card policies for the last decade. In 2003, the companies paid a combined $3-billion to settle a lawsuit by stores over their "honour all cards" policies, which tied acceptance of credit to debit cards.

The U.S. Department of Justice brought and settled a civil antitrust suit against Visa and Mastercard in 2010. As part of the consent decree, the companies agreed to drop certain policies that kept stores from steering their customers to cheaper forms of payment.

But the decree left intact policies that prohibit stores from charging customers more when they use certain payment cards, according to a July 2011 court filing from plaintiffs.

The defendants denied that any collusion took place.

In December, Visa announced it had set aside an additional $1.57- billion to cover the cost of a potential settlement in the case, bringing its litigation reserve balance to $4.28-billion, according to a regulatory filing. Mastercard in the fourth quarter of 2011 recorded a $770-million pretax charge, as an estimate of its potential liability in the case, a filing with the U.S. Securities and Exchange Commission showed.

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Visa and Mastercard together accounted for more than 80 per cent of U.S. credit and debit card purchases by volume in 2011, according to data from the Nilson Report, a California trade publication.

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