U.S. Merchant Interchange Lawsuit

A number of merchants and merchant trade groups have filed several lawsuits alleging that the U.S. interchange fees that MasterCard establishes violate antitrust laws, and that the cost of interchange is too high. MasterCard believes that these lawsuits are without merit, and a clear demonstration of certain merchants wanting the significant benefits of accepting payment cards without having to pay for the value of the services they receive. Furthermore, these lawsuits are being driven by class action lawyers whose primary motive is to extract enormous fees for themselves.

Every business establishes a price for the goods and services it provides, and the payments business is no exception. In fact, the Supreme Court recently affirmed that joint ventures have broad rights to set prices without violating antitrust laws.

Benefits to Merchants

Interchange is a small fee paid by the merchant’s bank (also known as the acquiring bank) to the issuing bank (the cardholder’s bank). Interchange keeps the system in balance and is designed to maximize both merchant acceptance and card issuance.

Accepting payment cards provides merchants with an incredible value at a fair price. The benefits to merchants of accepting MasterCard are significant, and include increased sales, as more people are attracted to stores that accept their card of choice; management of lending losses, fraud and the costs of complying with regulations. Interchange enables merchants to participate in a payment system that is far more cost-effective for them than issuing their own proprietary card or some other form of credit.

Moreover, payment cards help merchants operate more successfully. Electronic payment transactions are faster at checkout, and the merchants who comply with issuers’ security guidelines are guaranteed payment. With less cash on hand, merchants are less vulnerable to theft and can provide safer workplaces for their employees. Paperless payments also save time and money by easing payment reconciliation.

Benefits to Consumers

Consumers benefit as well. Interchange helps foster choice, innovation and security—all vitally important to today’s consumer. By providing incentives for card issuers, interchange encourages banks to innovate and develop new payment options, broaden the range of card programs available to consumers, and invest in cutting-edge security and fraud prevention measures. Interchange helps to spur new types of card programs to meet different consumer needs, and a wide variety of payment card reward and incentive programs that help people get more out of every dollar they spend.

Interchange Promotes a Competitive Payments Industry

The default interchange rates MasterCard has established for almost 40 years have proven to be the most efficient way to balance costs in the system and promote a strong, competitive payments industry. In essence, the result of interchange is more cards in circulation benefiting every participant in the system—cardholders, merchants and financial institutions.

Moreover, as a matter of legal precedent, interchange has been found to be legal, efficient and essential to the operation of a four-party payment system like MasterCard. Some countries have rejected a free market approach toward interchange and essentially engaged in fee price setting. In those countries, including Australia, where the level of interchange has been reduced as a result of regulatory intervention, cardholders have seen fees rise and card benefits reduced. At the same time, costs to merchants will rise as more cards are issued through three-party systems, like American Express, which charge higher merchant fees.

Four Party vs. Three Party System

Each of the two major bank card networks, MasterCard International and Visa, operates a “four-party payment system” that processes transactions, routing information between cardholders’ and merchants’ financial institutions in fractions of a second. The MasterCard network links together the four parties involved in each transaction (hence the name “four-party system”) as described below:

  • The cardholder’s issuing bank markets and issues MasterCard payment cards to consumers, and extends credit to cardholders from the time a purchase is made until payment is due.
  • The cardholder uses a MasterCard payment card to purchase goods and services at more than 23 million acceptance locations around the world.
  • The merchant accepts MasterCard payment cards in exchange for goods and services, and receives guaranteed payment as well as increased sales.
  • The acquiring bank enrolls merchants into programs that accept MasterCard, Maestro and Cirrus-branded cards. The payment card universe also includes three-party payment systems, such as American Express and Discover. In a three-party system, the company operating the network interfaces directly with merchants and consumers, in addition to processing transactions, issuing cards and enlisting merchants to accept those cards.

