Wal-Mart sues Visa over swipe fees

If interchange rates are cut, rewards programs may be at risk

Wal-Mart has sued Visa for anticompetitive practices, targeting Visa's interchange fees or "swipe fees" that help support credit card rewards programs and cash-back deals for cardholders.

"If interchange rates go down, rewards are likely to go down," said Sanjay Sakhrani, bank industry analyst at Keefe Bruyette & Woods.

In papers filed in federal court in Arkansas on Tuesday, Wal-Mart Stores Inc. said Visa used its market dominance to jack up the fees that retailers must pay for credit and debit card transactions. U.S. retailers have paid $350 billion in card interchange fees and network fees from Jan. 1, 2004, to Nov. 27, 2012, the lawsuit charges. Wal-Mart is claiming $5 billion in damages.

"[T]o the extent Wal-Mart was forced to pass these costs through to its customers in the form of higher retail prices, Wal-Mart suffered lost sales as a result," the lawsuit states.

Visa's payment network is the world's largest by far, according to its annual report to the U.S. Securities and Exchange Commission. It handled 81.6 billion transactions globally in 2012, 76 percent more than No. 2 network MasterCard. In dollar terms in the U.S., Visa handled $789 billion in consumer credit card transactions in 2013.

Visa  would not comment about Wal-Mart's lawsuit, a spokeswoman said.

The charges parallel claims in a class action by other retailers against Visa and MasterCard, which Wal-Mart opted out of. The retailers won a $5.7 billion settlement that was approved by a federal judge in December. 

Debit card swipe fees were capped under the Dodd-Frank Act, but credit card fees were unaffected, leaving them the focus of court action by retailers.

Consumer advocate U.S. Public Interest Research Group sides with the retailers, saying that high swipe fees force all consumers to pay higher prices for goods to support the rewards programs that mainly benefit the affluent. Most swipe fee income "goes to either bank profits or cardholder rewards," Consumer Program Director Ed Mierzwinski wrote in a January blog post.

Under the December settlement, retailers gained the right to slap surcharges of up to 4 percent on credit card transactions to cover the costs of swipe fees. But the National Retail Federation said most stores won't impose the surcharge for fear of alienating customers. Laws in 10 states prohibit credit card surcharges in any case.

Wal-Mart's lawsuit was unsurprising after the retail giant opted out of the class-action settlement, analysts said."They have the muscle to do something on their own," said Susan Menke, senior financial services analyst at  Mintel Comperemedia, a card industry analyst. "They're looking for lower interchange fees."

Menke said the lawsuit is part of a long-running battle over interchange fees, indicating that consumers will see little or no impact from this latest skirmish. Swipe fees are a major reason the retail giant attempted to gain U.S. banking powers in 2005 -- powers that it has in Canada and Mexico -- to offer its own credit cards.

Visa was partly spun off from its founding banks through a stock offering in 2008, but continues to be controlled by card-issuing banks through their seats on its board and their ownership stakes, Wal-Mart said in its lawsuit. Wal-Mart charged that banks quash competition through rules such as the "honor all issuers" rule, which requires merchants to accept all cards that carry the network's brand regardless of cost.

"It's clear that over time, there's going to be a lot of attention paid to interchange," Sakhrani said. "Over time there's a downward bias to interchange."

However, he added, merchants also benefit from innovations that are supported by swipe fees, such as mobile payments technology. "The question," he said, "is whether merchants and the card industry are extracting appropriate value out of interchange."

See related: Fed sets debit 'swipe fee' cap at 21 cents, Churning crackdown worries credit card rewards chasers

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Updated: 03-18-2019