How Interchange Rates Are Established

In establishing default interchange rates, MasterCard considers, among other factors, certain costs that the issuing banks incur, including but not limited to, credit losses, fraud losses and fraud prevention costs, the cost of the interest-free period (the time before the cardholder has made a payment), and processing costs. Other factors that MasterCard considers include incenting merchant acceptance and new acceptance categories, merchant cost of accepting alternative forms of payments, and the cost of introducing new payment card programs and technologies that enable the participants in a four-party system, like the MasterCard network, to continue providing cardholders with leading-edge payment opportunities.

Default interchange is established at levels aimed at ensuring maximum participation in the card network system by both merchants and cardholders. It motivates financial institutions to innovate and issue cards, allows merchants to benefit from accepting them, and maximizes the number of cardholders who use them. Since interchange is set to maximize network volume, it cannot be examined in isolation, as some merchants are trying to do by complaining their costs of accepting payment cards are too high. Interchange must be examined in the context of the need to balance the higher costs of card issuance with the benefits to merchants of card acceptance, so that cardholders, merchants and financial institutions all continue to benefit from today’s strong, competitive payments landscape.

Case Law Related to Interchange

Previous lawsuits have been filed and complaints made challenging default interchange, and each time courts have found interchange fees in principle to be pro-competitive and essential to the operation of four-party systems.

One of the landmark cases challenging interchange was brought by National Bankcard Corporation (NaBanco), an acquiring bank, against Visa. NaBanco alleged that Visa’s interchange fees constituted horizontal price fixing in violation of U.S. antitrust laws. In the NaBanco case, the appellate court rejected plaintiffs’ antitrust claims concluding that a default interchange rate was essential to offering a card in a four-party payment system and that interchange was indeed pro-competitive.

In July 2005, a federal court in the Northern District of California dismissed a lawsuit challenging interchange, saying that merchants, as indirect purchasers, do not have standing under U.S. antitrust laws to bring a claim against interchange. Judge Jeffrey S. White dismissed the case and rejected the plaintiffs’ request to file another complaint, concluding that future attempts by the plaintiffs in this context would be “futile” as plaintiffs would be “unable to marshal sufficient facts to confer standing.”

Status of Merchants’ Complaints Challenging Interchange

In October 2005, a panel overseeing a multidistrict litigation (MDL) of certain merchants’ interchange complaints against MasterCard, Visa (and in some cases the issuing banks) transferred the cases to Judge John H. Gleeson in the U.S. District Court of the Eastern District of New York. These cases are at their early stages and MasterCard looks forward to the opportunity to present its arguments to the Court.

Competition between MasterCard and Visa

In their complaints, plaintiffs allege that MasterCard and Visa jointly, or individually, have market power in the general purpose credit card market. Plaintiffs allege that both networks exercise that market power in setting interchange rates. MasterCard does not believe it has market power in any market however defined. In fact, Judge Gleeson, who is presiding over the consolidated interchange cases, declined in the Wal-Mart case to rule that MasterCard had market power, prior to trial.

The marketplace, as well as legal precedent demonstrates that MasterCard and Visa compete vigorously. In the Department of Justice’s antitrust case against MasterCard and Visa, Judge Barbara S. Jones found that the industry structure was pro-competitive and that MasterCard and Visa compete vigorously against each other to the benefit of consumers. Judge Jones cited numerous examples of competition between MasterCard and Visa, including aggressive advertising and “share shifting,” which refers to initiatives the networks use to gain share at the other’s expense.


The merchant complaints challenging interchange are without merit. The fact is that accepting payment cards provides merchants with an incredible value at a fair price. That said, MasterCard does recognize that merchants do want lower costs for all aspects of their business, and we have been working closely with the merchant community to find solutions that satisfy them while maintaining the benefits consumers receive from having the enormous choice of payment options available today.

Profitable Perspectives
Advancing Commerce Through Innovation
(Presentation from Card Forum, April 21, 2009)

Joshua Peirez
Group Executive
Innovative Platforms
MasterCard Worldwide

Benefits of Open Payment Systems and the Role of Interchange